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Industry Associations Comment on SEC Regulatory Framework for "Fund of Funds" Arrangements

Several industry associations proposed amendments to an SEC-proposed new rule intended to "streamline and enhance" the regulatory framework for "fund of funds arrangements" (i.e., mutual funds or other funds that invest in shares of another fund).

The Managed Funds Association ("MFA") and the Investment Company Institute ("ICI") generally supported the proposal but suggested changes.

The MFA asked the SEC to amend the proposal to ensure that private funds fall under the scope of Rule 12d1-4. According to the MFA, this would allow private funds to be invested and regulated in the same manner as registered funds, which would (i) ensure a "[l]evel playing field," (ii) benefit investor and capital allocation across U.S. markets, (iii) ensure that investor protection is equal across registered and private funds, and (iv) allow the SEC to have "appropriate oversight" over the registered private fund managers. The MFA noted that if the SEC does not enact this recommendation, it should at least allow private funds to make additional investments in exchange-traded funds.

The ICI advised the SEC to:

  • remove the proposed redemption restriction (which would restrict acquiring funds' ability to redeem shares of acquired funds) and instead adopt the current regulatory approach that has "been serving investors very effectively for decades";

  • align the proposed requirements concerning voting shares of underlying management investment companies with the current approach;

  • specify the finding that an acquiring fund adviser would have to make concerning the complexity and aggregate fees of a fund of funds arrangement;

  • rescind the requirement that an acquiring fund must have a certification regarding separate account fees from an insurance company;

  • add additional exceptions to the restrictions on multi-tier arrangements;

  • expand the scope of the relief to allow private funds and foreign funds to invest in registered funds or business development companies ("BDCs") under the proposed rule;

  • confirm that it intends to rescind no-action relief that concerns only fund of funds arrangements that are addressed by the proposed rule;

  • allow funds to exclude BDCs from the definition of "acquired fund" in order to treat BDCs and investments in operating companies the same for expense presentation purposes; and

  • prohibit private funds from exceeding Section 12(d)(1) restrictions when they are investing in closed-end funds.

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