On October 7, 2020, the Securities and Exchange Commission adopted a new Rule 12d1-4 (the “New Rule”) under the Investment Company Act of 1940, as amended (the “Investment Company Act”), which permits registered investment companies or business development companies (the “acquiring fund”) to acquire the securities of other registered investment companies or business development companies (the “acquired fund”) (the “fund of funds” arrangements) in excess of the limits contained in Section 12(d)(1) of the Investment Company Act, provided certain conditions have been met, including:
Limits on Control and Voting. The New Rule will prohibit an acquiring fund from controlling an acquired fund and will require an acquiring fund that holds more than a certain percentage of an acquired fund’s outstanding voting securities to vote those securities in a prescribed manner in order to minimize the influence that an acquiring fund may exercise over an acquired fund. An acquiring fund that is part of the same fund group as the acquired fund and an acquiring fund that has a sub-adviser that acts as adviser to the acquired fund will not be subject to the control and voting conditions.
Required Evaluations and Findings. To address concerns that an acquiring fund could exert undue influence over an acquired fund or charge duplicative fees and expenses, the New Rule will require certain evaluations and findings be made before the acquiring fund invests in an acquired fund. These differ depending upon whether a fund is the acquiring or acquired fund and whether it is a management company, unit investment trust, or a separate account funding variable insurance contracts.
Required Fund of Funds Investment Agreements. The New Rule will require funds that do not share the same investment adviser to enter into a fund of funds investment agreement memorializing the terms of the arrangement.
Limits on Complex Structures. To limit funds’ ability to use fund of funds arrangements to create overly complex structures, the New Rule generally will prohibit funds from creating three-tier fund of funds structures, except in certain circumstances, including an exception that will permit an acquired fund to invest up to 10% of its total assets in other funds (including private funds) without restriction.