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SEC Proposes Changes to Regulatory Framework for "Fund of Funds" Arrangements

The SEC proposed a new rule and several amendments that would "streamline and enhance" the regulatory framework for funds of funds, which exist where mutual funds or other funds invest in shares of another fund (i.e., "fund of funds" arrangements).

Under the proposal, a fund would not need an individual exemption order from the SEC when it takes shares from another fund that exceed Investment Company Act limits. To rely on this rule, the funds would have to comply with new investor protection requirements that would restrict funds' ability to, among other things:

  • "improperly influence other funds" by restricting the control and voting ability of the acquiring fund;
  • "charge excessive fees" by "requiring an evaluation of aggregate fees associated with the investment in the acquired fund and the complexity of the fund of funds arrangement"; and
  • create three-tier fund of funds structures in most circumstances.

Comments on the proposal must be submitted within 90 days of its publication in the Federal Register.

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