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SEC Staff Issues Interpretive Letter Permitting Open-End Funds to Acquire Shares of Affiliated Closed-End Funds

On January 25, 2017, the staff of the SEC’s Division of Investment Management issued an interpretive letter (the Letter) agreeing with a law firm’s position that registered open-end funds (and unit investment trusts) may invest in closed-end funds in reliance on Rule 12d1-2 under the 1940 Act, regardless whether the investing and underlying funds are in “the same group of investment companies.”

Section 12(d) of the 1940 Act generally makes it unlawful for a registered investment company to purchase or other otherwise acquire any security issued by another registered investment company except in accordance with the limits set forth in that Section. Section 12(d)(1)(G) permits open-end funds to invest in other open-end funds that are part of the same group of investment companies, together with government securities and short-term paper, provided that certain other conditions are met. Rule 12d1-2, adopted by the SEC in 2006, allows open-end funds relying on  Section 12(d)(1)(G) also to invest in a broad range of other investments, including securities of non-investment company issuers, certain money market funds and securities issued by an investment company “other than securities issued by another registered investment company that is in the same group of investment companies.”

Section 12(d)(1)(G) defines “same group of investment companies” as “any 2 or more registered investment companies that hold themselves out to investors as related companies for purposes of investment and investor services.” As the incoming letter to the SEC staff explains, it is possible that, under an interpretation of Rule 12d1-2, closed-end funds could also be deemed to be part of the investing open-end fund’s “group of investment companies” and thus be excluded from the investments permitted to be made by such open-end funds under the Rule.

The Letter resolved this uncertainly by stating that, for purposes of Rule 12d1-2, the term “group of investment companies” does not include closed-end investment companies. Accordingly, the Letter stated that “a registered open-end investment company or a registered unit investment trust may rely on [Rule 12d1-2] to invest in a closed-end investment company regardless of whether the two companies hold themselves out to investors as related companies for purposes of investment and investor services.”

The Letter is available at: https://www.sec.gov/divisions/investment/noaction/2017/dechert-012517-12d1.htm.

© 2017 Vedder Price

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Vedder Price P.C. attorneys provide a full range of services to a diverse financial services clientele. Attorneys practicing in the firm’s Investment Services Group are experienced in all aspects of investment company and investment adviser securities regulations, broker-dealer regulatory and compliance matters, derivatives and financial product matters, and ERISA and tax matters. Clients include mutual fund complexes, hedge and other private funds, money managers, broker-dealers, independent directors, and many other types of institutions such as banks, savings and loans,...

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