SEC drafts rules on creation of umbrella funds

The Securities and Exchange Commission (SEC) will soon allow investment companies to be formed as umbrella funds that can create sub-funds with segregated assets and liabilities.

The Commission on February 18 released for public comment the proposed rules on the creation and operation of umbrella funds, which will provide investment companies and their fund managers greater operational flexibility and cost savings.

An umbrella fund is a registered, open-end investment company that consists of two or more sub-funds that may pursue different investment objectives, policies and strategies.

The proposed rules will apply to newly formed, as well as existing, open-end investment companies seeking to adopt an umbrella fund structure.

Under the draft rules, an existing investment company may convert into an umbrella fund by amending its Articles of Incorporation (AOI) and Registration Statement (RS) to conform with the requirements set by the proposed guidelines.

All investment companies that intend to create sub-funds will be required to include

“Umbrella Fund” in their respective names.

An umbrella fund must consist of at least two sub-funds at any time during its operation. However, it is granted a six-month period to comply and register at least one more sub-fund from approval of the first, in cases of new or converted investment companies, or from approval of the termination of a sub-fund which resulted in its noncompliance.

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 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.

Before offering shares or units pertaining to any of its sub-funds, the umbrella fund may register all of its securities at once and allocate the approved shares or units to any of its sub-funds. It may also initially register the securities to be allocated to the first sub-fund and subsequently apply for registration of the additional securities.

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 umbrella fund will not be allowed to issue securities in its own name, except in connection with any of its sub-funds. However, the umbrella fund will still be the issuer or registrant of all securities to be issued by all of its sub-funds.

In offering securities to the public, the umbrella fund must be licensed to act as an investment company. Moreover, securities must not be sold or offered for sale or distribution without an RS duly filed with and approved by the Commission, pursuant to Republic Act No. 8799, or the Securities Regulation Code (SRC).

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.

Each sub-fund of an umbrella fund must indicate in its name its classification whether it is an Equity Fund, Bond or Fixed Income Fund, Balanced Fund, Money Market Fund, Index Fund, Feeder Fund, Fund-of-funds, Co-Managed Fund or Multi-asset/Asset Allocation Fund.

The assets of a particular sub-fund will belong exclusively to the said sub-fund. Any liability that is attributable to a sub-fund may only be discharged out of the assets of the said sub-fund.

The fund manager and the independent entity engaged by the umbrella fund to calculate or cross-check its net asset value (NAV) every dealing day must ensure that the NAV of each sub-fund is computed separately and only the assets and liabilities attributable to a specific sub-fund will be considered in determining the daily NAV of each sub-fund.

The umbrella fund’s offering documents will consist of a Main Prospectus that concisely covers information and key facts about the umbrella fund and the common details among its sub-funds. The Sub-Fund Supplement must provide the specific details and additional information regarding a particular sub-fund, such as its investment objective, policy, strategy, offer price, and offer period, among others.

The fund manager, on behalf of the umbrella fund, will have to submit reports required of an investment company as per the SRC, the Implementing Rules and Regulations of Republic Act No. 2629, or the Investment Company Act, and any amendments thereto.

The draft rules require the submission of separate quarterly and annual financial statements for each sub-fund showing a clear segregation of their 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.

If there will be a cross sub-fund investment during a period under review, the umbrella fund will be required to provide in the annual or quarterly report the name of the subfund invested into, the number of units or shares held by the sub-fund in the target sub-fund, and the holdings at market value and as a percentage of the sub-fund’s NAV.

An umbrella fund will not be allowed to terminate any of its sub-funds without the Commission’s authorization. Such termination will also require prior approval of the majority of its board of directors and at least a majority of the combined stockholders of the umbrella fund and the concerned sub-fund.

In cases when all the sub-funds of the umbrella fund will solely offer units of participation, only its stockholders will have the exclusive right to vote on whether the sub-fund should be terminated. In all instances, unitholders have to be notified of the changes within 30 days from the board and stockholders’ approval.

In applying for the voluntary termination of a sub-fund, the investment company will be required to submit a verified petition for its termination, stating the proposed process of termination, its consequences, effects on shareholders or unitholders, as well as the distribution of assets to stockholders or unitholders.

The SEC will also require the investment company to submit a board resolution approving the termination of the sub-fund, proof that the unitholders were notified, and all relevant books and papers of the umbrella fund and details regarding the sub-fund, among others.

Once a sub-fund is terminated, it will be wound up as if it were a separate investment company and the fund manager will carry out the liquidation of assets within six months from the receipt of the Commission’s approval of its termination, among other conditions.

The public may access the draft Memorandum Circular providing for the Rules on Umbrella Funds on the SEC website. All interested parties have until March 4, 2022 to submit their comments and inputs through email at cgfd_ld@sec.gov.ph.