The Staff of the Division of Investment Management has granted no-action relief to a closed-end registered hedge fund-of-funds to allow it to create a “toxic waste” fund to isolate illiquid assets.  The relief allows the fund sponsor to create a liquidating fund to which the registered fund will transfer its interests in illiquid underlying hedge funds (i.e. hedge funds that have suspended redemptions).  The registered fund will then distribute its interests in the liquidating fund in kind on a pro rata basis to the investors in the registered fund.  Without the no-action relief, the contemplated transaction might violate Sections 17(a)(2) and 17(d) of the 1940 Act.  In a footnote, the Staff warned that, due to the fact-specific nature of the request, no other parties may rely on the relief granted.

OUR TAKE:  We don’t have any issue with the Staff’s legal analysis under Section 17.  We wonder how investors will take receiving shares in a liquidating fund that holds nothing but interests in funds that have ceased allowing redemptions.