December 18, 2020

SEC Adopts Final Fund of Funds Rule

Rule 12d1-4

In October 2020, the Securities and Exchange Commission (SEC) adopted Rule 12d1-4 (final rule) and other amendments under the Investment Company Act of 1940, as amended (1940 Act), which allows funds (acquiring funds) subject to certain conditions to acquire shares of other funds (acquired funds) in excess of the limits in Section 12(d)(1) of the 1940 Act (fund of funds arrangements) without obtaining a fund of funds exemptive order. Mutual funds, exchange-traded funds, exchange-traded managed funds, listed and unlisted closed-end funds, unit investment trusts (UITs) and listed and unlisted business development companies can be acquiring and acquired funds under the final rule. Private funds and unregistered investment companies are excluded from the final rule. The final rule will become effective on January 19, 2021.

The final rule subjects fund of funds arrangements to a tailored set of conditions, which are based on the conditions contained in SEC exemptive orders, and address (i) limits on control of acquired funds and voting requirements; (ii) certain required findings; (iii) a required fund of funds investment agreement; and (iv) limits on complex fund of funds arrangements. With respect to a separate account funding variable insurance contracts that invests in an acquiring fund, the final rule requires that the insurance company certify to the acquiring fund that the aggregate of all fees and charges associated with each variable insurance contract investing in the acquiring fund are reasonable in relation to the services rendered, the expenses expected to be incurred and the risks assumed by the insurance company as set forth in Section 26 of the 1940 Act.

Rescission of Rule 12d1-2 and Amendment to Rule 12d1-1 and Form N-CEN; Rescission of Current SEC Relief

Effective January 19, 2022, the SEC is rescinding Rule 12d1-2 under the 1940 Act, which permits a fund relying on Section 12(d)(1)(G) of the 1940 Act to: (i) acquire securities of other funds that are not part of the same group of investment companies; (ii) invest directly in stocks, bonds and other types of securities; and (iii) acquire the securities of money market funds. Funds currently relying on Section 12(d)(1)(G) will be required to rely on the final rule to make the other direct investments. The SEC is also rescinding previously granted exemptive relief and withdrawing related no-action relief permitting fund of funds arrangements that fall within the scope of the final rule. Affiliated insurance fund relief is considered by the SEC to be outside the scope of the final rule and is not rescinded.

The SEC also adopted amendments to Rule 12d1-1 under the 1940 Act, allowing funds relying on Section 12(d)(1)(G) to continue to invest in unaffiliated money market funds (i.e., cash sweep arrangements). Additionally, the SEC adopted amendments to Form N-CEN, which require that a fund report if it relied on the final rule or the statutory exception from Section 12(d)(1)(G) to operate as a fund of funds during the reporting period.

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