SEC’s Division of Investment Management Publishes Four FAQs Related to the Adoption of Rule 12d1-4 for Fund of Funds Arrangements

At a Glance

• The Securities and Exchange Commission issued FAQs regarding fund of funds arrangements pursuant to Rule 12d1-4 under the Investment Company Act of 1940.
• The FAQs clarify that:
  • A fund of funds agreement is required if an acquiring fund is relying on Rule 12d1-4 to exceed any of the three limitations (3% / 5% / 10%) set forth in Section 12(d)(1), even if the 3% limitation is not exceeded.
  • A fund of funds agreement is required before an acquiring fund acquires another fund in excess of the limitations, but no fund of funds agreement is required between the acquiring fund and other funds it had previously acquired before its reliance on Rule 12d1-4.
  • An acquired fund does not need to count investments in debt securities issued by collateralized loan obligations towards the 10% limitation.

In October 2020, the Securities and Exchange Commission (SEC) adopted Rule 12d1-4 (Rule 12d1-4) under the Investment Company Act of 1940 (1940 Act), which made changes to the regulatory framework applicable to fund of funds arrangements. Section 12(d)(1)(A) prohibits a registered fund from: (i) acquiring more than 3% of another fund’s outstanding voting securities (the 3% limitation); (ii) investing more than 5% of its total assets in any one fund (the 5% limitation); or (iii) investing more than 10% of its total assets in funds generally (the 10% limitation). Rule 12d1-4 permits a fund to acquire shares of another fund in excess of these limits without obtaining an exemptive order from the SEC, subject to certain conditions.

On March 5, 2026, the SEC’s Division of Investment Management published four frequently asked questions (FAQs) related to the adoption of Rule 12d1-4.

Fund of Funds Investment Agreements

The FAQs clarify that a fund of funds agreement is required if a registered fund is relying on Rule 12d1-4 for an exemption from any of these three limitations. If an acquiring fund’s acquisition of an acquired fund would result in it exceeding the 5% limitation or the 10% limitation, but would not result in it exceeding the 3% limitation, a fund of funds agreement is still required. Importantly, however, in instances where the 3% limitation is not exceeded, a fund of funds agreement does not need to include any material terms relating to “fund findings” necessary to satisfy the conditions required by Rule 12d1-4(b)(2)(iv) and to be reported to a registered fund’s board. As a best practice, many fund complexes’ fund of funds agreements are already tailored to this requirement and only apply terms related to fund findings for designated funds that exceed the 3% ownership threshold and require advance notice for an acquiring fund to exceed the 3% threshold.

The FAQs state that the purpose of a fund of funds agreement is to empower funds to negotiate and tailor appropriate terms to protect their interest in a fund of funds arrangement, and requiring an agreement, even in instances where the 3% limitation is not exceeded, facilitates negotiations.

The FAQs note that the requirements stated above also apply to unit investment trusts.

Subsequent Acquisitions

If an acquiring fund subsequently makes an acquisition in another fund in excess of the limitations described above — e.g., the 10% limitation — despite previously holding other acquired funds below the limitations, the acquiring fund must enter into a fund of funds agreement. However, the acquiring fund does not need to enter into an agreement with the previously acquired funds in which the management company invested prior to its reliance on Rule 12d1-4 unless the acquiring fund purchased additional shares in those funds.

Investments in Debt Securities Issued by CLOs

The 10% limitation covered by Rule 12d1-4 includes private funds and defines a private fund as an issuer that would be an investment company under the 1940 Act but for the exclusions provided for in Section 3(c)(1) or Section 3(c)(7) of the 1940 Act. Many issuers of collateralized loan obligations (CLOs) rely on these exclusions, and the FAQs clarify that an acquired fund does not need to count investments in debt securities issued by CLOs towards the 10% limitation. Specifically, the SEC stated that it would not recommend an enforcement action in this instance, reasoning that although Rule 12d1-4 was designed to avoid investor confusion by preventing shareholders from navigating multiple tiers of fees, investments in CLO debt securities do not raise these concerns.

The FAQs can be found here.