On October 7, 2020, the SEC unanimously voted to adopt new rule 12d1-4 under the Investment Company Act and related amendments intended to streamline and enhance the regulatory framework for fund of funds arrangements. Subject to certain conditions, the final rule allows registered investment companies and business development companies to acquire the shares of another fund in excess of the limits prescribed in section 12(d)(1) of the Investment Company Act without obtaining an individual exemptive order.
Notably, the final rule eliminates the “redemption limit” that was included in the proposed rule, which was strongly opposed by numerous commenters, and that change should be well received by the fund industry. However, the final rule contains a number of important differences from existing SEC exemptive orders, which, as the SEC acknowledged, may require substantial restructuring of certain current fund of funds arrangements. In particular, the SEC declined to make a special accommodation for “central funds” as requested by a number of commenters, although the SEC did provide flexibility for acquired funds to invest in other funds, including central funds, up to 10% of the acquired fund’s total assets. The final rule will also have implications for fund boards of directors, including with respect to their oversight obligations of fund of funds arrangements under rule 38a-1.