The SEC adopted a new rule and related amendments in order to simplify and update the regulatory framework for "fund of funds" arrangements (see previous coverage).

New ICA Rule 12d1-4 ("Exemptions for investments in certain investment companies") will allow a registered investment company or business development company ("BDC") to acquire the securities of any other registered investment company or BDC in excess of the limits set forth in Section 12(d)(1) of the Investment Company Act. To rely on this rule, the funds will have to comply with new investor protection requirements that restrict the funds' ability to, among other things:

  • "exert undue influence over another fund" by (i) restricting the control and voting ability of the acquiring fund and (ii) requiring a fund of funds investment management agreement between acquiring and acquired funds, subject to certain exceptions;
  • charge excessive fees by requiring the acquiring fund's adviser to make a finding that aggregate fees and expenses are not duplicative; and
  • create three-tier fund of funds structures in most circumstances.

In connection with the new rule, the SEC rescinded ICA Rule 12d1-2 ("Exemptions for investment companies relying on section 12(d)(1)(G) of the Act") and related exemptive relief under Sections 12(d)(1)(A), 12(d)(1)(B), and 12(d)(1)(C) of the Investment Company Act. The SEC also amended ICA Rule 12d1-1 ("Exemptions for investments in money market funds") to permit funds to continue to invest in money market funds outside of the same group of investment companies.

Additionally, the SEC amended Form N-CEN to require funds to report whether they relied on ICA Rule 12d1-4 or the exception under Section 12(d)(1)(G) of the Investment Company Act during the relevant reporting period.

The final rule and related amendments go into effect 60 days after publication in the Federal Register.

Primary Sources

  1. SEC Press Release: SEC Updates Regulatory Framework for Fund of Funds Arrangements
  2. SEC Final Rule: Fund of Funds Arrangements

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