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SEC Grants No Action Relief for US RICs Investing in Foreign Funds

In June, the SEC issued no action relief allowing US registered investment companies advised by Red Rocks Capital, LLC to invest in certain investment companies organized outside the United States beyond the limits permitted under Section 12(d)(1)(A) of the Investment Company Act of 1940. Under Section 12(d)(1)(A) of the 1940 Act, a US RIC generally not permitted acquire any security issued by another investment company if it would result in the RIC:

(i) owning more than three percent of the total outstanding voting stock of the acquired company,

(ii) having more than five percent of its total assets invested in the acquired company or

(iii) having more than ten percent of its total assets invested in the acquired company and all other investment companies.

The limitation imposed by Section 12(d)(1)(A) does not apply to acquisitions of pooled investment vehicles, including funds organized outside the United States ("Foreign Funds"), that rely on exemptions from the definition of "investment company" under Section of the 1940 Act, but do apply to acquisitions of Foreign Funds that do not rely on an exclusion from the definition of investment company under the 1940 Act ("non-exempt Foreign Funds").  Red Rocks Capital's funds sought to invest in the latter.

The Staff's letter grants the necessary relief from the rules to permit funds advised by Red Rocks Capital to invest in non-exempt Foreign Funds in amounts beyond the statutory limitations of Section 12(d)(1)(A), subject to certain representations.  The relief was granted by the SEC  based in part on the rationale that the SEC has no significant regulatory interest in protecting the non-exempt Foreign Funds from undue influence by an acquiring US registered investment company. 

The full text of the SEC's no-action letter, and Red Rocks Capital's request for relief are available at:  http://www.sec.gov/divisions/investment/noaction/2011/redrocks060311.htm