Investment funds that buy shares in other funds will be able
to do so with fewer regulatory hurdles under a rule the Securities and Exchange
Commission adopted Wednesday.
The agency would allow a so-called fund of funds to acquire
shares of another fund in excess of current limits without requiring individual
approval as long as the fund meets certain conditions. A fund of funds is a
pooled investment vehicle consisting of other underlying funds that diversify
the acquiring fund.
The new rule applies to open-end funds, unit investment
trusts, closed-end funds (including business development companies),
exchange-traded funds and exchange-traded managed funds. It was approved
unanimously by the five SEC members in a nonpublic vote.
The regulation includes safeguards to prohibit an acquiring
fund from controlling or exerting an undue influence over an acquired fund. It
prevents the charging of duplicative fees and limits overly complex structures.
It does not allow funds comprising a fund of funds to share the same investment
adviser.
“To achieve asset allocation, diversification and other
objectives, many funds have invested in other funds,” SEC Chairman Jay Clayton
said in a statement. “Today’s action will enhance and modernize the regulatory
framework for these arrangements … [and] provide 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 rule will become effective 60 days after its publication
in the Federal Register. To ease the transition to the new framework, the compliance
date and the rescission of the current rule and exemptive orders will not occur
until more than a year later.
The agency and the industry will need that extra time to
acclimate, said SEC Commissioner Hester Peirce.
“Transitioning from an exemptive order framework for
funds-of-funds won’t be easy, but a consistent, workable regulatory approach is
important,” Peirce wrote in a tweet. “For less common arrangements, the
exemptive process is still available.
The Investment Company Institute, which represents the
mutual fund industry, supports the new rule on first glance.
“The SEC’s final fund of funds rule helps streamline the
regulatory framework governing funds of funds,” ICI general counsel Susan Olson
said in a statement. “Though ICI is still analyzing the SEC’s release, we are
pleased that the Commission removed the proposed redemption restrictions that
would prevent fund managers from acting in the best interest of investors.”
The fund of funds rule was initially proposed in December
2018. The agency took public comments through last March.
Approximately 40% of all registered funds hold an investment
in at least one other fund, according to the SEC. Assets in such arrangements
totaled $2.54 trillion last year.
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