Shareholder Amy Pershkow, Associate Mark Quade and Counsel Nathaniel Segal recently published the article “SEC Proposes New Rules-Based Framework for Fund of Funds Arrangements” in the March issue of Investment Lawyer. In the article, the authors examine the SEC’s proposed new regulatory framework for fund of funds arrangements, including proposed Rule 12d1-4 under the Investment Company Act (the Proposed Rule).

The authors explain that the proposed framework is an effort by the SEC to reform and streamline the regulatory regime for fund of fund arrangements, which currently consists of a combination of statutory exemptions, SEC rules and exemptive orders. The article discusses the scope of the Proposed Rule, which would expand permissible fund of funds arrangements to include all investment companies and business development companies. “Specifically, the Proposed Rule would enable a registered investment company or business development company (BDC)—an ‘acquiring fund’—to acquire shares of any other registered investment company or BDC—an ‘acquired fund’—in excess of the statutory limitations, subject to a ‘tailored set of conditions that would enhance investor protection.’”

The article also summarizes the regulatory background governing fund of fund arrangements and the conditions of the Proposed Rule, including obligations and restrictions applicable to acquiring funds that hold more than 3 percent of an acquired fund’s outstanding shares—notably, a prohibition on an acquiring fund’s redemption of more than 3 percent of the acquired fund’s outstanding shares in any 30-day period and certain proxy voting requirements. In addition, the authors describe the impact of the Proposed Rule on a board’s oversight of fund of funds arrangements.

Comments on the SEC’s proposal are due by May 2, 2019.