SEC Adopts Changes to Regulatory Framework of Fund of Funds Arrangements

The Securities and Exchange Commission voted on October 7, 2020, to adopt new Rule 12d1-4 under the Investment Company Act of 1940 to govern most arrangements where registered funds invest in other registered funds (“fund of funds” arrangements), as well as related amendments to the existing regulatory framework governing such arrangements. As part of this new regulatory framework, the SEC also is rescinding Rule 12d1-2 under the 1940 Act and most exemptive orders granting relief from Sections 12(d)(1)(A), (B), (C) and (G) of the 1940 Act, as well as withdrawing certain staff no-action letters relating to Section 12(d)(1) of the 1940 Act. In addition, the SEC is making related amendments to Rule 12d1-1 and Form N-CEN.

Rule 12d1-4 (Rule) will allow a registered investment company or a business development company (each referred to as an “acquiring fund” under the Rule) to acquire shares of any other registered investment company or BDC (each referred to as an “acquired fund” under the Rule) in excess of the limitations currently imposed by the 1940 Act without obtaining individual exemptive relief from the SEC, subject to applicable conditions. The Rule imposes conditions designed specifically for acquiring funds and other conditions applicable to acquired funds.

Rule 12d1-4 will be effective 60 days after publication in the Federal Register, and the compliance date for the amendments to Form N-CEN will be 425 days after publication in the Federal Register. The rescission of Rule 12d1-2 and the applicable existing exemptive orders, along with the withdrawal of relevant staff no-action letters, will be effective one year after the effective date of Rule 12d1-4.

The changes initially were proposed on December 19, 2018 (proposed rule). The final rulemaking package reflects several important modifications from the proposed rule (most notably, the Rule will not include the proposed limitation on redemptions by an acquiring fund, which was strongly opposed by many commenters). The SEC characterized these modifications as “designed to increase the workability of the [R]ule’s requirements, while enhancing protections for investors in fund of funds arrangements.”

The following provides an overview of fund of funds arrangements and the components of the SEC’s final rulemaking package, which likely will require adjustments to many existing fund of funds arrangements, as well as related compliance, reporting and other processes.

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