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Thompson Hine LLP, a full-service business law firm with approximately 400 lawyers in 11 offices, was ranked number 1 in the category “Most innovative North American law firms: New working models” by The Financial Times and was 1 of 7 firms shortlisted for The American Lawyer’s inaugural Legal Services Innovation Award. The firm has been recognized by the National Law Journal as a Legal Technology Trailblazer and featured by Bloomberg for its innovative service delivery models, which drive accuracy and predictability. The firm’s commitment to innovation is embodied in Thompson Hine SmartPaTHTM – a smarter way to work – predictable, efficient and aligned with client goals. For more information, please visit ThompsonHine.com and ThompsonHine.com/SmartPaTH.

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On December 19, 2018, the Securities and Exchange Commission (SEC) proposed Rule 12d1-4 (Proposed Rule) under the Investment Company Act of 1940, as amended, (1940 Act) to streamline rules for registered fund of funds arrangements. The Proposed Rule would allow registered investment companies to acquire other registered investment companies and business development companies without the limitations of Rules 12d1-1, 12d1-2 and 12d1-3 (FoF Rules), but would impose additional conditions on fund of funds arrangements.

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Funds invest in other funds to meet asset allocation, diversification or other investment objectives. The SEC adopted the FoF Rules to address fund of funds arrangements and prevent investors of an acquiring fund from controlling the assets of the acquired fund, and to shield against excessive fees. Over time, Congress created statutory exceptions to, and the SEC issued exemptive orders from, the FoF Rules. This combination of statutory exceptions and exemptive orders created a regulatory regime where substantially similar fund of funds arrangements are subject to different conditions.

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The Proposed Rule and related amendments create a consistent, rules-based framework for fund of funds arrangements to follow that is designed to provide additional protections for investors. The Proposed Rule permits a registered investment company to acquire other registered investment companies and business development companies without regard to the FoF Rules’ limitations. It also allows open-end funds, unit investment trusts (UITs), exchange-traded funds and exchange-traded mutual funds to be acquiring or acquired funds, and it provides exemptive relief from Section 17(a) of the 1940 Act, which prohibits an affiliated person of a fund from selling or purchasing any security or property of the fund. The Proposed Rule excludes private funds and unregistered investment companies.

Under the Proposed Rule, fund of funds arrangements must meet the following conditions:

Proposed Rescission of Rule 12d1-2 and Amendments to Rule 12d1-1

Rule 12d1-2 allows a fund relying on Section 12(d)(1)(G) of the 1940 Act to acquire securities of funds within the same fund group to also acquire securities of unaffiliated funds. The SEC proposes rescinding Rule 12d1-2 and exemptive orders permitting fund of funds arrangements in favor of requiring such fund of funds arrangements to rely instead on the Proposed Rule and comply with its conditions. The SEC also proposes amending Rule 12d1-1 to permit a fund of funds that invests in underlying funds within the same fund group to continue to invest in an unlimited amount of unaffiliated money market funds.

Proposed Amendment to Form N-CEN

In addition, the SEC proposes requiring a fund of funds to report on Form N-CEN whether it relied on the Proposed Rule or Section 12(d)(1)(G) of the 1940 Act during each reporting period.

While the SEC has provided a 90-day comment period, it voted unanimously to propose the Proposed Rule and the related amendments. The Proposed Rule may create cost efficiencies and reduce delays by eliminating the need for certain acquiring funds to obtain individual SEC exemptive relief, while providing some flexibility for funds of funds. Although the SEC’s recent proposal is aimed at streamlining the multitude of exemptive orders and, as a result, the often inconsistent rules, some conditions and the rescission of exemptive relief orders may create additional problems for fund of funds arrangements that rely on those exemptive orders.

Andrew J. Davalla 614.469.3353 <a href="mailto:Andrew.Davalla@ThompsonHine.com">Andrew.Davalla@ThompsonHine.com</a>

Donald S. Mendelsohn 513.352.6546 <a href="mailto:Don.Mendelsohn@ThompsonHine.com.com">Don.Mendelsohn@ThompsonHine.com</a>

Philip B. Sineneng 614.469.3217 <a href="mailto:Philip.Sineneng@ThompsonHine.com">Philip.Sineneng@ThompsonHine.com</a>

Ryan Wheeler 513.352.6693 <a href="mailto:Ryan.Wheeler@ThompsonHine.com">Ryan.Wheeler@ThompsonHine.com</a>

This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel.

This document may be considered attorney advertising in some jurisdictions.

https://admin.thompsonhine.com/wp-content/uploads/2022/04/Investment_Management_Update_-_SEC_Proposes_New_Rule_for_Fund_of_Funds_Arrangements.pdf

SEC Proposes New Rule for Fund of Funds Arrangements

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