News & Insights

New Investment Company Act rule updates regulatory requirements for fund of funds arrangements

New Investment Company Act rule updates regulatory requirements for fund of funds arrangements


Recently, the U.S. Securities and Exchange Commission adopted a new rule and related amendments regarding fund of funds arrangements. The rule, 12d1-4, aims to streamline a comprehensive regulatory approach to these arrangements.

Recent numbers report that over 40% of registered funds are invested in at least one other fund, making these arrangements a topic of importance to regulators. Fund types included in the rule are open-end funds, unit investment trusts, closed-end funds (including business development companies), exchange-traded funds, and exchange-traded managed funds.


  • The SEC is rescinding previous fund of funds rules: This includes rules and other exemptive relief, which are now replaced with other measures and provisions under the new rule.
  • New limits on voting and control were introduced: 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.
  • Evaluations and findings are required: These measures will reduce the risk of acquiring funds overcharging or over-influencing acquired funds by requiring certain diligence to be conducted prior to the beginning of an engagement.
  • An investment agreement is required: 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.
  • Three-tier fund of funds structures are prohibited: To avoid complicated or complex arrangements, three-tier fund of funds structures are generally not allowed under the rule. Exceptions to the restriction allow acquired funds to freely invest up to 10% of total assets into other funds. This arrangement is referred to as the 10% bucket and allows fund of funds to utilize structures that create higher efficiency for investors.
  • The SEC amended rule 12d-1: This will now allow funds investing mostly in funds within the same fund group to continue investing in money market funds.
  • Changes to Form N-CEN were introduced: 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.


Market participants currently engaging in fund of funds arrangements are required to transition to compliance with the provisions laid out in the new rule, if not doing so already. 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 private fund issues, Fairview can help. Our team of private fund 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.