New Fund of Funds Rule: Avoiding Regulatory Pitfalls and Investor Disputes When Funds Invest in Other Funds

Description

On Oct. 7, 2020, the SEC adopted a new rule under the Investment Company Act of 1940, which provides a new framework governing investments by a registered investment company or a business development company (BDC) in other registered investment companies or BDCs. Fund managers must understand the new rule’s complexities to avoid compliance pitfalls.

Fund of funds arrangements are limited by the "anti-pyramiding" provisions in Section 12(d)(1)(A), which generally prohibit a regulated fund from acquiring securities of another regulated fund over certain thresholds. The new rule permits a fund to acquire shares of other funds above those thresholds, subject to new limitations: the acquiring fund may not acquire "control" over any acquired fund and must comply with new requirements with respect to voting rights. Investment advisers of acquiring funds and acquired funds must make certain evaluations and findings designed to address investor protection concerns associated with fund of funds arrangements.

Funds with different investment advisers must enter into an agreement that memorializes the terms governing the arrangement and permits the investment advisers to make the necessary findings. This agreement must be filed as an exhibit to the funds' registration statements. In addition, the new rule will limit certain complex fund of funds arrangements that are commonly used in the registered funds industry today.

Listen as our authoritative panel discusses the new investment options presented by the new rule and the structural and regulatory issues which must be considered when making fund of funds investments.