SEC plans ‘umbrella fund’ rules

THE Securities and Exchange Commission (SEC) has drafted guidelines that will allow investment companies to be formed as “umbrella funds” which can create sub-funds with segregated assets and liabilities.

In a statement on Monday, the regulator said the move would offer fund managers “greater operational flexibility and cost savings.”

An umbrella fund is a registered, open-end investment firm with two or more sub-funds that have different investment objectives, policies, and strategies. The SEC wants all sub-funds to include the phrase “Umbrella Fund” in their names.

Meanwhile, sub-funds of an umbrella fund should include their classification under their names. Sub-funds should identify if it is an equity fund, bond or fixed-income fund, a balanced fund, money market fund, index fund, feeder fund, fund-of-funds, co-managed fund, or multi-asset/asset allocation fund.

Both new and existing open-end investment companies interested in adopting an umbrella fund structure will be covered by the drafted rules.

To convert into an umbrella fund, existing companies would need to revise their Articles of Incorporation (AOI) and Registration Statement (RS) to conform with the requirements under the proposed guidelines.

An umbrella fund must maintain at least two sub-funds at all times. Firms will be given a six-month period to comply from the approval of the first or from the approval of the termination of a sub-fund that led to its noncompliance.

The draft memorandum also covers rules on the termination of a sub-fund.

“Failure to meet the continuing requirement on the minimum number of sub-funds will constitute a ground for suspension of the secondary license of the umbrella fund,” the SEC said.

“The suspension order may be lifted upon approval of the second sub-fund registration, or upon filing of an application to amend the AOI and RS to convert to a regular investment company,” it added.

The umbrella funds need to be licensed to act as an investment firm to offer securities to the public. The funds may also register the securities of its first sub-fund and have additional securities registered afterward or have them registered all at once.

“In addition, an umbrella fund will not be allowed to establish and offer the securities of a new sub-fund unless the Commission has approved the securities and the relevant Sub-Fund Supplement,” the SEC said.

Umbrella funds will be the issuer or registrant of all the securities issued by their sub-funds. However, it will not be issued under the umbrella funds’ name unless it is in connection with any of its sub-funds.

“A sub-fund will only be allowed to issue a single type of security. The offering of both shares and units in a single sub-fund will be prohibited,” the SEC said.

The SEC’s draft regulations also cover requirements on the offering documents, such as the main prospectus and the sub-fund supplement.

Meanwhile, the draft memorandum also details the segregation of assets and liabilities of sub-funds. The fund manager and an independent entity tapped by the umbrella fund are tasked to ensure that the net asset value of each sub-fund is computed separately.

The fund manager will be required to submit reports on behalf of the umbrella fund as required under the Securities Regulation Code.

Umbrella funds will need to file separate quarterly and annual financial statements for each of their sub-funds to show the clear segregation of assets and liabilities.

“The umbrella fund may also choose to prepare a consolidated report, as long as the assets and liabilities of each sub-fund are clearly segregated and disclosed in the Notes to Financial Statements,” the SEC said. — Keren Concepcion G. Valmonte