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News July 31, 2006 Issue

IM Staff Issues Fund of Funds No-Action Letter

The Alternative Investment Partners Absolute Return Fund, a Morgan Stanley fund of funds, recently obtained no-action relief from the staff of the SECís Division of Investment Management confirming that a mid-tier fund in a three-tier fund of funds arrangement need not register, and the fund of funds would not run afoul of ICA Section 12(d)(1)(E), if non-US investors are permitted to invest in the mid-tier fund.

The arrangement involved a registered top-tier fund that controls an unregistered offshore fund, which in turn invests in securities issued by a registered closed-end investment company. The facts parallel those in the April 30, 2004 Man-Glenwood no-action letter, with a twist: non-U.S. investors would be permitted to invest in the mid-tier offshore fund. However, the top-tier fund would still control the offshore fund.

The staff agreed that the limited offer and sale of securities by the offshore fund to non-U.S. investors would not affect the analysis of whether the arrangement is permissible under ICA Section 7(d) or Section 12(d)(1)(E).