August 3, 1992
TO: SEC RULES COMMITTEE NO. 53-92
STATE LIAISON COMMITTEE NO. 28-92
INSTITUTIONAL FUNDS COMMITTEE NO. 16-92
RE: INSTITUTE COMMENTS ON NASAA TWO-TIER FUND PROPOSAL
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As we previously advised you, the NASAA Investment Company
Registration/Trading Practices Committee issued "Proposed
Guidelines for the Registration of Master Fund/Feeder Funds"
("Portfolio/First-Tier Fund") ("proposed guidelines") for public
comment in mid-June. The proposed guidelines would require
narrative disclosure following the fee table which summarizes the
expenses of the the Portfolio and first-tier fund ("FTF"). The
proposed guidelines also set forth certain areas where additional
disclosure may be appropriate in an FTF prospectus. (See
Memorandum to SEC Rules Committee No. 41-92, State Liaison
Committee No. 22-92 and Institutional Funds Committee No. 12-92,
dated June 15, 1992.)
The Institute submitted the attached comment letter to the
NASAA Committee on the proposed guidelines. Initially, the
Institute recognized the cooperative effort between the NASAA
Committee and the SEC and noted that this dialogue should serve
as a model for future issues involving both state and federal
regulators. The Institute also applauded the regulatory approach
taken by the NASAA Committee, i.e., identifying areas unique to
the two-tier fund structure which may require additional
disclosure rather than requiring specific language to be included
in the FTF’s prospectus.
Moreover, the Institute specifically recommended that the
NASAA Committee delete the proposal requiring thirty days advance
written notice to shareholders if the investment objective of the
Portfolio or FTF is changed and such occurs without a shareholder
vote (i.e., the fund has a non-fundamental investment objective)
since this is a general mutual fund issue and not one unique to
two-tier funds. In addition, the Institute questioned why NASAA
would require shareholder approval for conversion to a two-tier
structure if such approval would not be required in order to
convert under the provisions of the Investment Company Act of
1940 or applicable state corporate law. The Institute also
objected to the proposed guideline which would have required
disclosure informing investors "how" to obtain information about
whether other FTFs in the same Portfolio are available to
investors.
The Institute strongly objected to the requirement which
would require that the disinterested directors/trustees of the
FTF may not be the same as the directors/trustees of the
Portfolio -- in essence, requiring two separate boards. The
Institute noted that although certain two-tier funds have elected
to have separate boards for both the Portfolio and the FTF, such
should not be mandated by the states. Moreover, separate boards
are not required for affiliated funds in the same fund group, nor
are they required for multi-class funds. A copy of the
Institute’s comment letter is attached.
Members of NASAA will consider and vote on whether to adopt
the proposed guidelines at the NASAA Fall Conference in
September. If adopted by NASAA, it is anticipated that the
individual states will begin applying the disclosure requirements
in the proposed guidelines sixty days after approval by NASAA
members.
We will keep you advised of developments.
Patricia Louie
Assistant Counsel
Attachment