April 23, 1992
TO: STATE LIAISON COMMITTEE NO. 16-92
RE: SEC ISSUES STAFF REPORT ON HUB AND SPOKE FUNDS
__________________________________________________________
As we previously advised you, Representative John D.
Dingell, Chairman of the U.S. House Committee on Energy and
Commerce requested the SEC staff to prepare a report on the
issues hub and spoke funds raise under the federal securities
laws and what the the SEC is doing to ensure that investors are
adequately protected. (See Memorandum to State Liaison Committee
No. 13-92, dated April 3, 1992.)
On April 15, 1992, the SEC submitted the attached report to
Chairman Dingell. The report notes that these funds are excluded
from the fund of funds restrictions in the Investment Company Act
of 1940 by virtue of Section 12(d)(1)(E) which permits certain
investment companies to register exclusively in the securities of
another investment company. Moreover, at the present time, hub
and spoke funds do not raise concerns regarding complex pyramidal
structures, layering of fees or the threat of large scale
redemptions.
The report includes a discussion of the organizational
structure of hub and spoke funds, how such are regulated on the
federal level and the disclosure required to be included in a
spoke fund prospectus. The report notes that the Division of
Investment Management's review of hub and spoke arrangements have
focused primarily upon the following three areas of concern:
(1) whether the hub and spoke structure creates
additional risks of investment beyond those
associated with investment in a single tier fund;
(2) whether the information regarding these
arrangements in a fund's prospectus is adequate,
and
(3) whether the hub and spoke structure deprives
investors of any rights they would otherwise have
as investors in a single tier mutual fund under the
1940 Act or the Securities Act of 1933.
Based upon the Division treating hub and spoke funds, to a
great extent, as functionally one combined entity, the Division
believes that investors enjoy all the protections of the 1933 and
1940 Act that they would have as investors in a traditional
mutual fund.
We will keep you advised of developments.
Patricia Louie
Assistant General Counsel
Attachment