In the staff no-action letter to Franklin Templeton Investments, dated April 3, 2015 (“FTI Letter”),[1] we stated that we would not recommend enforcement action to the Securities and Exchange Commission (“Commission”) under Sections 12(d)(1)(A) and (B) and 17(a) of the Investment Company Act of 1940 (“1940 Act”) in the context of a three-tier arrangement involving registered open-end investment companies in the same group of investment companies.[2]  Specifically, the arrangement in the FTI Letter involved a Fund of Funds investing in an Underlying Fund, which in turn invested in a Central Fund for purposes of efficient portfolio management.[3]

One of the terms of the FTI Letter provided that an Underlying Fund will not invest more than 5% of its total assets in a Central Fund (“5% Limit”) or more than 10% of its total assets in investment companies generally, including the Central Fund and any companies relying on Section 3(c)(1) or 3(c)(7) of the 1940 Act (“10% Limit,” and together with the 5% Limit, the “Underlying Fund Investment Limit”).  The 10% Limit, as explained in the FTI Letter, serves to ensure that the Underlying Fund itself is not a fund of funds and the three-tier structure is not so complex as to raise concerns under Sections 12(d)(1)(A) and (B) of the 1940 Act.

Your letter, dated September 27, 2016, requests assurance that we would not recommend enforcement action to the Commission under Sections 12(d)(1)(A) and (B) and 17(a) of the 1940 Act”) in the context of a three-tier fund arrangement, detailed in your letter, that is substantially identical to that described in the FTI Letter and meets all of the terms of the FTI Letter except the Underlying Fund Investment Limit.  Specifically, the request in your letter is limited to an investment by an Underlying Fund, as defined in your letter, solely for short-term cash management purposes, in a Core Fund, as defined in your letter, that is a fixed-income fund that could have a dollar-weighted average portfolio maturity of up to 3 years (“Short-Term Bond Core Fund”).[4]  In this limited situation, your letter argues, the Underlying Fund’s investment in the Short-Term Bond Core Fund need not be subject to the Underlying Fund Investment Limit, provided that the Underlying Fund invests no more than 25% of total assets in one or more Short-Term Bond Core Funds.[5]

In support of your request, you state that Commission orders generally have permitted underlying funds in a fund of funds arrangement to invest in other investment companies for short-term cash management purposes without particular limitations.[6]  You state that such investments do not raise the concern about complex fund structures that is reflected in Sections 12(d)(1)(A) and (B) of the 1940 Act.  We agree.

 Based on the facts and representations set forth in your letter, and without necessarily agreeing with your legal analysis, we would not recommend enforcement action to the Commission under Sections 12(d)(1)(A) and (B) and 17(a) of the 1940 Act if an Asset Allocation Fund, as defined in your letter, purchases or otherwise acquires shares of an Underlying Fund that, in turn, purchases or otherwise acquires shares of a Short-Term Bond Core Fund for short-term cash management purposes, as described in your letter.[7] This response expresses our views on enforcement action only, and does not express any legal or interpretive conclusion on the issues presented.  Because our position is based upon the facts and representations made in your letter, any different facts or representations may require a different conclusion.