September 18, 1992
TO: BOARD OF GOVERNORS NO. 68-92
SEC RULES MEMBERS NO. 38-92
STATE SECURITIES MEMBERS NO. 38-92
INSTITUTIONAL FUNDS COMMITTEE NO. 19-92
RE: NASAA ADOPTS TWO-TIER FUND DISCLOSURE GUIDELINES
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The Institute is pleased to advise you that NASAA adopted
"Guidelines for Registration of Master Fund/Feeder Funds" (e.g.,
"hub and spoke" funds) on September 15, 1992 during the NASAA
Fall Conference. The final guidelines adopted by NASAA
incorporate several of the Institute’s recommendations with
respect to the appropriate level of disclosure that should be
included in a first-tier fund prospectus. A copy of the final
guidelines (subject to proofing by NASAA) is attached.
As you may be aware, in February of this year, the NASAA
Investment Company Registration/Trading Practices Committee
("NASAA Committee") issued specific cover page and prospectus
disclosure language for states to use in reviewing applications
for two-tier funds ("initial disclosure guidelines"). In certain
instances, this disclosure differed from that required on the
federal level (i.e., risk factors and fee table disclosure). In
order to resolve the inconsistencies in the disclosure required
by the states and the SEC, the NASAA Committee has been working
closely with the SEC and the Institute to review the disclosure
requirements for two-tier funds. In June, the NASAA Committee
issued "Proposed Guidelines for the Registration of Master
Fund/Feeder Funds" ("proposed guidelines") which substantially
revised the initial disclosure guidelines and addressed several
of the concerns expressed by the Institute and the SEC with
respect to the initial disclosure guidelines.
The final guidelines require narrative disclosure following
the fee table which summarize the expenses of the Portfolio and
first-tier fund rather than a separate fee table for both tiers
as originally proposed in the initial disclosure guidelines. In
addition, the final guidelines also identify specific areas
unique to the two-tier fund structure which may require
additional disclosure rather than requiring specific language to
be included in the first-tier fund’s prospectus.
The final guidelines also require an existing traditional
mutual fund to obtain shareholder approval prior to converting to
the two-tier fund structure. This requirement differs from the
original proposal which would have required a fund to obtain
shareholder approval to convert to a two-tier structure and
shareholder approval reauthorizing the conversion to the two-tier
structure either immediately prior to actual conversion or at the
next regularly scheduled shareholders meeting after conversion to
the two-tier structure.
Finally, the final guidelines require that the
disinterested directors/trustees of both tiers may not be the
same unless a majority of the disinterested members of the board
have adopted written procedures to deal with potential conflicts
of interest. The original proposal called for separate boards of
directors/trustees for both the Portfolio and first-tier fund.
The effective date of the final guidelines is November 15,
1992 (sixty days after the date upon which the vote for adoption
occurred). However, some states may exercise their discretion
and adopt or apply portions of the final guidelines before the
effective date.
We will keep you informed of developments.
Patricia Louie
Assistant Counsel
Attachment