News & Insights

Compliance Date Approaching for Fund of Funds Arrangements Under The Investment Company Act of 1940, as Amended


Last year the U.S. Securities and Exchange Commission adopted a new rule and related amendments regarding fund of funds arrangements in rule 12d1-4 (see our prior coverage here). The regulatory framework provides flexibility to fund managers to allocate and structure investments efficiently, without the costs and delays of seeking individualized exemptive orders, as long as the arrangements satisfy a number of conditions designed to enhance investor protection. The compliance date for the new rule is January 19, 2022.

Since the new rule rescinds 12d1-2 and most exemptive relief permitting fund of funds arrangements, fund managers must be ready to follow the new comprehensive framework by the January 19, 2022, compliance date. Additionally, Form N-CEN amendments must also be in place by January 19, 2022.


  • Limits on Control and Voting: Acquiring funds that own above a certain amount of an acquired fund’s outstanding voting securities will be required to vote those securities in a prescribed manner to reduce the influence the acquiring fund has over the acquired fund. There are exemptions for certain arrangements where the funds are part of the same fund group or where a sub-adviser of the acquiring fund acts as adviser to the acquired fund.
  • Required Evaluations and Findings: To reduce the risk of acquiring funds overcharging or over-influencing acquired funds, certain evaluations and finds must be conducted prior to the beginning of an engagement.
    • Acquiring Fund Evaluations and Findings: These include an evaluation of the complexity of the structure of the investment, relevant fees and expenses, and a required finding that the acquiring fund’s fees and expenses do not duplicate the fees and expenses of the acquired fund.  If a UIT is the acquiring fund, the principal underwriter or depositor must make such finding.  Additionally, where separate accounts funding variable insurance contracts invest in an acquiring fund a certification that the separate account meets the fee and expense standards of section 26(f)(2)(A) is required from the insurance company issuing the separate account.
    • Acquired Fund Evaluations and Findings: An acquired fund’s investment adviser is required by the new rule to find that any undue influence concerns associated with the acquiring fund’s investment in the acquired fund are reasonably addressed.  The investment adviser must consider (1) the scale and maximum investment limits of the contemplated investment, (2) the anticipated timing of the acquiring fund’s redemption requests, (3) to what extent the acquiring fund will provide advance notification of investments and redemptions, and (4) the circumstances under which the acquired fund may elect to satisfy redemption requests in kind rather than in cash and the terms of any redemptions in kind.
  • Required Fund of Funds Investment Agreements: Funds that do not have the same investment adviser are now required to enter into an investment agreement to ensure terms of the arrangement are properly observed.  At a minimum this agreement must include:
    • any material terms regarding the acquiring fund’s investment in the acquired fund necessary to make the required evaluations and findings under the rule;
    • a termination provision whereby either the acquiring fund or acquired fund may terminate the agreement subject to advance written notice no longer than 60 days; and
    • a requirement that the acquired fund provide the acquiring fund with information on the fees and expenses of the acquired fund reasonably requested by the acquiring fund.
  • Recordkeeping Requirements: Acquiring and acquired funds relying on rule 12d1-4 must maintain and preserve the following records for not less than five years, the first two years in an easily accessible place:
    • A copy of each fund of funds investment agreement in effect, or that at any time within the past five years was in effect;
    • A written record of the board and adviser evaluations and findings required by the rule and the basis therefore (within the past five years for management companies);
    • The certification from each insurance company required by the rule.
  • Prohibited Complex Structures: To avoid complicated or complex arrangements, three-tier fund of funds structures are generally not allowed under the rule. However, the rule permits an acquired fund to invest in excess of the section 12d-1 limits in certain circumstances.  The rule also includes an exception for acquired funds to freely invest up to 10% of total assets into other funds, including private funds. This arrangement is referred to as the 10% bucket and allows fund of funds to utilize structures that create higher efficiency for investors.
  • Changes to Form N-CEN: Form N-CEN will now require funds to report if they relied on the new rule, 12d1-4, or if they relied on the statutory exception in rule 12(d)(1)(G) of the Investment Company Act.


Funds engaging in fund of funds arrangements  must be in compliance with the new rule by January 19, 2022.  Funds planning to engage in fund of funds arrangements in the future will also be subject to the new provisions.

If your business requires assistance interpreting rule 12d1-4, meeting compliance requirements, or is seeking further guidance on fund issues, Fairview can help. Our team of compliance experts can get your firm on track with a meaningful compliance program. Contact us today for more information about what Fairview can do for your business.