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investee fund, the types of investments made by the investee fund, and where investors can obtain
the investee fund’s financial statements. We believe that when this information is publicly available,
investors have the transparency needed to obtain information regarding the investments and
obligations of the investee fund. Conversely, when investee funds represent a significant
concentration of the investor fund’s net assets and the financial statements are not publicly available,
we believe that consolidation of the investee fund would be warranted in order to provide the level of
transparency desired by an investor. In lieu of consolidation, we suggest the Board consider
permitting that, if investee funds’ financial statements are not publicly available, when significant,
such investee funds’ financial statements may be attached to the investor fund’s financial statements,
similar to a master-feeder presentation.
Amount of Investee Fund Debt/Leverage: The greater the amount of leverage created by both debt
and derivative transactions, the greater the need for transparency, as this activity could significantly
impact the performance of the investor fund. Additionally, when the creditors of the investee fund
have recourse against the investor fund with respect to the investee fund’s obligations, consolidation
may be warranted in order to provide investors the appropriate information to understand the extent
of the obligations of the investor fund. Conversely, consolidation of an investee, which has issued
debt without recourse to the parent’s assets, may give an unwarranted impression that the parent’s
assets may be available for settlement of the debt. This may be particularly true if the parent’s and
investee’s assets are combined in the investment portfolio without any ready means to distinguish
which assets are and are not available for recourse.
Liquidity of Investments Held by Investee Fund: It may be appropriate to assess the liquidity of
the investee fund’s investments to determine the length of time it may take the investee fund to
monetize its investments. When the investee fund holds a material amount of illiquid investments,
greater transparency may be warranted.
Nature of the Investment in the Investee Fund: In most fund-of-funds structures, the investor
fund invests in the investee fund to obtain returns from current income and capital appreciation. The
investee fund is selected to obtain professional management with respect to a certain sector or asset
class or, in a proprietary fund-of-funds structure, to create an efficient asset allocation strategy. At
the time of investment, it is possible there are few investors in the investee fund and, as noted in our
above example, this could lead to the investor fund having a controlling financial interest. However,
in most cases this control will be diluted over time as new investors invest in the investee fund.
While we acknowledge that temporary control is not a concept that GAAP considers in assessing
consolidation, we believe that, in the case of an investment company consolidating another
investment company, it is easy to foresee numerous instances of consolidation and deconsolidation
from one period to another due to investor flows at the investee fund, which may result in financial
statement presentation which is not meaningful to users.
Structure of Investment Company Complex: It is important to consider whether the investment
company was involved in the design or creation of the investee fund or whether the investee fund is
in the same investment company complex when determining whether consolidation is appropriate.