The Securities and Exchange Commission (SEC) has issued new rules governing the creation of umbrella funds, which are open-end investment companies that have at least two sub-funds pursuing their own investment objectives.

The commission issued SEC Memorandum Circular (MC) No. 14, the rules on umbrella funds, to expand the structuring options of investment companies with sub-funds that provide greater flexibility and administrative efficiency, and give investors opportunities for enhanced and cost-efficient portfolio diversification.

Umbrella funds are like big department stores with different sections or sub-funds for equity, bond, money market, and other investment channels. Investors own shares of the umbrella, but their investments are placed in specific sub-funds, with the option to switch from one sub-fund to another.

While switching may entail a fee, it is usually at a lower cost and involves less paperwork than exiting one stand-alone fund and moving to an entirely different one.

On the sidelines of the 3rd Management Association of the Philippines (MAP) Summit on Shared Prosperity last Wednesday, April 8, SEC Chairman Francis E. Lim said the mutual fund industry is a key player in the local capital market, and the new rules will make investing easier for the public.

He explained that, under the current practice, there are separate corporate entities or stand-alone mutual funds, making it difficult to switch from one fund to another. In the case of umbrella funds, however, it will be much easier and faster for investors to move from one sub-fund to another.

Under the new rules, an existing stand-alone investment company offering only units of participation may be converted into an umbrella fund by amending its articles of incorporation, by-laws, and registration statement to conform with the rules on umbrella funds.

When applying for an amendment to the registration statement for this purpose, the investment company must submit a main prospectus together with the application for registration of the initial sub-funds and the corresponding sub-fund supplements.

The investment company can simultaneously apply for additional registration of securities during the conversion to an umbrella fund structure.

The assets and liabilities attributable to the issued and outstanding securities of a previous stand-alone investment company shall form part of only one sub-fund.

Subject to compliance with reallocation conditions as provided in these rules, the investment company can allocate all or a portion of its registered securities to the initial sub-funds.

In case only a portion is allocated, the remaining registered and unissued securities may be allocated to any of the succeeding sub-funds, subject to the commission’s approval of the relevant sub-fund supplement.

Each sub-fund of an umbrella fund shall, as far as practicable, 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, among others.

Should the name of the sub-fund be without such specificity, the fund classification should nonetheless be clearly disclosed in other relevant sections of the sub-fund supplement and product highlight sheet for easy identification.

Unitholders shall be allowed to switch or transfer from one sub-fund to another sub-fund of the umbrella fund, subject to reasonable limitations, fees, and procedures as disclosed in the main prospectus of the umbrella fund.