Asset Management Partners Discuss the SEC’s Fund-of-Funds Rule Proposal

In The News
May 10, 2019

As comments on the SEC’s proposed fund-of-funds rule emerge, several firms have expressed concern about the rule’s differential treatment of private and foreign funds compared to public funds. A Compliance Reporter article published on May 9 titled “Private and foreign funds exclusion at issue in SEC proposal” names Ropes & Gray among firms that have called for the Commission to extend the scope of the proposed rule to uniformly apply to private, public and foreign firms. Excerpts from the letter, by asset management partner Thomas Hiller, were cited in the piece.

An article titled SEC's Fund-of-Funds Proposal Hobbles PMs: Commenters published by BoardIQ on May 7 reviews comment letters submitted to the SEC on the fund-of-funds rule, proposed at the end of last year. The piece highlights that many letters take issue with the stipulation that funds of funds investing more than 3% in another fund would not be allowed to redeem more than 3% of their total outstanding shares in any 30-day period.

Commission staff “were trying to address the risk of undue influence by the fund of fund on the underlying fund,” asset management partner Brian McCabe says in the article. “The staff is concerned that the adviser to the fund of fund might, by threatening redemption, be able to get the adviser to the underlying fund to do something that is good for the fund of funds but not so great for the underlying fund,” McCabe states.

Mr. McCabe advises that as the Commission processes the comment letters, it may be useful for independent directors overseeing funds of funds to discuss with the adviser what the plan would be if the final rule were to contain the redemption limit.