directors or investment advisers.\342\ In addition, this certification
requirement will ensure an analysis of the aggregate fee and expense
structure of all the funds involved.
---------------------------------------------------------------------------

    \341\ Rule 12d1-4 restricts fund of funds arrangements to two
tiers other than in limited circumstances, such as master-feeder
arrangements in reliance on section 12(d)(1)(E) of the Act. See
infra section II.C.3 (discussing complex structure requirements).
    \342\ Section 15(c) of the Act applies to registered open-end
funds that have a board of directors, whereas section 36(b) of the
Act applies to certain payments to a registered investment company's
investment adviser.
---------------------------------------------------------------------------

    The final rule's conditions for separate accounts funding variable
insurance contracts are based on the current fund of funds exemptive
orders.\343\ Our exemptive orders include a condition similar to the
certification requirement.\344\ Under the orders, the

insurance company must certify to the acquiring fund that the aggregate
of all fees and charges associated with each variable insurance
contract that invests in the acquiring fund are reasonable in relation
to the services rendered, the expenses expected to be incurred, and the
risks assumed by the insurance company.
---------------------------------------------------------------------------

    \343\ See 2018 FOF Proposing Release, supra footnote 6, at
section II.C.3.c.
    \344\ Specifically, in the orders, each acquiring fund must
represent in its participation agreements with an acquired fund that
no insurance company sponsoring a registered separate account
funding variable insurance contracts will be permitted to invest in
the acquiring fund unless the insurance company has made a
certification to the acquiring fund. Id. at n.173-174 and
accompanying text.
---------------------------------------------------------------------------

    Under the rule, an insurance company sponsoring a separate account
must certify that the fees and expenses borne by the separate account,
acquiring fund, and acquired fund in the aggregate are reasonable and
consistent with the standard set forth in section 26 of the Act.
Because the final rule will require most funds to enter into a fund of
funds investment agreement, we considered whether to codify the
approach of the exemptive orders and require that the fund of funds
investment agreement include a representation regarding the insurance
company's certification.\345\ Rule 12d1-4 will not require that the
fund of funds investment agreement include this representation,
although the agreement may do so. This is consistent with our general
approach not to codify in our rule all the particularized terms that an
agreement must include to reflect the fund of funds arrangement.
---------------------------------------------------------------------------

    \345\ The Commission proposed the certification requirement, in
part, because the proposal did not contemplate participation
agreements. See 2018 FOF Proposing Release, supra footnote 6, at
section II.C.3.c.
---------------------------------------------------------------------------

iv. Fund of Funds Investment Agreements
    The final rule will require funds to enter into a fund of funds
investment agreement before the acquiring fund acquires securities of
the acquired fund in excess of the limits of section 12(d)(1) in
reliance on rule 12d1-4 unless both funds have the same adviser.\346\
This requirement works in tandem with the requirement to make certain
Fund Findings by providing a method to hold the parties to the
arrangement to the terms that led each fund's investment adviser to
agree to the arrangement in the first place. In negotiating the fund of
funds investment agreement, funds can set the terms of the agreement to
support the Fund Findings. For example, an acquired fund could require
the acquiring fund to agree to submit redemptions over a certain amount
for a given period as a condition to the fund of funds investment
agreement. This agreement both sets the expectations of the parties at
the outset of the arrangement and provides a method of enforceability
should one party not live up to these expectations. Thus, the fund of
funds investment agreement is designed to address historical abuse
concerns under section 12(d)(1), including an acquiring fund
threatening large-scale redemptions as a means of exercising undue
influence over an acquired fund.\347\ Further, the requirement to enter
into such agreement puts the acquired fund on notice that an acquiring
fund is investing in it in reliance on the rule.
---------------------------------------------------------------------------

    \346\ Rule 12d1-4(b)(2)(iv). Unlike the conditions relating to
voting and control, the rule will require funds that are part of the
same group of investment companies to enter into a fund of funds
investment agreement if they do not have the same investment
adviser.
    \347\ We believe that, due to the flexibility that the final
rule provides in this regard, no special exceptions for certain
funds or situations, such as interval funds or acquired fund
liquidations, are necessary. But see NYC Bar Comment Letter
(suggesting that these instances should be exempted from its
proposed alternative approach to the proposed redemption limit). We
would expect that the relevant parties would negotiate appropriate
terms into their fund of funds investment agreement.
---------------------------------------------------------------------------

    In the 2018 Proposing Release, we requested comment on alternatives
to the proposed redemption limit, specifically asking whether we should
permit acquired funds to set their own redemption limit (and, if so,
what parameters we should establish) or whether we should require
participation agreements.\348\ As discussed above, a number of
commenters recommended a negotiated agreement similar to the
participation agreements required in our exemptive orders as an
alternative to the proposed redemption limit.\349\ We agree with these
commenters that a negotiated agreement, combined with the findings
requirements discussed above, would be a more effective control against
the threat of the use of large redemptions to exercise undue influence
than the proposed redemption limit.
---------------------------------------------------------------------------

    \348\ See 2018 FOF Proposing Release, supra footnote 6, at 57-
58. We also requested comment on: (i) Whether participation
agreements require the parties to a fund of funds arrangement to
provide information necessary for compliance with other provisions
of the Act; and (ii) whether we should codify the conditions of
existing exemptive orders including the procedural requirements. See
id.
    \349\ See supra footnotes 221 through 236, 266 through 270, and
296 through 299 and accompanying text.
---------------------------------------------------------------------------

    The fund of funds investment agreement differs in certain ways from
the requirement in our exemptive orders that, prior to investing in
another fund, acquiring and acquired funds enter into a participation
agreement. Participation agreements under our orders require both funds
in a fund of funds arrangement (and their investment advisers) to
fulfill their responsibilities under the order.\350\ Participation
agreements also require that the acquiring fund notify the acquired
fund prior to investing in excess of the limits of section 12(d)(1)(A)
and provide the acquired fund a list of the names of each of its
affiliates to help the acquired fund ensure compliance with the
affiliated transaction provisions of the Act.\351\ Because all funds
operating in accordance with rule 12d1-4 will be required to comply
with the rule's conditions, the rule will not require that a fund of
funds investment agreement include these types of contractual
provisions.\352\ In contrast to a participation agreement, the fund of
funds investment agreement will be required to memorialize the terms of
the arrangement that serve as a basis for the required finding. The
agreement will empower funds relying on the rule to negotiate and
tailor appropriate terms to protect their interests in a fund of funds
arrangement. For example, the fund of funds investment agreement will
provide a mechanism for an acquired fund to limit an acquiring fund's
investments in reliance on the rule and arm itself with other tools it
desires to protect against potential undue influence from an acquiring
fund.
---------------------------------------------------------------------------

    \350\ Fund of funds exemptive orders require a participation
agreement to state, without limitation, that the funds' boards and
their investment advisers understand the terms and conditions of the
order and agree to fulfill their responsibilities under the order.
See, e.g., ETF Managers Trust, et al., Investment Company Act
Release Nos. 33799 (Feb. 19, 2020) [85 FR 10794 (Feb. 25, 2020)]
(notice) and 33823 (Mar. 24, 2020) (order) and related application
(``ETF Managers Trust'').
    \351\ While not required by exemptive orders, some funds include
other provisions in participation agreements to govern the fund of
funds arrangement, such as provisions related to mirror voting,
waiver of compensation, and notification upon exceeding certain
thresholds. We are not requiring that these conditions be included
in the written agreement.
    \352\ See ICI Comment Letter.
---------------------------------------------------------------------------

    Rule 12d1-4 also will require funds operating in accordance with it
to enter into a fund of funds investment agreement that includes three
specific provisions. While some commenters suggested that we did not
need to outline specific provisions in these agreements,\353\ we
believe that certain minimum requirements are necessary to ensure that
the fund of funds agreement is effective at curtailing undue influence.
These requirements are based on the Fund Findings, as well as elements
of our exemptive orders and

commenters' recommendations in response to our requests for
comment.\354\
---------------------------------------------------------------------------

    \353\ See ICI Comment Letter (stating that because a fund of
funds arrangement would need to comply with the generally applicable
provisions of the rule, its proposed alternative to a participation
agreement would not require negotiation). But see Capital Group
Comment Letter (suggesting that the Commission should include
practical conditions in a participation agreement-type regime).
    \354\ See, e.g., ETF Managers Trust, supra footnote 350
(representing, among other things, that the participation agreement
permitted an unaffiliated acquired fund to terminate it). See also
ICI Comment Letter (``[r]equiring the acquired fund to agree to (and
then terminate, if desired) the investment by an acquiring fund from
a different group of investment companies would give the acquired
fund a critical tool for protecting the interests of its
shareholders''); Wells Fargo Comment Letter (stating that the
standard representations, compliance polices, and other conditions
accompanying participation agreements in the exemptive orders
establish an effective framework of checks and balances that has
successfully governed unaffiliated fund of funds arrangements);
Fidelity Comment Letter (suggesting that in a participation
agreement, an acquired fund could always protect itself by refusing
to enter into such an agreement); NYC Bar Comment Letter
(suggesting, among other things, that a participation agreement-type
regime would permit the acquiring fund to negotiate the glide-path
of redemptions).
---------------------------------------------------------------------------

    First, the fund of funds investment agreement must include any
material terms necessary for the adviser, underwriter, or depositor to
make the Fund Finding where the funds involved include management
companies or UITs.\355\ This ensures that the adviser or other party
making the Fund Finding will have memorialized the terms of the
investment that underpin the Fund Finding, thereby making these terms
fixed and clearly agreed if a dispute arises in the future. Given the
importance of the Fund Findings to rule 12d1-4's protections, we
believe that it is critical for the agreement to identify such terms to
minimize ambiguity.
---------------------------------------------------------------------------

    \355\ Rule 12d1-4(b)(2)(iv)(A). This is not required of separate
accounts because the acquiring fund is obtaining a certification
from the insurance company offering the separate account rather than
making a finding regarding the separate account.
---------------------------------------------------------------------------

    Second, each fund of funds investment agreement must include a
termination provision whereby either party can terminate the agreement
with advance written notice within a period no longer than 60
days.\356\ This provision will give an acquired fund the ability to
terminate an acquiring fund's acquisition of additional fund shares and
provides the acquired fund with the negotiating leverage to address
undue influence concerns. Termination of the agreement does not, unless
otherwise agreed to by the parties, require that the acquiring fund
reduce its position in the acquired fund, but will prevent the
acquiring fund from purchasing additional shares of the acquired fund
beyond the limits of section 12(d)(1).\357\
---------------------------------------------------------------------------

    \356\ Rule 12d1-4(b)(2)(iv)(B). The 60-day period is based upon
a similar provision in section 15(a) of the Act. See 15 U.S.C. 80a-
15(a)(3). We believe that this period is also consistent with the
termination provision in some existing participation agreements.
    \357\ Termination of the agreement would mean that the funds
could no longer rely upon the rule to purchase or otherwise acquire,
or sell or otherwise dispose of, fund securities in excess of the
limits of section 12(d)(1) because they would not have a fund of
funds investment agreement effective for the duration of the fund's
reliance on the rule. See rule 12d1-4(b)(2)(iv).
---------------------------------------------------------------------------

    Lastly, the agreement must include a provision requiring an
acquired fund to provide the acquiring fund with fee and expense
information to the extent reasonably requested.\358\ We believe that
this requirement is appropriate to assist the acquiring fund's adviser
with assessing the impact of fees and expenses associated with an
investment in an acquired fund. For example, an acquired fund that
invests in other funds would more readily have fee and expense
information associated with the underlying investment than the
acquiring fund, which may inform the acquiring fund's consideration of
fees and expenses associated with an investment in the acquired fund.
We believe that fund of funds investment agreements are material
contracts not made in the ordinary course of business. As a result,
they must be filed as an exhibit to each fund's registration
statement.\359\
---------------------------------------------------------------------------

    \358\ Rule 12d1-4(b)(2)(iv)(C).
    \359\ See, e.g., Item 28(h) of Form N-1A.
---------------------------------------------------------------------------

    In sum, we believe that this requirement provides important
additional protections beyond those provided by the Fund Findings
requirement. First, it ensures both parties agree to the significant
terms of the investment, including those terms on which the adviser or
other party making the Fund Finding has based its analysis. Second, it
ensures that an acquiring fund has the information it needs to assess
the impact of the relevant fees and expenses. Lastly, these agreements
permit funds to terminate the investment if they so choose, thereby
ending the funds' ability to rely upon the rule for any additional
investments in the acquired fund.
    The rule will not require acquired funds and acquiring funds that
are advised by the same adviser to enter into a fund of funds
investment agreement. We believe that there are comparatively fewer
benefits to formalizing a fund of funds arrangement with an executed
agreement if the funds have the same adviser, assuming that the funds'
adviser has made the applicable Fund Finding. Given the importance of
the fund of funds investment agreement to the structure of the rule, we
think it is important to require it of every fund unless the same
adviser is the primary adviser to both funds. That is, the exception
will not be available when an investment adviser acts as an adviser to
one fund and a sub-adviser to the other fund in a fund of funds
arrangement relying on the rule or as sub-adviser to both funds. We
believe that this distinction is appropriate because a sub-adviser may
not have the same access to information or be negotiating from the same
position as other advisers. Thus, in situations where an adviser is the
primary adviser to the acquired fund and serves as the sub-adviser to
the acquiring fund, a fund of funds investment agreement would be
required. Similarly, funds that do not have an adviser, such as
internally managed funds or UITs, always would need to enter into a
fund of funds investment agreement. Funds that do have the same adviser
must still memorialize the arrangements that led the relevant adviser
to make the Fund Finding for each fund under the rule.\360\
---------------------------------------------------------------------------

    \360\ Rule 12d1-4(c)(2). See also supra section II.C.4.
---------------------------------------------------------------------------

    In the 2018 Proposing Release, we noted that an adviser to both an
acquiring and acquired fund would owe a fiduciary duty to each of these
funds.\361\ As noted above, some commenters suggested that this was a
reason to exclude affiliated funds of funds from the proposed
redemption limit.\362\ However, another commenter questioned whether
advisers to more than one fund can effectively exercise their fiduciary
duty to each fund independently of the other fund.\363\ Advisers must
act in accordance with their fiduciary duties to each respective fund,
which should address the conflicts of interests advisers face when
acting as an adviser to both the acquiring and acquired funds. Because
of this, and the requirement to make the Fund Findings, we believe that
it is unnecessary to apply the fund of funds investment agreement
requirement to funds having the same adviser. In cases where an adviser
believes that it cannot satisfy its fiduciary duty to both funds in a
fund of funds arrangement, the adviser should not enter into the
arrangement.
---------------------------------------------------------------------------

    \361\ 2018 FOF Proposing Release, supra footnote 6, at n.107 and
accompanying text.
    \362\ See Wells Fargo Comment Letter; Thrivent Comment Letter;
SIFMA AMG Comment Letter; see also John Hancock Comment Letter; MFS
Comment Letter; Ropes Comment Letter.
    \363\ See CFA Comment Letter.
---------------------------------------------------------------------------

    We also are not exempting all funds within the same group of
investment companies from the fund of funds investment agreement
requirement, as suggested by a number of commenters in relation to the
more-restrictive proposed redemption limit.\364\ While some funds
within the same group may

have effective communication and controls such that a fund of funds
investment agreement may seem duplicative, not all do. As we noted
above, two funds in the same group of investment companies could have
two different advisers and two different boards satisfying their
fiduciary duties to their respective funds and shareholders. In some
cases, the investment advisers to funds in the same group of investment
companies are not even affiliated persons.\365\ Further, these funds
are likely subject to different compliance policies and procedures and,
as a result, we believe that a fund of funds investment agreement is an
effective mechanism to memorialize the arrangement in these
circumstances.
---------------------------------------------------------------------------

    \364\ See supra footnote 216 and accompanying text.
    \365\ See supra footnotes 166 through 170 and accompanying text.
---------------------------------------------------------------------------

    In summary, we believe that the requirement to enter into a fund of
funds investment agreement, coupled with the expanded Fund Findings,
are collectively a more effective approach than the proposed redemption
limit to address undue influence concerns from redemptions. As compared
to the proposed redemption limit that applied to all fund of funds
arrangements, the conditions we are adopting provide funds with the
ability to tailor their limits or protections to specific arrangements
to better promote protection against potential undue influence and are
more similar to requirements in orders providing section 12(d)(1)
relief for fund of funds. As a result, we believe the rule, as adopted,
will be an effective, less burdensome approach.
3. Complex Structures
    A concern underlying section 12(d)(1) is that complex multi-tier
fund structures could lead to excessive fees and investor confusion. To
address this concern rule 12d1-4 will include conditions designed
generally to restrict fund of funds arrangements to two-tiers, largely
as proposed. Additionally, as proposed, rule 12d1-4 includes exceptions
to the two-tier limitation that are limited in scope and designed to
capture circumstances that do not raise the concerns underlying section
12(d)(1) of the Act. In response to concerns raised by commenters,
however, we are adding an additional exception that will permit an
acquired fund to invest up to 10% of its total assets in other funds
without restriction on the purpose of the investment or types of
underlying funds, or the size of the investment in a particular
underlying fund (the ``10% Bucket''). The final rule's conditions seek
to permit innovation and efficient portfolio management while limiting
the potential for confusing structures and duplicative fees.
a. General Prohibition on Three-Tier Structures
    Rule 12d1-4 includes conditions designed to restrict fund of funds
arrangements to two tiers (other than in limited circumstances),
generally as proposed. Commenters were mixed with respect to the
proposed rule's general prohibition on three-tier structures. Some
commenters agreed with the Commission that multi-tier structures have
the potential to confuse investors and generate duplicative fees.\366\
One commenter, for example, supported a broad restriction that limits
fund of funds arrangements to two levels.\367\ Some commenters
generally supported a prohibition on three-tier structures, but also
advocated for broad-based exceptions for certain acquired fund
investments in underlying funds that had been permitted under
historical exemptive relief and included in the proposed rule.\368\
---------------------------------------------------------------------------

    \366\ See, e.g., CFA Comment Letter; Invesco Comment Letter;
Voya Comment Letter.
    \367\ CFA Comment Letter.
    \368\ See, e.g., Invesco Comment Letter (recommending exceptions
for securities lending programs and cash sweep arrangements), Voya
Comment Letter (recommending exceptions for master-feeder
arrangements, short-term cash management, interfund borrowing and
lending, and investments in wholly owned subsidiaries).
---------------------------------------------------------------------------

    Other commenters stated that multi-tier structures may be
beneficial and recommended that the Commission allow such structures by
relying on other aspects of the rule to enhance investor
protection.\369\ Some commenters recommended that the rule permit
certain specific multi-tier structures, stating that such structures
are beneficial to fund shareholders and do not raise the concerns
section 12(d)(1) was designed to prevent.\370\ Similarly, one commenter
wrote that the proposed three-tier condition was too rigid and would
constrain legitimate three-tier arrangements.\371\ Further, some
commenters noted that the proposed condition would require
restructuring of certain fund of funds arrangements, resulting in
additional costs for investors and limiting the variety of investment
strategies available in the marketplace.\372\ Some commenters also
recommended that the three tier limitations should not apply to
acquired fund investments in private funds, since section 12(d)(1) does
not restrict a fund from investing in private funds.\373\
---------------------------------------------------------------------------

    \369\ Morningstar Comment Letter (advising against a general
prohibition on three-tier structures in favor of fee and expense
disclosure in prospectuses and annual reports); TRP Comment Letter
(stating that the proposed rule's requirements that an adviser
evaluate the complexity of the structure and engage in a best
interest finding are sufficient without a broader prohibition on
three-tier structures).
    \370\ See, e.g., ICI Comment Letter (recommending that the rule
include an expanded list of permitted multi-tier fund of fund
arrangements that could be beneficial to shareholders); Fidelity
Rutland Comment Letter (recommending that the rule permit the use of
affiliated funds commonly created by an adviser for the purpose of
efficiently managing exposure to a specific asset class (commonly
referred to as ``central funds'')); Ropes Comment Letter
(recommending that the rule permit three-tier structures where the
underlying fund is an ETF or where all three funds in the structure
are in the same group of investment companies); Comment Letter of
Davis Polk & Wardwell LLP (May 2, 2019) (``DPW Comment Letter'')
(recommending that the rule permit three-tier structures where the
underlying fund is a limited life grantor trust).
    \371\ TRP Comment Letter (recommending a principles-based
approach that would generally permit multi-tier structures subject
to the other conditions of the rule).
    \372\ See, e.g., PIMCO Comment Letter; Nuveen Comment Letter;
SIFMA AMG Comment Letter.
    \373\ ICI Comment Letter. See also IPA Comment Letter
(recommending that the rule exempt BDC investments in private funds
from the general prohibition on three-tier structures); Guggenheim
Comment Letter (recommending an exception for structured finance
vehicles if the rule generally prohibits acquired funds from
investing in private funds).
---------------------------------------------------------------------------

    As an alternative to the three-tier condition, some commenters
suggested that the Commission require the acquiring fund adviser to
engage in a best interest determination and enhanced board reporting on
the use of complex structures.\374\ Other commenters recommended that
the Commission require enhanced investor disclosure rather than
restricting fund structures.\375\
---------------------------------------------------------------------------

    \374\ TRP Comment Letter; SIFMA AMG Comment Letter.
    \375\ See, e.g., Morningstar Comment Letter; TRP Comment Letter
(suggesting enhancing the proposed report to the board to include a
statement that the adviser believes the fund of funds structure and
disclosure documents sufficiently mitigate the risk of the three-
tier structure being overly confusing to investors). But See CFA
Comment Letter (expressing skepticism about the benefit of enhanced
disclosures to retail investors) citing Study Regarding Financial
Literacy Among Investors As Required by Section 917 of the Dodd-
Frank Wall Street Reform and Consumer Protection Act, Staff of the
U.S. Securities and Exchange Commission (August 2012).
---------------------------------------------------------------------------

    Although we acknowledge that three-tier structures may provide
efficient and cost-effective exposure to certain market segments in
certain circumstances, we continue to believe that multi-tier
structures can obfuscate the fund's investments, fees, and related
risks.\376\ For example, if an acquiring fund invests in an acquired
fund that in turn invests in other funds, an acquiring

fund shareholder could find it difficult to determine the nature and
value of the holdings ultimately underlying his or her investment.
Accordingly, we continue to believe that it is appropriate to limit the
ability of funds to structure multi-tier arrangements in reliance on
rule 12d1-4. We also believe that enhanced disclosure, without
additional limitations on multi-tier structures, would be insufficient
to address potential investor confusion associated with complex
structures.\377\ As discussed below, we have made certain modifications
to the final rule, however, that are designed to provide additional
flexibility for acquired funds to gain exposure to underlying funds in
order to minimize disruption to existing fund structures and preserve
some flexibility for efficient multi-tier arrangements.\378\ We believe
that the final rule's three-tier limitation appropriately provides such
flexibility and provides protections against complex structures and
excessive fees.
---------------------------------------------------------------------------

    \376\ See 2018 FOF Proposing Release, supra footnote 6, at 83.
    \377\ See infra footnotes 388-390 and accompanying text.
    \378\ See, e.g., Guggenheim Comment Letter (predicting that many
debt funds that serve as acquired funds would need to be
restructured given that such funds hold substantial investments in
entities that rely on section 3(c)(1) and 3(c)(7) of the act, such
as structured finance vehicles).
---------------------------------------------------------------------------

b. Limitations on Other Funds' Acquisitions of Acquiring Funds
    Rule 12d1-4 includes a condition designed to prevent an acquiring
fund from also being an acquired fund under the rule or under section
12(d)(1)(G) of the Act. Specifically, the rule prohibits a fund that is
relying on section 12(d)(1)(G) of the Act (15 U.S.C. 80a-12(d)(1)(G))
or rule 12d1-4 from acquiring, in excess of the limits in section
12(d)(1)(A), the outstanding voting securities of an acquiring fund (a
``second-tier fund''), unless the second-tier fund makes investments
permitted by rule 12d1-4(b)(3)(ii) as discussed below.\379\ As a
result, this condition will limit a fund's ability to create multi-tier
arrangements, subject to certain limited exceptions. This condition is
generally more comprehensive and, therefore, limiting, than the
conditions in our orders, and addresses certain multi-tier arrangements
that have emerged.\380\
---------------------------------------------------------------------------

    \379\ Rule 12d1-4(a)(3)(i). See also section 12(d)(1)(G)(v)
(granting the Commission authority to prescribe rules or regulations
with respect to acquisitions under section 12(d)(1)(G) as necessary
and appropriate for the protection of investors).
    \380\ See 2018 FOF Proposing Release, supra footnote 6, at 77
(noting that our orders do not expressly prohibit a fund from
investing in an acquiring fund (i.e., the top tier in a traditional
fund of funds structure) beyond the limits in section 12(d)(1)).
---------------------------------------------------------------------------

    This provision, however, will not prevent a fund from investing all
of its assets in an acquiring fund in reliance on section
12(d)(1)(E).\381\ We do not believe three-tier structures involving a
master-feeder arrangement present the risk that section 12(d)(1) was
designed to address. In addition, this condition will not prevent other
funds from acquiring the voting securities of an acquiring fund in
amounts of 3% or less, which effectively creates a type of three-tier
structure that does not raise the concerns that section 12(d)(1) was
designed to prevent.\382\
---------------------------------------------------------------------------

    \381\ For example, this type of three-tier structure would
permit a target date fund (itself an acquiring fund) to simply act
as a conduit through which an insurance product separate account
invests.
    \382\ A fund could acquire the securities of an acquiring fund
within the limits of section 12(d)(1)(A). Funds relying on section
12(d)(1)(F) could acquire up to 3% of the outstanding voting
securities in an unlimited number of funds. See section 12(d)(1)(F).
---------------------------------------------------------------------------

    Rule 12d1-4's limitation on investments in acquiring funds is
generally consistent with the proposed complex structures provision.
However, the final rule will not apply the condition only to
investments in an acquiring fund that discloses in its registration
statement that it may be an acquiring fund for purposes of rule 12d1-4,
as proposed.\383\ Because rule 12d1-4 will require most funds to enter
into a fund of funds investment agreement, and an adviser that manages
both acquiring and acquired funds should have information regarding an
acquired fund's investments, the final rule will prohibit a fund from
investing in an acquiring fund without tying this limitation to
registration statement disclosures.\384\
---------------------------------------------------------------------------

    \383\ Proposed rule 12d1-4(b)(4)(ii) (prohibiting a fund relying
on the rule or section 12(d)(1)(G) of the Act from acquiring the
securities of a fund that discloses in its most recent registration
statement that it may be an acquiring fund in reliance on proposed
rule 12d1-4).
    \384\ We believe funds investing in reliance on section
12(d)(1)(G) likely would have, or be able to obtain, sufficient
information to know which other funds within the same group of
investment companies are acquiring funds under rule 12d1-4. See 2018
FOF Proposing Release, supra footnote 6, at 79. We do not believe
that funds within the same group of investment companies will face
challenges in obtaining this information because of the potential
for information barriers. See supra section II.C.1.a.i.
---------------------------------------------------------------------------

    While several commenters addressed the proposed limit on multi-tier
structures generally, no commenters addressed whether the rule should
prohibit a fund from investing in an acquiring fund. We continue to
believe that concerns of undue influence, complex structures, and
excessive fees apply both to three-tier structures where registered
funds invest in acquiring funds and three-tier structures where an
acquired fund invests a substantial portion of its assets in other
registered funds. Accordingly, we continue to believe that it is
appropriate to limit funds' ability to invest in acquiring funds,
subject to the exception for funds relying on section 12(d)(1)(E). We
believe this condition will help limit the construction of complex
multi-tier structures, while preserving some flexibility for efficient
multi-tier arrangements. In addition, rule 12d1-4 does not prohibit
other funds from acquiring the voting securities of an acquiring fund
in amounts allowed by the Act (i.e., 3% or less). We do not believe
that multiple registered funds holding 3% or less of the acquiring fund
implicate the historical abuses, such as undue influence, that section
12(d)(1) is intended to prevent.\385\
---------------------------------------------------------------------------

    \385\ See 2018 FOF Proposing Release, supra footnote 6, at 78-
79.
---------------------------------------------------------------------------

c. Limitations on Acquired Funds' Acquisition of Other Funds and
Private Funds; Exceptions to Three-Tier Limitation
    As proposed, rule 12d1-4 will include a condition designed to limit
fund of funds arrangements where the acquired fund is itself an
acquiring fund. The rule generally will prohibit arrangements where an
acquired fund invests in other investment companies or private funds in
excess of the limits in section 12(d)(1)(A). Specifically, the rule
states that no acquired fund may purchase or otherwise acquire the
securities of an investment company or private fund if immediately
after such purchase or acquisition, the securities of investment
companies and private funds owned by the acquired fund have an
aggregate value in excess of 10% of the value of the total assets of
the acquired fund, subject to certain enumerated exceptions.\386\ We
continue to believe that the general limitation on acquired fund
investments in other investment companies or private funds is an
appropriate means to protect against the creation of overly complex
structures.\387\ While investments by acquired funds in other
investment companies or in private funds may provide efficient exposure
to a specific asset class or offer other portfolio management
advantages, such investments can be confusing to investors and can
result in additional

fees and expenses.\388\ We believe that this potential reduction of
investment flexibility for acquired funds is appropriate to prevent
potential increases in duplicative fees and expenses, and to avoid the
investor confusion, that might occur if the final rule did not impose
such limits on multi-tier structures.\389\ As explained above with
respect to complex structures generally, we believe a structural three-
tier prohibition will help to limit the potential for complex
structures that could be difficult for investors to understand even
with comprehensive disclosures.\390\
---------------------------------------------------------------------------

    \386\ Rule 12d1-4(b)(3)(ii). This prohibition applies to
investments in a company that is controlled by an investment
company, because such a controlled company is also subject to
section 12(d)(1) when it acquires the securities of other investment
companies. See section 12(d)(1)(A).
    \387\ See 2018 FOF Proposing Release, supra footnote 6, at 81.
    \388\ See Guggenheim Comment Letter. Although one commenter
suggested that the rule should not limit an acquired fund's ability
to invest in private funds because section 12(d)(1) of the Act does
not limit a fund's ability to invest in private funds, (See ICI
Comment Letter), the risks of investor confusion and fee layering
apply both with respect to an acquired fund's investments in other
investment companies and with respect to an acquired fund's
investments in private funds in a multi-tier structure. Accordingly,
we believe it is appropriate that the complex structures limitations
of rule 12d1-4 apply to an acquired fund's investments in private
funds. This approach also is consistent with the complex structures
limitations in our exemptive orders.
    \389\ We believe it would be more appropriate for the Commission
to consider multi-tier structures that do not fall within the
confines of rule 12d1-4 through the exemptive application process.
This will allow the Commission to weigh the policy considerations of
such structures in the context of the facts and circumstances of the
specific fund of funds arrangement described in the application.
While the expenses of a third-tier fund may represent only a small
proportion of the expenses of a top-tier acquiring fund because a
third-tier fund would represent only a small proportion of the top
tier acquiring fund's investment portfolio, the exemptive
application process would permit the Commission to consider whether
additional fee- or expense-related conditions would be appropriate
in connection with a specific multi-tier arrangement or in
connection with a specific investment strategy undertaken through a
multi-tier structure.
    \390\ For example, without a general three-tier prohibition, an
acquired fund could shift a substantial portion of its assets among
underlying funds with different investment exposures and risks, and
disclosure at the acquiring fund level may still leave acquiring
fund investors unaware of substantial changes to their investment
exposure and risks at the acquired fund and underlying fund levels.
See CFA Comment Letter (expressing skepticism about the benefit of
enhanced disclosures to retail investors); but see Morningstar
Comment Letter (supporting an enhanced disclosure requirement) and
TRP Comment Letter (suggesting that the adviser report to the fund's
board that a fund of funds disclosure documents sufficiently
mitigate the risk of investor confusion).
---------------------------------------------------------------------------

    Largely as proposed, the rule will allow arrangements where an
acquired fund invests in other funds in certain enumerated
circumstances. These exceptions are limited in scope and are designed
to capture circumstances where an acquired fund may invest in another
fund to efficiently manage uninvested cash, to address specific
regulatory or tax limitations, or to facilitate certain transactions.
Specifically, these categories include securities of another investment
company that is: (i) Acquired in reliance on section 12(d)(1)(E) of the
Act (i.e., master-feeder arrangements); (ii) acquired pursuant to rule
12d1-1; (iii) a subsidiary wholly-owned and controlled by the acquired
fund; (iv) received as a dividend or as a result of a plan of
reorganization of a company; or (v) acquired pursuant to exemptive
relief from the Commission to engage in interfund borrowing and lending
transactions.\391\ These categories have been permitted under existing
exemptive orders and addressed in no-action letters, and do not raise
the concerns that section 12(d)(1) was designed to address, as
discussed further below.
---------------------------------------------------------------------------

    \391\ Rule 12d1-4(b)(3)(ii).
---------------------------------------------------------------------------

    We made several modifications to the enumerated exceptions of the
proposed rule to address many of the concerns identified by commenters.
Additionally, in a change from the proposal, rule 12d1-4 will include a
separate exception that will permit an acquired fund to invest up to
10% of its assets in other investment companies or private funds. As
discussed below, we do not believe that permitting these arrangements
will raise concerns identified by Congress when enacting section
12(d)(1).\392\
---------------------------------------------------------------------------

    \392\ See also 2018 FOF Proposing Release, supra footnote 6, pp
80-83 and associated footnotes (describing the enumerated
circumstances under which our exemptive orders permitted three tier
fund of funds structures and the rationale in support of such
structures).
---------------------------------------------------------------------------

i. Master-Feeder Investments
    The proposed exception for master-feeder arrangements in reliance
on section 12(d)(1)(E) of the Act did not receive substantial public
comment and we are adopting as proposed.\393\ Under section 12(d)(1)(E)
of the Act, the acquired feeder fund in this example is, in effect, a
conduit through which the acquiring fund can access the master fund. We
do not believe that permitting these arrangements would create an
overly complex structure that could confuse investors, nor do we
believe that these arrangements involve concerns regarding undue
influence or layering of fees.\394\ For example, an acquired feeder
fund's investment in its master fund would be entirely transparent
because the feeder fund would disclose the master fund's portfolio
holdings in its shareholder reports.
---------------------------------------------------------------------------

    \393\ Voya Comment Letter (supporting the exceptions for master-
feeder arrangements and investments in wholly-owned and controlled
subsidiaries).
    \394\ See 2018 FOF Proposing Release, supra footnote 6, at p.
78.
---------------------------------------------------------------------------

ii. Rule 12d1-1 Investments
    The final rule will permit an acquired fund to invest more than 10%
of its total assets in investment companies and private funds if such
investments are made pursuant to rule 12d1-1. The proposed rule
included an exception for short-term cash management purposes pursuant
to rule 12d1-1 or exemptive relief from the Commission.\395\
---------------------------------------------------------------------------

    \395\ Proposed Rule 12d1-4(b)(3)(ii)(B).
---------------------------------------------------------------------------

    Several commenters requested clarification or expansion of this
proposed exception.\396\ For instance, two commenters recommended that
the Commission remove the phrase ``short-term cash management
purposes'' from the exception because rule 12d1-1 does not include the
phrase.\397\ These commenters suggested there could be a variety of
reasons other than short-term cash management that an acquired fund
would invest in reliance on rule 12d1-1 that do not raise any
additional fund of funds concerns.\398\ Another commenter requested
that the Commission clarify the applicable exemptive relief referenced
in the exception, since the Commission also proposed to rescind
relevant exemptive relief.\399\
---------------------------------------------------------------------------

    \396\ See, e.g., ICI Comment Letter; NYC Bar Comment Letter;
PIMCO Comment Letter; PGIM Comment Letter.
    \397\ NYC Bar Comment Letter; ICI Comment Letter.
    \398\ ICI Comment Letter; Dechert Comment Letter (acquiring
funds may make investments pursuant to rule 12d1-1 for the purpose
of complying with asset coverage requirements and other legitimate
portfolio management purposes).
    \399\ ICI Comment Letter (noting it is unclear whether
investments in short-term bond funds would be permitted under the
proposed exception given the rescission of exemptive relief, despite
numerous exemptive orders providing relief for investments in short-
term bond funds).
---------------------------------------------------------------------------

    Some commenters recommended that the final rule eliminate the
reference to rule 12d1-1 and instead expand the types of investments
that would be permitted for short-term cash management purposes to
include short-term bond funds.\400\ Another commenter recommended that
the Commission expand the relief to permit acquired funds to equitize
cash by investing in other funds, such as certain ETFs.\401\ One
commenter recommended that the Commission also consider exceptions for
securities lending and cash sweep arrangements among affiliates.\402\
---------------------------------------------------------------------------

    \400\ ICI Comment Letter; PIMCO Comment Letter; PGIM Comment
Letter.
    \401\ ABA Comment Letter.
    \402\ Invesco Comment Letter.
---------------------------------------------------------------------------

    In response to concerns raised by commenters, we have modified this
exception to permit an acquired fund to

invest in investment companies and private funds in excess of the
section 12(d)(1) limits if such investments are made pursuant to rule
12d1-1.\403\ By removing the phrase ``short-term cash management
purposes,'' the final rule will provide acquired funds with additional
flexibility to invest in funds pursuant to rule 12d1-1 for any
investment purpose. We also removed the reference to the phrase ``or
exemptive relief from the Commission'' in order to clarify that the
exception for acquired fund investments pursuant to rule 12d1-1 does
not incorporate prior exemptive relief that an acquired fund may have
received for cash management or collateral management purposes. As
described below, we are rescinding this exemptive relief and removed
the associated reference from the rule text. Although several
commenters requested that the Commission not rescind prior exemptive
relief that allows an acquired fund's investment in short-term bond
funds for cash management or collateral management purposes, we believe
rule 12d1-4 provides appropriate flexibility for funds to invest for
these purposes. Specifically, rule 12d1-4 provides the 10% Bucket,
which permits an acquired fund to invest up to 10% of its assets in
other investment companies for any investment purposes.
---------------------------------------------------------------------------

    \403\ Rule 12d1-4(b)(3)(ii)(B).
---------------------------------------------------------------------------

    In response to concerns raised by commenters relating to
investments to equitize cash, the final rule will permit an acquired
fund to invest up to 10% of its assets in other funds to equitize cash
or for other investment purposes, pursuant to the 10% Bucket described
in section II.C.3.d below.\404\ The exception for investments pursuant
to rule 12d1-1 is designed to permit acquired funds to invest in money
market funds, which we do not believe raise the concerns that section
12(d)(1) was designed to prevent.\405\ Accordingly, we decline to
broaden the rule to permit additional investments under this exception,
and clarify that investments are only permissible under this exception
to the extent they are made pursuant to rule 12d1-1.
---------------------------------------------------------------------------

    \404\ See ICI Comment Letter; PIMCO Comment Letter; PGIM Comment
Letter; ABA Comment Letter.
    \405\ See 2006 FOF Adopting Release, supra footnote 19, at 9-10.
---------------------------------------------------------------------------

iii. Investments in a Wholly-Owned Subsidiary
    We are adopting an exception from the three-tier limitation for
investments in funds that are wholly-owned and controlled by the
acquired fund, as proposed. Wholly-owned subsidiaries are typically
organized under the laws of a non-U.S. jurisdiction in order to invest
in commodity-related instruments and certain other instruments for tax
and other reasons.\406\ We requested comment as to whether the rule
should include additional limits on acquired funds' use of
subsidiaries, and requested suggestions on the contours of any such
limitations.\407\ Commenters did not address this aspect of the
proposal, and rule 12d1-4 will include an exception to the general
three-tier limitation for investments through such wholly-owned and
controlled subsidiaries. Because the wholly-owned subsidiary's
financial statements are consolidated with the financial statements of
the acquired fund, we do not believe that this arrangement would be so
complex that investors could not understand the nature of such
exposure.\408\
---------------------------------------------------------------------------

    \406\ See 2018 FOF Proposing Release, supra footnote 6, at pp.
82-83.
    \407\ See id., at pp. 84.
    \408\ In this type of arrangement, the acquired fund controls
the wholly-owned subsidiary and the acquired fund consolidates its
financial statements with the wholly-owned subsidiary's financial
statements, provided that U.S. GAAP or other applicable accounting
standards permit consolidation and acquired fund's total annual fund
operating expenses include the wholly-owned subsidiaries' expenses.
See, e.g., Consulting Group Capital Markets Fund, et al., Investment
Company Act Release Nos. 32940 (Dec. 15, 2017) [82 FR 60463 (Dec.
20, 2017)] (notice) and 32966 (Jan. 9, 2018) (order) and related
application.
---------------------------------------------------------------------------

iv. Investments Received as a Dividend as a Result of a Plan of
Reorganization and Investments Acquired To Engage in Interfund
Borrowing and Lending
    We continue to believe that it is appropriate to provide exceptions
from the three-tier limitation to facilitate certain transactions.\409\
The proposed rule included exceptions for arrangements where an
acquired fund receives fund shares as a dividend or as a result of a
plan of reorganization. Acquired funds do not acquire such investments
to create a multi-tier fund structure. Rather, a fund acquires these
investments from a business restructuring unrelated to a fund's status
as an acquired fund under the rule.\410\ The proposed rule also
included an exception for acquired fund investments entered into
pursuant to exemptive relief from the Commission to engage in interfund
borrowing and lending transactions. This exception would facilitate
certain interfund transactions, subject to conditions specifically
designed to address the concerns that such transactions present under
the terms of existing interfund lending orders.\411\ A commenter
supported the proposed rule's exception of these transactions from the
three-tier limitation, and we continue to believe it is appropriate
that the rule include these exceptions.\412\ Therefore, we are adopting
these exceptions as proposed.
---------------------------------------------------------------------------

    \409\ See 2018 FOF Proposing Release, supra footnote 6, at 82.
    \410\ See section 12(d)(1)(D) (exempting from section 12(d)(1)
securities received as a dividend, as a result of an offer of
exchange approved under section 11, or as a result of a plan of
reorganization).
    \411\ See, e.g., Franklin Alternative Strategies Funds, et al.,
Investment Company Act Release Nos. 33095 (May 10, 2018) [83 FR
22720 (May 16, 2018)] (notice) and 33117 (June 5, 2018) (order) and
related application (permitting funds to participate in an interfund
lending facility).
    \412\ See, e.g., Voya Comment Letter.
---------------------------------------------------------------------------

d. Ten Percent Bucket
    In addition to the enumerated exceptions to the limitation on
acquired fund investments, the rule will permit an acquired fund to
invest up to 10% of its total assets in other funds, regardless of the
size of the investment in any one fund, in order to provide funds with
additional flexibility, and thereby permit certain structures that
could benefit investors through greater efficiency. For purposes of
calculating the 10% Bucket, investments by an acquired fund pursuant to
the general exceptions in the section above would not be included.
While the proposed rule did not include the 10% Bucket for acquired
fund investments in other funds, we requested comment on whether the
proposed rule's limitations were appropriately calibrated to mitigate
complex structure concerns, and whether we should adopt different
investment limits.\413\ We also requested comment on whether the rule
should permit acquired funds relying on section 12(d)(1)(G) to invest
in a third-tier fund in order to centralize the portfolio management of
floating rate or other instruments.\414\
---------------------------------------------------------------------------

    \413\ See 2018 FOF Proposing Release, supra footnote 6, at 84.
    \414\ See id., at 86.
---------------------------------------------------------------------------

    Under rule 12d1-4, an acquired fund might utilize the 10% Bucket
for cash management purposes outside of investments made in reliance on
rule 12d1-1, to equitize cash, or for any other portfolio management
purposes.\415\ The 10% Bucket provides flexibility for fund of funds
arrangements to evolve, while limiting the complex arrangements that
section 12(d)(1) was designed to prevent. If an acquired fund wishes to
acquire other underlying funds in excess of the 10% Bucket, the
acquired fund may seek exemptive relief. In such circumstances, the
Commission would have the opportunity to consider the proposed

structure in the context of rule 12d1-4 and weigh the benefits of the
proposed structure against the concerns underlying section 12(d)(1).
---------------------------------------------------------------------------

    \415\ As an example, an acquired fund could utilize the 10%
Bucket to invest in short-term bond funds for cash management
purposes.
---------------------------------------------------------------------------

    As discussed above, section 12(d)(1)(A)(iii) of the Act limits an
acquiring fund's total investment in other funds to no more than 10% of
the acquiring fund's assets. The 10% Bucket effectively applies this
10% limit to acquired funds' investments in underlying funds.\416\ The
rule as adopted, however, will not impose the 3% and the 5% limits of
section 12(d)(1)(A)(i) and (ii), respectively, on investments by an
acquired fund in third-tier funds. Accordingly, the rule will not
prohibit an acquired fund from holding more than 3% of the outstanding
voting securities of any single third-tier fund and will not prohibit
an acquired fund from investing more than 5% of its assets in any
single third-tier fund. Rather, the 10% Bucket will allow an acquired
fund some flexibility to invest up to 10% of its assets in other funds
in order to meet its investment objectives while minimizing shareholder
confusion by limiting the extent of those acquired fund investments.
This limit is intended to prohibit multiple layers of funds, which
raise greater concerns of duplication of fees and expenses as well as
investor confusion, and reflects a view that funds that invest in
another fund beyond the 3% and the 5% limits of section 12(d)(1)(A)(i)
and (ii), but not the 10% limit of section 12(d)(1)(A)(iii), are not
primarily designed to invest in other funds and do not implicate the
concerns that led to the adoption of the 10% limit in 1970.\417\ In
such a structure, by which an acquired fund relies on the 10% Bucket to
invest in an underlying fund in excess of the section 12(d)(1) limits,
the acquired fund and underlying funds must comply with the conditions
of rule 12d1-4 as acquiring and acquired funds, respectively, or
operate pursuant to another exemption.\418\
---------------------------------------------------------------------------

    \416\ Like the limits under section 12(d)(1) of the Act, the 10%
Bucket is an acquisition test. Accordingly, if an acquired fund
holds more than 10% of its assets in other underlying funds due to
market movements it could not invest any additional assets in
underlying funds, but the 10% Bucket would not require the acquired
fund to dispose of its existing investments in underlying funds to
under 10% of its assets. Further, if an existing acquired fund holds
more than 10% of its total assets in other funds pursuant to an
existing exemptive order, the acquired fund would not be required to
dispose of those holdings after the rescission of its exemptive
order and the effective date of the rule. However, the acquired fund
could invest additional assets in underlying funds only in
accordance with the terms of the rule.
    \417\ See Reporting Modernization Adopting Release, supra
footnote 56, at 81936. See also PPI Report supra footnote 64, at
page 322 (describing concerns about the organization and operation
of registered fund holding companies whose primary purpose is the
acquisition of shares of other registered investment companies). The
House and Senate Reports that accompanied the 1970 amendments to the
Act describe concerns about ``fundholding companies'' whose
portfolios consist entirely or largely of the securities of other
investment companies. See H.R. Rep. No. 1382, 91st Cong., 2d Sess.
28 (1970) (``1970 Amendments House Report''); S. Rep. No. 184, 91st
Cong., 1st Sess. 29 (1969) (``1970 Amendments Senate Report''). By
imposing the 10% limit in section 12(d)(1)(A)(iii) as part of the
1970 amendments to the Act, Congress distinguished between
investment companies that invest less than 10% of their assets in
other investment companies, on the one hand, and fund holding
companies whose primary purpose is the acquisition of shares of
other registered investment companies, on the other.
    \418\ For example, if an acquired fund invests 10% of its total
assets in a third-tier underlying fund, and the investment by the
acquired fund accounts for 20% of the voting stock of the underlying
fund, the acquired fund and the underlying fund would be required to
comply with the conditions of rule 12d1-4 as an acquiring fund and
acquired fund, respectively.
---------------------------------------------------------------------------

    We proposed a similar provision in 2008 as part of a proposal to
allow funds to invest in ETFs beyond the section 12(d)(1) statutory
limits.\419\ In order to prevent the formation of overly complex
structures, the proposed 2008 rule would have prohibited an acquired
ETF from investing more than 10% of its assets in other funds and
private funds. One commenter on proposed rule 12d1-4 recommended that
rule 12d1-4 include a 10% bucket to provide additional flexibility for
acquired fund investments in other funds, and noted that the
Commission's 2008 rule proposal included such a provision.\420\
---------------------------------------------------------------------------

    \419\ 2008 ETF Proposing Release, supra footnote 18, at n.225
and accompanying text (requiring an acquired ETF to have a disclosed
policy that prohibits it from investing more than 10% of its assets
in other investment companies in reliance on section 12(d)(1)(F) and
12(d)(1)(G) of the Act).
    \420\ ICI Comment Letter (``Allowing for this exception
generally would permit the structures contemplated by the recent no-
action letters and the 2008 Commission proposal, and permit acquired
funds to have additional limited ability to invest in other funds
when such investments would not exceed the basic 10 percent limit
included in Section 12(d)(1)(A)(iii) to protect against overly
complex structures.'').
---------------------------------------------------------------------------

    As discussed in the 2018 FOF Proposing Release, our staff has
previously stated that it would not recommend enforcement action if an
acquired fund in a fund of funds arrangement invested up to 10% of its
assets in other funds, including ``central funds,'' which are
affiliated funds commonly created by an adviser for the purpose of
efficiently managing exposure to a specific asset class.\421\ However,
the staff stated its position in light of several considerations,
including that: (a) An acquired fund would not exceed the 5% limit in
section 12(d)(1)(A)(ii) with respect to an investment in shares of a
single central fund or the 10% limit in 12(d)(1)(A)(iii) with respect
to investments in underlying investment companies generally; (b)
management fees and other fees that were subject to limits; (c)
acquisitions by the central fund in other investment companies or
private funds that were subject to limits; (d) a requirement that
shares of the central fund be sold solely to the funds within the same
group of investment companies; and (e) the board of directors of each
of the funds would consider the reasons for the proposed investments in
the central fund and the benefits expected to be realized from such
investments.\422\ In a subsequent letter, the staff stated that it
would not recommend enforcement action if an acquired fund invested,
solely for short-term cash management purposes, up to 25% of its assets
in a central fund that is a fixed-income fund that could have a dollar-
weighted average portfolio maturity of up to 3 years.\423\
---------------------------------------------------------------------------

    \421\ 2018 FOF Proposing Release, supra footnote 6, at 86. See
Franklin Templeton Investments, Staff No-Action Letter (pub. avail.
April 3, 2015) (``Franklin Templeton No-Action Letter''). In the
Franklin Templeton No-Action Letter, the staff stated it would not
recommend that the Commission take any enforcement action under
sections 12(d)(1)(A) and (B) (and other sections of the Act) if an
acquiring fund relying on section 12(d)(1)(G) purchases or otherwise
acquires shares of an underlying fund that, in turn, purchases or
otherwise acquires shares of a central fund. The Franklin Templeton
No-Action Letter also included a representation that an acquired
fund's adviser would waive fees on assets invested in underlying
central funds.
    \422\ Franklin Templeton No-Action Letter.
    \423\ Thrivent Financial for Lutherans and Thrivent Asset
Management LLC, Staff No-Action Letter (pub. avail. Sep. 27, 2016)
(``Thrivent No-Action Letter''). The circumstances of the Thrivent
No-Action Letter did not involve a limitation on acquired funds
exceeding the 5% limit in section 12(d)(1)(A)(ii) with respect to an
investment in shares of a single central fund, and included a
representation that the central funds would not charge advisory
fees). See id. Rule 12d1-4(b)(3)(ii)(B) provides cash management
flexibility by permitting an acquired fund to invest in other
investment companies or private funds beyond the 10% limit if the
acquired fund makes such investments in reliance on rule 12d1-1.
---------------------------------------------------------------------------

    Several commenters advocated that the final rule permit acquired
funds to invest in central funds.\424\ Commenters noted that central
funds are frequently used for cash management purposes, but

could also be used to gain exposure to any asset class or sector.\425\
Several commenters recommended that the rule permit acquired funds to
invest in private funds, structured finance vehicles, and other
entities that rely on sections 3(c)(1) or 3(c)(7) of the Act that are
not traditionally considered pooled investment vehicles.\426\ Other
commenters requested an exception for acquired fund investments in
ETFs.\427\ While the final rule does not incorporate prior staff
positions regarding acquired fund investments in central funds, the
rule provides substantial flexibility for fund groups to continue to
utilize central funds within the 10% Bucket. The 10% Bucket allows
acquired funds to gain exposure to any asset class or sector through
investments in affiliated or unaffiliated underlying investment
companies and private funds without imposing many of the limitations
that were associated with prior staff positions in this area.
---------------------------------------------------------------------------

    \424\ Comment Letter of MFS Investment Management (May 2, 2019);
Fidelity Comment Letter; PGIM Comment Letter (cash management); ICI
Comment Letter (short-term bond funds); Thrivent Comment Letter (25%
of its total assets in one or more short-term bond funds);
Guggenheim Comment Letter (short-term bond funds); Dechert Comment
Letter (short-term bond funds); NYC Bar Comment Letter (money market
funds); Fidelity Rutland Trust Comment Letter; SIFMA AMG Comment
Letter; Comment Letter of Capital Research and Management Company
(Jan. 8, 2019) (``Capital Group (2) Comment Letter'').
    \425\ See, e.g., Capital Group (2) Comment Letter (describing
central fund investments in investment-grade corporate bonds,
mortgage-backed securities and high yield securities).
    \426\ ICI Comment Letter; Guggenheim Comment Letter; Dechert
Comment Letter; Comment Letter of Small Business Investor Alliance,
et al. (Feb. 28. 2019) (``SBIA Comment Letter''); FS Comment Letter;
IPA Comment Letter; PIMCO Comment Letter; SIFMA AMG Comment Letter.
    \427\ Ropes Comment Letter; Chapman Comment Letter; ICI Comment
Letter.
---------------------------------------------------------------------------

    As we discussed in the 2018 FOF Proposing Release, some existing
multi-tier structures may be required to modify their investments to
ensure compliance with rule 12d1-4.\428\ For example, as of June 2018,
we identified 231 three-tier structures for which both the first- and
second-tier funds invested in other funds beyond the limits in section
12(d)(1).\429\ Such multi-tier arrangements may need to restructure
their holdings over time to continue to maintain the same investment,
to the extent that the acquired funds in such structures invest more
than 10% of their assets in underlying funds, exclusive of investments
in underlying funds made pursuant to the enumerated exceptions
described above.\430\
---------------------------------------------------------------------------

    \428\ 2018 FOF Proposing Release, supra footnote 6, at 150.
    \429\ Id.
    \430\ As noted above, because the 10% Bucket is an acquisition
test, if an acquired fund holds more than 10% of its assets in other
underlying funds pursuant to an existing exemptive order, the
acquired fund would not be required to dispose of those holdings
after the rescission of its exemptive order and the effective date
of the rule. However, the acquired fund could invest additional
assets in underlying funds only in accordance with the terms of the
rule.
---------------------------------------------------------------------------

    We agree with commenters that additional flexibility to enter into
multi-tier arrangements could lead to efficiencies and cost savings for
fund investors. However, unlimited ability to enter into multi-tier
arrangements could lead to complex structures in which an acquiring
fund shareholder finds it difficult to determine the nature and value
of the holdings ultimately underlying his or her investment. We do not
believe that a 25% limit would be appropriate for investments in
underlying funds in pursuit of any investment purpose because such a
limit is based on considerations related to investments in central
funds for short-term cash management purposes. In addition, such a
limit would be far in excess of the 10% limit that Congress enacted in
1970 in response to its concerns about ``fund holding'' companies.\431\
Accordingly, rule 12d1-4 provides flexibility for acquired funds to
invest in private funds, structured finance vehicles, central funds,
ETFs, and other investment funds up to a 10% limit, consistent with the
10% limit set forth in section 12(d)(1). We believe that this 10%
Bucket, when combined with the enumerated exceptions discussed above,
will provide flexibility for beneficial multi-tier arrangements while
limiting the harms that Congress sought to prevent.
---------------------------------------------------------------------------

    \431\ See 1970 Amendments House Report; 1970 Amendments Senate
Report supra footnote 417 and accompanying text.
---------------------------------------------------------------------------

4. Recordkeeping
    The final rule will require the acquiring and acquired funds that
participate in fund of funds arrangements in accordance with the rule
to maintain and preserve certain written records for a period of not
less than five years, the first two years in an easily accessible
place. These records include: (i) A copy of each fund of funds
investment agreement that is in effect, or was in effect in the past
five years, and any amendments thereto; (ii) a written record of the
relevant Fund Finding made under the rule and the basis therefor within
the past five years; and (iii) the certification from each insurance
company required by the rule.\432\ These requirements are largely as
proposed, with the addition of fund of funds investment agreement
records as these agreements were not part of the proposal. Also, to
match the expansion of the Fund Findings requirement, both acquiring
and acquired funds will need to keep records of the applicable
evaluations and findings under the final rule. We also are not adopting
the proposed requirement to keep the reports provided to the board of
directors regarding management company findings, as we believe that
this would be duplicative with the requirements of rule 31a-1,
particularly the requirements to keep minute books of directors'
meetings and advisory material received from the investment
adviser.\433\ We did not receive comments on the recordkeeping
provisions of the proposed rule.\434\
---------------------------------------------------------------------------

    \432\ Rule 12d1-4(c).
    \433\ Rule 31a-1(b)(4) and (11).
    \434\ We received comments on the substantive elements
underlying the proposed recordkeeping requirements. See supra
section II.C.2.b (discussing proposed findings and determinations
requirements and related comments).
---------------------------------------------------------------------------

    Funds and UITs currently have compliance program-related
recordkeeping procedures in place that incorporate this type of
retention period, and consistency with that period minimizes compliance
burdens to funds related to the preservation of the records.\435\
Although the retention period would differ from the required period for
UIT findings under rule 22e-4 and the general recordkeeping
requirements in rule 31a-2, we believe it is appropriate to have
consistent recordkeeping requirements under rule 12d1-4.\436\ We
believe that these recordkeeping requirements allow for external
examinations of compliance with this condition without placing an undue
burden on the funds. Moreover, because the fund of funds investment
agreement sets forth the relevant material terms of the fund of funds
arrangement specific to particular acquiring funds and acquired funds,
we believe it is appropriate to include it as part of a fund's
recordkeeping requirements.
---------------------------------------------------------------------------

    \435\ The retention period is consistent with the period
provided in rule 38a-1(d).
    \436\ See rule 22e-4(c) (requiring a UIT to maintain, for the
life of the UIT and for five years thereafter, a record of the
determination that the portion of the illiquid investments that the
UIT holds or will hold at the date of deposit that are assets is
consistent with the redeemable nature of the securities it issues).
See also Investment Company Liquidity Risk Management Programs,
Investment Company Act Release No. 32315 (Oct. 13, 2016) [81 FR
82142 (Nov. 18, 2016)]; 2018 FOF Proposing Release, supra footnote
6, at 69.
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D. Rescission of Rule 12d1-2 and Amendment to Rule 12d1-1

1. Rescission of Rule 12d1-2
    We are rescinding rule 12d1-2, as proposed, to create a more
consistent and efficient regulatory framework for the regulation of
fund of funds arrangements. As discussed above, section 12(d)(1)(G)
allows a registered open-end fund or UIT to acquire an unlimited amount
of shares of other open-end funds and UITs that are in the same ``group
of investment companies.'' A fund relying on this exemption is subject
to certain conditions, including

a condition limiting the types of securities an acquiring fund can
hold, in addition to the shares of funds in the same group of
investment companies, to government securities and short-term
paper.\437\ Congress designed this limit to restrict the use of this
exemption to a ``bona fide'' fund of funds, while providing the fund
with a source of liquidity to redeem shares.\438\
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    \437\ See 15 U.S.C. 80a-12(d)(1)(G)(i)(II). The acquired fund
also must have a policy against investing in shares of other funds
in reliance on section 12(d)(1)(F) or 12(d)(1)(G) to prevent multi-
tier structures, and overall distribution expenses are limited to
prevent excessive sales loads.
    \438\ See Fund of Funds Investments, Investment Company Act
Release No. 26198 (Oct. 1, 2003) [68 FR 58226 (Oct. 8, 2003)].
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    In 2006, the Commission exercised its exemptive authority to adopt
rule 12d1-2.\439\ Rule 12d1-2 codified, and in some cases expanded,
three types of relief that the Commission provided for fund of funds
arrangements that did not conform to the section 12(d)(1)(G) limits.
Specifically, rule 12d1-2 permitted a fund relying on section
12(d)(1)(G) to: (i) Acquire the securities of other funds that are not
part of the same group of investment companies, subject to the limits
in section 12(d)(1)(A) or 12(d)(1)(F); \440\ (ii) invest directly in
stocks, bonds, and other securities; \441\ and (iii) acquire the
securities of money market funds in reliance on rule 12d1-1.\442\ Rule
12d1-2 was designed to provide a fund relying on section 12(d)(1)(G)
with greater flexibility to meet its investment objective when the
risks that lead to the restrictions in section 12(d)(1) are
minimized.\443\ The Commission stated that the investments permitted
under rule 12d1-2 did not raise additional concerns under section
12(d)(1)(G) because: (i) They were not investments in funds; or (ii)
they represented fund investments that are limited in scope (i.e., cash
sweep arrangements under rule 12d1-1) or amount (i.e., up to the limit
in section 12(d)(1)(A) or 12(d)(1)(F)).\444\
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    \439\ See 2006 FOF Adopting Release, supra footnote 19.
    \440\ See rule 12d1-2(a)(1).
    \441\ See rule 12d1-2(a)(2). Rule 12d1-2 limits investments to
``securities.'' The Commission has issued a series of exemptive
orders that allow a fund relying on section 12(d)(1)(G) to invest in
financial instruments that may not be ``securities.'' These orders
provide that the funds will comply with rule 12d1-2, but for the
ability to invest in a portion of their assets in these other
investments. See, e.g., Van Eck Associates Corp, et al., Investment
Company Act Release Nos. 31547 (Apr. 6, 2015) [80 FR 19380 (Apr. 10,
2015)] (notice) and 31596 (May 6, 2015) (order) and related
application.
    \442\ 17 CFR 270.12d1-2(a)(3).
    \443\ 2006 FOF Adopting Release, supra footnote 19.
    \444\ Id.
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    We have also granted exemptions that permit funds to invest in
funds within the same group of investment companies as an alternative
to the requirements of section 12(d)(1)(G) and rule 12d1-2.\445\ Funds
relying on these orders could invest in the same group of related
investment companies and unaffiliated funds without regard to the
limitations in sections 12(d)(1)(A) or 12(d)(1)(F). In addition, funds
relying on our exemptive orders could invest to a greater extent in
funds that were not part of the same group of investment companies and
in other investments. Funds relying on exemptive relief also could
invest in closed-end funds to a greater extent than funds relying on
section 12(d)(1)(G) combined with rule 12d1-2 and could invest in other
financial instruments that may not be securities within the meaning of
section 2(a)(36) of the Act, such as derivatives.\446\
---------------------------------------------------------------------------

    \445\ See Janus Investment Fund, et al., Investment Company Act
Release Nos. 31753 (Aug. 13, 2015) (notice) and 31808 (Sept. 9,
2015) (order) and related application (``Janus Investment Fund'').
    \446\ A fund relying on section 12(d)(1)(G) and rule 12d1-2
could acquire no more than 3% of a closed-end fund's outstanding
voting securities. A fund relying on an exemptive order could
acquire an unlimited amount of the voting securities of a closed-end
fund in the same group of investment companies and up to 25% of the
outstanding voting securities of other closed-end funds. Further,
funds are limited to investments in securities if they rely upon
section 12(d)(1)(G) and rule 12d1-2. See supra footnote 441.
---------------------------------------------------------------------------

    Our exemptive orders include conditions that differ from the
conditions in section 12(d)(1)(G) and the conditions within those
orders also differ depending on whether the investment involves an
acquired fund that is in the same group of investment companies.\447\
The orders generally subject investments in funds that are not part of
the same group of investment companies to a broader set of conditions
designed to protect investors from the harms Congress sought to address
by enacting section 12(d)(1).\448\ Under this existing framework,
substantially similar fund of funds arrangements are subject to
different limitations and conditions.\449\ This has resulted in an
inconsistent and inefficient regulatory framework where the relief on
which a fund of funds arrangement is relying is not always clear to
other funds, investors, or regulators.
---------------------------------------------------------------------------

    \447\ See, e.g., Northern Lights Fund Trust, et al., Investment
Company Act Release Nos. 32973 (Jan. 23, 2018) [83 FR 4081 (Jan. 29,
2018)] (notice) and 33008 (Feb. 21, 2018) (order) and related
application (setting forth conditions applicable to affiliated fund
of funds arrangements, including that: (1) any sales charges or
service fees charged with respect to shares of acquiring funds would
not exceed the limits set forth in FINRA Rule 2341; and (2) no
acquired fund will acquire securities of any other investment
company in excess of the limitations of section 12(d)(1) except to
the extent that such acquired fund (a) acquires such securities in
compliance with section 12(d)(1)(E), (b) receives such securities as
a dividend or as the result of a plan of reorganization, or (c)
acquires such securities pursuant to exemptive relief from the
Commission permitting the acquired fund to acquire the securities of
investment companies for short-term cash management purposes or to
engage in interfund lending).
    \448\ See supra footnote 446 and accompanying text (regarding
conditions applicable to unaffiliated acquired funds).
    \449\ See supra footnote 26.
---------------------------------------------------------------------------

    Commenters generally opposed the proposed rescission of rule 12d1-
2.\450\ Some commenters stated that rescinding rule 12d1-2 would
disrupt investment strategies, opportunities, and operations, and lead
to an increase in funds' compliance or investing costs.\451\ Commenters
also suggested, as discussed in more detail below, that the rescission
of rule 12d1-2, along with the rescission of exemptive orders and
withdrawal of staff letters, would impact funds' ability to utilize
certain fund structures, such as three-tier central fund
arrangements.\452\ Several commenters suggested a number of changes to
proposed rule 12d1-4 in response to the Commission's proposed
rescission of rule 12d1-2.\453\ For example, these commenters
recommended eliminating or substantially restructuring the proposed
redemption limit, exempting funds within the same group of investment
companies from the proposed redemption limit, or permitting continued
reliance on rule 12d1-2 for funds in the same group of investment
companies.\454\ In particular, two of these commenters raised specific
concerns about the proposed redemption limit's impact on fund of funds
arrangements if the Commission rescinds rule 12d1-2.
---------------------------------------------------------------------------

    \450\ See, e.g., Allianz Comment Letter; Invesco Comment Letter;
Thrivent Comment Letter, PIMCO Comment Letter; Fidelity Rutland
Comment Letter; Schwab Comment Letter; NYC Bar Comment Letter; PGIM
Comment Letter, BlackRock Comment Letter; ABA Comment Letter; SIFMA
AMG Comment Letter; Capital Group Comment Letter.
    \451\ See, e.g., Allianz Comment Letter; Thrivent Comment
Letter; PIMCO Comment Letter; ABA Comment Letter; SIFMA AMG Comment
Letter.
    \452\ See generally PIMCO Comment Letter.
    \453\ See, e.g., Allianz Comment Letter; Thrivent Comment
Letter; NYC Bar Comment Letter; ABA Comment Letter; BlackRock
Comment Letter; PIMCO Comment Letter; Fidelity Rutland Comment
Letter; PGIM Comment Letter; SIFMA AMG Comment Letter.
    \454\ See, e.g., NYC Bar Comment Letter; PIMCO Comment Letter;
SIFMA AMG Comment Letter.
---------------------------------------------------------------------------

    Some commenters recommended that the Commission retain rule 12d1-2
and codify existing exemptive orders permitting funds relying on rule
12d1-2 to enter into derivatives and financial

instruments.\455\ As an alternative, some commenters suggested that the
Commission ``grandfather'' existing fund of funds arrangements that
rely on rule 12d1-2 if the Commission rescinds the rule.\456\
Commenters stated that rescinding rule 12d1-2 would increase costs and
operational inefficiencies by requiring existing fund of funds
arrangements to either: (i) Comply with section 12(d)(1)(G) of the Act
and eliminate any investments other than those permitted under the
statute; or (ii) operate in accordance with rule 12d1-4 and restructure
to comply with the proposed redemption limit and complex structure
limitations.\457\
---------------------------------------------------------------------------

    \455\ See, e.g., PIMCO Comment Letter; Fidelity Rutland Comment
Letter; PGIM Comment Letter; BlackRock Comment Letter; ABA Comment
Letter; SIFMA AMG Comment Letter.
    \456\ See, e.g., Allianz Comment Letter; Thrivent Comment
Letter.
    \457\ See, e.g., PIMCO Comment Letter; ABA Comment Letter; NYC
Bar Comment Letter; SIFMA AMG Comment Letter.
---------------------------------------------------------------------------

    We continue to believe that it is necessary to rescind rule 12d1-2
in order to harmonize the overall regulatory structure and create a
consistent and efficient regulatory framework for the regulation of
fund of funds investments. The rescission of rule 12d1-2 will eliminate
some of the flexibility of funds relying on section 12(d)(1)(G) to: (i)
Acquire the securities of other funds that are not part of the same
group of investment companies, subject to the limits in section
12(d)(1)(A) or 12(d)(1)(F); and (ii) invest directly in stocks, bonds,
and other securities.\458\ Accordingly, funds that wish to invest in
funds within the same group of investment companies beyond the limits
in section 12(d)(1)(A), as well as other securities and the securities
of the other funds, will no longer be able to rely on section
12(d)(1)(G) and rule 12d1-2.\459\ Instead, acquiring funds will have
flexibility to invest in different types of funds and other asset
classes under rule 12d1-4 under a single set of conditions that are
tailored to address the concerns that underlie section 12(d)(1) of the
Act.
---------------------------------------------------------------------------

    \458\ Rule 12d1-2(a)(1) and (a)(2). In connection with our
proposed amendment to rule 12d1-1 discussed below, funds relying on
section 12(d)(1)(G) could continue to invest in money market funds
that are not part of the same group of investment companies even
with the proposed rescission of rule 12d1-2(a)(3).
    \459\ Funds also may continue to rely on section 12(d)(1)(F) to
make smaller investments in a number of funds and section
12(d)(1)(E) to invest all of their assets in a master-feeder
arrangement. See supra footnote 20 and accompanying text.
---------------------------------------------------------------------------

    We believe that this approach will enhance investor protection by
subjecting more funds of funds arrangements to the conditions in rule
12d1-4. As we discussed in the 2018 FOF Proposing Release, the purpose
of this rule is to streamline and enhance the regulatory framework
applicable to fund of funds arrangements. As we have exercised our
statutory authority to exempt fund of funds arrangements, we have
created a regulatory regime where substantially similar fund of funds
arrangements are subject to different conditions. The rule reflects
decades of experience with fund of funds arrangements, and will subject
funds that operate in accordance with it to a tailored set of
conditions that we believe will help protect investors from the harms
Congress sought to address by enacting section 12(d)(1) of the Act. The
requirements of the rule are designed to provide investors with the
benefits of fund of funds arrangements while protecting them from the
historical abuses that section 12(d)(1) is designed to prevent.\460\ We
therefore believe that it is crucial that fund of funds arrangements
follow the protections of rule 12d1-4 and are rescinding rule 12d1-2.
We also are not exempting or providing other relief for existing
investments for these funds for similar reasons.
---------------------------------------------------------------------------

    \460\ See 2018 FOF Proposing Release, supra footnote 6.
---------------------------------------------------------------------------

    We believe that the tailored conditions in rule 12d1-4 are
appropriate to protect investors and create a harmonized fund of funds
regulatory regime. We further believe that for fund of funds
arrangements currently relying on rule 12d1-2, reliance on rule 12d1-4
will be less disruptive to their arrangements than suggested by
commenters because the final rule does not include a redemption limit
and permits an acquired fund to invest up to 10% of its total assets in
other funds.\461\ Additionally, rule 12d1-4 includes tailored
conditions for fund of funds arrangements in the same group of
investment companies by excepting them from the rule's control and
voting conditions.
---------------------------------------------------------------------------

    \461\ See NYC Bar Comment Letter (suggesting that eliminating
the proposed redemption limit would address commenters'
inflexibility concerns with the proposed rescission of rule 12d1-2);
see also SIFMA AMG Comment Letter (suggesting that the Commission
should exempt affiliated fund of funds arrangements from the
proposed redemption limit). See supra section II.C.3 (discussing
complex structures including general exceptions to the three-tier
limitation and the 10% Bucket provision). See infra section V.C.1.a
(discussing Form N-PORT data related to the proposed redemption
limit).
---------------------------------------------------------------------------

    As proposed, in order to limit the hardship that the rescission of
rule 12d1-2 could have on existing fund of funds arrangements, we are
adopting a one-year period after the effective date before rule 12d1-2
is rescinded. We did not receive comment on this aspect of the proposed
rescission of rule 12d1-2. We believe that one year is adequate time
for funds relying on current rule 12d1-2 to bring their future
operations into conformity with section 12(d)(1)(G) or rule 12d1-4. We
also decline to exempt existing funds relying on rule 12d1-2 past this
one-year period, as suggested by some commenters,\462\ because it would
add unnecessary complexity to the regulatory framework and potentially
create an uneven playing field for funds based on differing rule
conditions, as discussed above.
---------------------------------------------------------------------------

    \462\ See supra footnote 456 and accompanying text.
---------------------------------------------------------------------------

2. Amendment to Rule 12d1-1
    We are adopting an amendment to rule 12d1-1 under the Act, as
proposed, to allow funds relying on section 12(d)(1)(G) to also rely
upon the rule. This provides these funds with continued flexibility to
invest in money market funds outside of the same group of investment
companies despite the rescission of rule 12d1-2.\463\ Comments received
on this aspect of the proposal supported it.\464\
---------------------------------------------------------------------------

    \463\ Rule 12d1-1(a) provides an exemption from section
12(d)(1)(G) for an investment company to acquire the securities of a
money market fund. Rule 12d1-2, which we propose to rescind,
provided the same relief.
    \464\ See, e.g., BlackRock Comment Letter.
---------------------------------------------------------------------------

    We continue to believe that such investments in money market funds
do not raise the concerns that underlie section 12(d)(1).\465\ We also
believe that retaining this flexibility will help funds in smaller
complexes that do not have a money market fund as part of their fund
complex invest in an unaffiliated money market fund, subject to the
conditions of rule 12d1-1.\466\ This limited flexibility may be less
costly than complying with section 12(d)(1)(G)'s limited
conditions.\467\ We are therefore amending rule 12d1-1 as proposed, to
provide an exemption from section 12(d)(1)(G) for an investment company
to acquire the securities of a money market fund.
---------------------------------------------------------------------------

    \465\ See 2006 FOF Adopting Release, supra footnote 19, at n.23
and accompanying text.
    \466\ See id., at section II.A.1(a).
    \467\ See, e.g., section 12(d)(1)(G)(i)(III)(bb) (limiting
combined sales charges and service fees to limits under current
FINRA sales rule); section 12(d)(1)(G)(i)(IV) (requiring the
acquired fund to have a policy that prohibits it from acquiring
securities of registered open-end investment companies or registered
UITs in reliance on section 12(d)(1)(G) or (F)).

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E. Disclosures Relating to Fund of Funds Arrangements

1. Amendments to Form N-CEN
    Form N-CEN is a structured form that requires registered funds to
provide census-type information to the Commission on an annual
basis.\468\ Form N-CEN provides both the Commission and the public with
enhanced and updated census-type information on a wide-range of
compliance, risk assessment, and policy related matters.\469\ We
proposed to add a requirement to Form N-CEN that would require
reporting if a management company relied on rule 12d1-4 or the
statutory exception in section 12(d)(1)(G) during the reporting period.
While Form N-CEN already requires a management company to report if it
is a fund of funds, we proposed to collect this information in order to
better assess reliance on rule 12d1-4 or the statutory exception in
section 12(d)(1)(G) by management companies and to assist us with our
accounting, auditing and oversight functions. We also proposed to
require UITs to report if they relied on proposed rule 12d1-4 or the
statutory exception in section 12(d)(1)(G) during the reporting period.
In proposing this requirement, we noted that the UIT section of Form N-
CEN does not currently require a UIT to identify if it is a fund of
funds.\470\
---------------------------------------------------------------------------

    \468\ See, e.g., Reporting Modernization Adopting Release, supra
footnote 56.
    \469\ Id.
    \470\ 2018 FOF Proposing Release, supra footnote 6.
---------------------------------------------------------------------------

    Commenters that addressed the proposed amendments to Form N-CEN
supported them,\471\ and we are adopting these amendments to the form
as proposed.\472\ We believe the amendments we are adopting to the form
will help us better assess reliance on rule 12d1-4, or the statutory
exception in section 12(d)(1)(G). In turn, this will allow the staff to
evaluate whether additional disclosure is needed. These amendments to
Form N-CEN will also assist with our accounting, auditing and oversight
functions, including compliance with the Paperwork Reduction Act.\473\
---------------------------------------------------------------------------

    \471\ See, e.g., Federated Comment Letter; Voya Comment Letter;
ICI Comment Letter.
    \472\ Items C.7.l. and C.7.m. of Form N-CEN (for management
companies) and Items F.18 and F.19 of Form N-CEN (for UITs).
    \473\ We are also making conforming changes to the title of Item
C.7. of Form N-CEN to reflect that the item includes a statutory
exemption. See amendment to Item C.7. (``Reliance on certain
statutory exemption and rules. Did the Fund rely on the following
statutory exemption or any of the rules under the Act during the
reporting period? (check all that apply)'').
---------------------------------------------------------------------------

2. Acquired Fund Fees and Expenses
    An acquiring fund is currently required to disclose the fees and
expenses it incurs indirectly from investing in shares of one or more
acquired funds. In Form N-1A, for example, an open-end fund investing
in another fund is required to include in its prospectus fee table an
additional line item titled ``Acquired Fund Fees and Expenses''.\474\
Since we adopted the AFFE disclosure requirement, some have expressed
concerns about the impact of this disclosure on certain acquired funds,
including BDCs.\475\ The 2018 FOF Proposing Release requested comment
on fees and expenses, including with respect to AFFE disclosure.
---------------------------------------------------------------------------

    \474\ See Instruction 3(f)(i) to Item 3 of Form N-1A. Other
forms, including N-2, N-3, N-4 and N-6 similarly require disclosure
relating to AFFE. See, e.g., Instruction 10.a to Item 3.1 of Form N-
2. A fund may include AFFE in the line item for ``Other Expenses''
rather than in a separate line item if the aggregate expenses
attributable to acquired funds does not exceed 0.01%
    \475\ See, e.g., ICI Comment Letter to File No. S7-12-18,
https://www.sec.gov/comments/s7-12-18/s71218-4560073-176206.pdf;
House Report to [Omnibus Spending Bill/H.R. 3280] (July 17, 2017),
https://www.congress.gov/congressional-report/115th-congress/house-report/234/1?overview=closed; Fidelity Management & Research
Company, Petition for Rulemaking (Dec. 28, 2006), https://www.sec.gov/rules/petitions/2006/petn4-528.pdf (``Fidelity
Petition''); see also Comment Letter of the Coalition for Business
Development to File No. 812-15065, https://www.sec.gov/comments/s7-27-18/s72718-6668087-203950.pdf (Jan. 16, 2020); Comment Letter of
Brett Palmer, President, SBIA, et al. to File No. S7-27-18, https://www.sec.gov/comments/s7-27-18/s72718-6892436-211002.pdf (Feb. 28.
2020) (``SBIA Comment Letter 2''); Comment Letter of Gwen Moore,
Steve Stivers, Brad Sherman and Bill Huizenga, Members of Congress
to File No. S7-27-18, https://www.sec.gov/comments/s7-27-18/s72718-6913308-211215.pdf (March 5, 2020).
---------------------------------------------------------------------------

    Some commenters similarly expressed certain concerns about current
AFFE disclosure requirements. For example, several commenters suggested
that fee table disclosure should focus on a fund's operating expenses
and should not incorporate AFFE.\476\ Some commenters suggested
eliminating the inclusion of certain investment-related expenses in fee
tables in the prospectus for all types of funds, or moving AFFE
disclosure to the risk factors or narrative description of a
prospectus.\477\ Several commenters also expressed particular concern
about treating BDCs as acquired fund investments and recommended
excluding BDC investments from AFFE.\478\
---------------------------------------------------------------------------

    \476\ See, e.g., ICI Comment Letter; PIMCO Comment Letter;
Invesco Comment Letter; Chapman Comment Letter; SIFMA AMG Comment
Letter.
    \477\ See, e.g., PIMCO Comment Letter; Invesco Comment Letter;
SIFMA AMG Comment Letter.
    \478\ See, e.g., SBIA Comment Letter (stating that AFFE
disclosure distorts an acquiring fund's expense ratio and has
disproportionately harmed BDCs because this disclosure requirement
has led to funds no longer investing in BDCs and several index
providers dropping BDCs from their indexes); Chapman Comment Letter;
Nuveen Comment Letter; FS Comment Letter; Chamber of Commerce
Comment Letter; Comment Letter of Alternative Credit Council (May 2,
2019) (stating that AFFE disclosure overstates the costs of a fund
investing in a BDC because it essentially requires double-counting
of a BDC's operating expenses and that because AFFE disclosure has
effectively resulted in funds no longer investing in BDCs, it has
restricted the market for BDCs, limited institutional ownership of
BDCs, and reduced investor choice); ICI Comment Letter; John Hancock
Comment Letter.
---------------------------------------------------------------------------

    On the other hand, some commenters expressed general support for
the current AFFE disclosure requirements in the prospectus fee
table.\479\ Two commenters credited AFFE disclosure for providing
investors with the necessary information to understand the potential
layering of fees in fund of funds arrangements and to compare similar
funds and expenses.\480\
---------------------------------------------------------------------------

    \479\ Kauff Comment Letter at 2; Rand Comment Letter at 1-2;
Cooper Comment Letter at 1-2.
    \480\ Kauff Comment Letter; Rand Comment Letter.
---------------------------------------------------------------------------

    We are not addressing AFFE disclosure requirements as part of this
rulemaking. Instead, we are considering modifications to AFFE
disclosure as part of a broader review of how funds disclose fees in
their prospectuses.\481\ In this regard, in the Investor Experience
Proposal, the Commission requested comment on a proposal to replace the
current requirement that AFFE be included in the prospectus fee table
of open-end funds regardless of the scope of investments in acquired
funds with a more tailored requirement based on the percentage of
assets invested in acquired funds.\482\ This amendment, which the
Commission proposed in conjunction with other changes to funds'
prospectus fee disclosure requirements, would permit open-end funds
that invest 10% or less of their total assets in acquired funds to omit
AFFE from the fund's bottom line expenses in the fee table and instead
disclose the amount of the fund's AFFE in a footnote to the fee table.
Open-end funds that invest more than 10% of their total assets in
acquired funds would continue to present AFFE as a line item

in the prospectus fee table, as they do today. The Commission also
requested comment on whether to amend AFFE disclosure requirements
similarly for other types of registered investment companies.
---------------------------------------------------------------------------

    \481\ See Tailored Shareholder Reports, Treatment of Annual
Prospectus Updates for Existing Investors, and Improved Fee and Risk
Disclosure for Mutual Funds and Exchange-Traded Funds; Fee
Information in Investment Company Advertisements, Investment Company
Act Release No. 33963 (Aug. 5, 2020) (``Investor Experience
Proposal''). The Commission, in proposing the AFFE disclosure
modifications in the Investor Experience Proposal, considered
comments received in connection with the 2018 FOF Proposing Release.
Id., at paragraph accompanying n. 608. The comment period for the
Investor Experience Proposal closes 60 days after its publication in
the Federal Register.
    \482\ Id. at paragraph accompanying n. 615.
---------------------------------------------------------------------------

F. Compliance Dates

    The Commission is providing for a transition period for the
amendments to Form N-CEN. Specifically, we are adopting compliance
dates for our amendment to Form N-CEN of January 19, 2022, one year
following the amendment's effective date. All reports on this form
filed on or after the compliance date must comply with the amendments.
Based on the staff's experience, we believe that this will provide
adequate time for affected funds to compile and review the information
that must be disclosed.

III. Rescission of Exemptive Relief; Withdrawal of Staff Letters

    Pursuant to our authority under the Act to amend or rescind our
orders when necessary or appropriate to the exercise of the powers
conferred elsewhere in the Act, we are rescinding, as proposed, the
exemptive relief permitting fund of funds arrangements that fall within
the scope of rule 12d1-4.\483\ As discussed in more detail below,
exemptive relief granted to fund of funds arrangements outside the
scope of the rule is not being rescinded.
---------------------------------------------------------------------------

    \483\ See section 38(a) of the Investment Company Act (15 U.S.C.
80a-37(a)).
---------------------------------------------------------------------------

    We proposed to rescind all orders granting relief from sections
12(d)(1)(A), (B), (C), and (G) of the Act with one limited exception.
We did not propose to rescind the exemptive orders providing relief
from section 12(d)(1)(A) and (B) granted to allow certain interfund
lending arrangements.\484\ Interfund lending arrangements allow certain
funds within the same complex to lend money to and borrow money from
each other for temporary purposes and subject to certain conditions.
While such arrangements require exemptive relief from sections
12(d)(1)(A) and (B), among other provisions, we stated that they do not
result in the pyramiding of funds or the related potential abuses that
the proposed rule was designed to address, and thus they were not
included within the scope of the proposed rule.
---------------------------------------------------------------------------

    \484\ See 2018 FOF Proposing Release, supra footnote 6, at 95.
---------------------------------------------------------------------------

    We also proposed to rescind the exemptive relief from sections
12(d)(1)(A) and (B) that has been included in our ETF and ETMF
orders.\485\ We believed that rescinding this fund of funds relief in
the ETF and ETMF orders, as well as more generally, would establish a
transparent regulatory framework for these arrangements. As discussed
in the 2018 FOF Proposing Release, we expected that the need to comply
with the requirements of proposed rule 12d1-4, as opposed to their
orders, would not significantly negatively affect the operations of
most existing fund of funds arrangements.\486\
---------------------------------------------------------------------------

    \485\ Some of the exemptive orders we have issued to ETFs
include relief permitting ETFs to use certain master-feeder
arrangements. We rescinded other master-feeder fund relief
generally, while continuing to permit ETF master-feeder arrangements
to rely on that relief as part of the implementation of rule 6c-11.
See 2019 ETF Adopting Release, supra footnote 25. In addition, we
understand that existing ETMFs currently rely on the master-feeder
relief in the orders and did not propose to rescind that relief.
See, e.g., Eaton Vance Management, et al., Investment Company Act
Release Nos. 31333 (Nov. 6, 2014) (notice) and 31361 (Dec. 2, 2014)
(order) (``Eaton Vance Order'').
    \486\ 2018 FOF Proposing Release, supra footnote 6, at 96. See
also section II.D.
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    Commenters had mixed reactions to our proposal to rescind existing
fund of funds exemptive orders. Several commenters supported the
proposed rescission of exemptive orders in connection with the adoption
of rule 12d1-4, citing the benefits of a standardized rule.\487\ Many
other commenters requested that we not rescind existing fund of funds
exemptive orders, and instead codify and expand on existing prior
exemptive orders.\488\ These commenters stated that our proposal would
eliminate a fund's ability to rely on existing fund of funds relief and
could result in undue costs and burdens, including potential
restructuring of existing arrangements.
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    \487\ See, e.g., MFDF Comment Letter; Morningstar Comment
Letter; TRP Comment Letter.
    \488\ See, e.g., Nationwide Comment Letter; ICI Comment Letter;
Federated 2 Comment Letter; Allianz Comment Letter; Fidelity Fixed
Income Trustees Comment Letter; Fidelity Comment Letter.
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    Other commenters suggested the Commission take a tailored approach
in order to limit disruption to existing fund of funds
arrangements.\489\ For example, one commenter requested we rescind only
the exemptive orders described in the 2018 FOF Proposing Release.\490\
Many commenters requested additional specificity as to which exemptive
orders would be withdrawn, and whether the Commission intended to
withdraw relief from provisions of the Act other than section 12(d)(1)
in such exemptive orders.\491\
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    \489\ John Hancock Comment Letter; Federated Comment Letter; TRP
Comment Letter.
    \490\ NYC Bar Comment Letter.
    \491\ See, e.g., Nationwide Comment Letter; ICI Comment Letter;
Voya Comment Letter; TRP Comment Letter; Federated Comment Letter;
NYC Bar Comment Letter; Federated Comment Letter; Dechert Comment
Letter; Chamber of Commerce Comment Letter.
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    As discussed in more detail below, several commenters requested
that the Commission expand the rule to incorporate individualized
relief set forth in certain exemptive orders.\492\ Alternatively, some
commenters suggested that the Commission preserve existing orders, and
allow current recipients of exemptive relief to follow the conditions
of their relief rather than relying on the rule.\493\ One commenter
suggested that the Commission give the holders of exemptive orders at
least a one-year period to transition operations or obtain new
exemptive relief.\494\
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    \492\ Nationwide Comment Letter; Allianz Comment Letter; DPW
Comment Letter; Voya Comment Letter; Capital Group Comment Letter;
Fidelity Comment; NYC Bar Comment Letter; PIMCO Comment Letter; PGIM
Comment Letter; Federated 2 Comment Letter.
    \493\ See, e.g., Allianz Comment Letter; PGIM Comment Letter;
ABA Comment Letter; Fidelity Fixed Income Trustees Comment Letter;
Fidelity Rutland Comment Letter; John Hancock Comment Letter.
    \494\ NYC Bar Comment Letter.
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    As proposed, and as discussed in more detail below, we are
rescinding the fund of funds exemptive orders that fall within the
scope of rule 12d1-4. Specifically, we are rescinding exemptive relief
that permits investments in funds beyond the limits in 12(d)(1)(A),
(B), or (C) of the Act, other than in circumstances that we believe are
outside the scope of rule 12d1-4 as discussed below. We are also
rescinding exemptive relief under section 12(d)(1)(G) that permits an
affiliated fund of funds to invest in assets that are beyond the scope
of that statutory provision. We continue to believe that rescinding
these orders will help to create a consistent framework for fund of
funds arrangements, subject to conditions that appropriately address
the concerns underlying section 12(d)(1), including the prevention of
overly complex structures for funds of funds. In order to limit the
hardship that revocation of these orders could have on existing fund of
funds arrangements, however, we are adopting a one-year period after
the effective date before rescission to give acquiring and acquired
funds relying on these exemptive orders time to conform their
operations with the requirements of the rule and rule amendments.
    Fund of funds exemptive relief that falls outside the scope of rule
12d1-4, as well as the relevant portions of fund of funds exemptive
orders that grant relief for provisions in the Act outside of the scope
of this rulemaking, will remain in place. For example, we have issued
several exemptive orders that

provide relief from sections 17(a) and 17(d) of the Act and rule 17d-1
under the Act that allow a registered fund to invest in private
funds.\495\ We are not rescinding the relief from section 17(a) and
under section 17(d) and rule 17d-1 granted in these orders. Similarly,
we are not rescinding the portions of certain funds of funds exemptive
orders that grant relief from section 17(d) of the Act and rule 17d-1
under the Act to enter into fee sharing agreements to avoid duplicative
fees.\496\ In addition, to the extent we rescind 12(d)(1) relief, we
are also rescinding any related 17(a) relief for the acquisition and
redemption of fund shares by another fund. We are not, however,
rescinding 17(a) relief permitting sales or redemptions of fund shares
in-kind or portfolio transactions between two funds.
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    \495\ See, e.g., Aberdeen Asset Management Inc., et al.,
Investment Company Act Release Nos. 33058 (March 27, 2018) (notice)
and 33080 (April 24, 2018) (order).
    \496\ See, e.g., Lord Abbett Investment Trust, et al.,
Investment Company Act Release Nos. 23088 (March 27, 1998) (notice)
and 23122 (April 21, 1998) (order) (granting relief for, among other
things, a servicing arrangement under which one or more of the
applicant funds may pay a portion of the administrative expenses of
another applicant fund).
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    The major topical areas of fund of funds exemptive relief that are
within the scope of rule 12d1-4 are as follows:
    Standard Fund of Funds Relief. Our exemptive relief relating to
standard fund of funds arrangements generally grants exemptions from
sections 12(d)(1)(A), (B), and (C) of the Act and sections 17(a)(1) and
(2) of the Act to permit acquiring funds to invest in acquired funds in
excess of the limits of in section 12(d)(1) of the Act.\497\ This
relief is rescinded, one year from the effective date of the rule.
---------------------------------------------------------------------------

    \497\ The standard fund of funds orders grant an exemption from
sections 12(d)(1)(A) and 12(d)(1)(B). See, e.g. Aberdeen Asset
Management Inc., et al., Investment Company Act Release Nos. 28429
(Sept. 30, 2008) (notice) and 28475 (Oct. 28, 2008) (order). A
subcategory of these standard fund of funds exemptive orders also
grant additional relief under section 12(d)(1)(C) to permit
investment in closed-end funds beyond the limits imposed by section
12(d)(1)(C). See, e.g., Ares Credit and Income Trust and Ares
Capital Management III LLC, Investment Company Act Release Nos.
33243 (Sept. 21, 2018) (notice) and 33275 (Oct. 17, 2018) (order).
The rescission of standard fund of funds exemptive orders applies to
the orders that grant additional relief under section 12(d)(1)(C),
as well, since that relief is within the scope of rule 12d1-4.
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    Fund of Funds Relief for ETFs and ETMFs. As proposed, the exemptive
relief from sections 12(d)(1)(A) and (B) that has been included in our
ETF and ETMF orders is rescinded, one year from the effective date of
the rule.
    ETFs Relying on Rule 6c-11. In 2019, we adopted rule 6c-11 under
the Investment Company Act to permit ETFs that satisfy certain
conditions to operate without the expense and delay of obtaining an
exemptive order from the Commission under the Act.\498\ In connection
with that rulemaking, we rescinded those portions of certain ETF
exemptive orders that grant relief related to the formation and
operation of an ETF, but we did not rescind the relief provided to ETFs
from section 12(d)(1) and sections 17(a)(1) and (a)(2) under the Act
related to fund of funds arrangements involving ETFs. The fund of funds
exemptive relief for these ETFs is rescinded as well.\499\
---------------------------------------------------------------------------

    \498\ 2019 ETF Adopting Release, supra footnote 25, at 8.
    \499\ Id. We also stated that ETFs relying on rule 6c-11 that do
not have exemptive relief from sections 12(d)(1)(A) and (B) may
enter into fund of funds arrangements as set forth in recent ETF
exemptive orders, provided that such ETFs satisfy the terms and
conditions for fund of funds relief in those orders. The 2019 ETF
Adopting Release noted that this position would be available only
until the effective date of a rule permitting registered funds to
acquire the securities of other registered funds in excess of the
limits in section 12(d)(1), including rule 12d1-4 if adopted. See
id. at 130-133. In order to give any ETFs relying on this position
sufficient time to come into compliance with rule 12d1-4, however,
this position will be available for a one-year period following the
effective date of rule 12d1-4.
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    Fund of Funds Relief for Non-Transparent ETFs and ETMFs. We also
have granted exemptive relief permitting certain actively managed ETFs
to operate without being subject to the daily portfolio transparency
condition included in other actively managed ETF orders (``non-
transparent ETFs'').\500\ These orders include relief from sections
12(d)(1)(A) and (B) of the Act to permit certain fund of funds
arrangements. We also have granted relief from sections 12(d)(1)(A) and
(B) permitting ETMFs to be an acquired fund in a fund of funds
arrangement.\501\ We believe that non-transparent ETFs and ETMFs raise
the same concerns regarding the pyramiding of funds and the related
potential abuses that the rule is designed to address. As a result,
relief under section 12(d)(1)(A) and (B) for non-transparent ETFs and
ETMFs is rescinded as proposed.\502\
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    \500\ Because these non-transparent ETFs do not provide daily
portfolio transparency, they do not meet the conditions of rule 6c-
11. See 2019 ETF Adopting Release, supra footnote 25, at text
accompanying n. 192.
    \501\ See, e.g., Eaton Vance Order, supra footnote 485.
    \502\ See supra footnote 485 noting that master-feeder relief
for ETMFs will not be rescinded.
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    Fund of Funds Direct Investment Relief. We have granted exemptive
relief to permit fund of funds arrangements that rely on section
12(d)(1)(G) of the Act to invest in assets other than funds within the
same group of investment companies, government securities, and short-
term paper. Certain exemptive relief granted prior to the adoption of
rule 12d1-2 in 2006 permitted funds of funds relying on section
12(d)(1)(G) to invest in securities and other financial
instruments.\503\ Some exemptive orders granted after the adoption of
rule 12d1-2 provide relief from rule 12d1-2(a) to the extent necessary
to permit an acquiring fund that relies on section 12(d)(1)(G) of the
Act to invest in financial instruments that may not be ``securities.''
\504\ Although some commenters requested we retain the relief for
direct investments,\505\ we are rescinding this relief, one year from
the effective date of the rule. As discussed above in section II.D, we
are rescinding rule 12d1-2 in order to create a more consistent and
efficient regulatory framework for the regulation of fund of funds
arrangements. We similarly believe that rescinding the direct
investment exemptive relief will establish an appropriate, consistent
framework for the regulation of these fund of funds arrangements by
subjecting them to the conditions of rule 12d1-4 if they continue to
invest in assets other than those permitted by section 12(d)(1)(G) of
the Act.
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    \503\ See, e.g., Nations Fund Trust, Investment Company Act
Release Nos. 24781 (Dec. 1, 2000) (notice) and 24804 (Dec. 27, 2000)
(order) (permitting a fund to invest in funds in the same group of
investment companies and in other securities (not issued by another
fund)).
    \504\ See, e.g., Context Capital Advisors, LLC, et al.,
Investment Company Act Release Nos. 31689 (June 24, 2015) and 31720
(July 21, 2015). As discussed in more detail below, certain staff
no-action letters in connection with this rulemaking, including
Northern Lights Fund Trust, SEC Staff No-Action Letter (June 29,
2015) (``Northern Lights Letter'') will be withdrawn. The Northern
Lights Letter permits an affiliated fund of funds arrangement
relying on section 12(d)(1)(G) and rule 12d1-2 to invest a portion
of its assets in other financial instruments (e.g., derivatives that
are not securities under the Act), consistent with its investment
objectives, policies and restrictions.
    \505\ See, e.g., Allianz Comment Letter.
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    Fund of Funds Affiliated Structures. The Commission granted certain
exemptive relief to permit an open-end fund or UIT to invest in other
open-end funds and UITs that are in the ``same group of investment
companies'' in excess of the limits in section 12(d)(1), subject to
certain enumerated conditions.\506\ Some exemptive orders

also permitted funds of funds to invest in an affiliated closed-end
fund.\507\ As with the standard fund of funds relief, we are rescinding
the affiliated structure relief. These fund of funds arrangements may
rely on section 12(d)(1)(G) or rule 12d1-4 to the extent they intend to
purchase other funds in the same group of funds beyond the limits of
section 12(d)(1). Additionally, although several commenters requested
that the Commission not rescind certain exemptive relief that allows an
acquired fund's investment in short-term bond funds for cash management
or collateral management purposes,\508\ rule 12d1-4 provides
appropriate flexibility for funds to invest for these purposes.
Specifically, rule 12d1-4 permits an acquiring fund to invest in any
acquired fund in excess of the statutory limits pursuant to the
conditions of the rule. Further, rule 12d1-4 provides an exception from
the rule's general prohibition against three tiers to permit an
acquired fund to invest in an underlying fund pursuant to rule 12d1-1
in excess of the statutory limits, and provides the 10% Bucket, which
permits an acquired fund to invest up to 10% of its assets in other
investment companies for any investment purposes. Rule 12d1-4 limits
the potential for confusing structures and duplicative fees, while
providing the flexibility of the 10% Bucket. Accordingly, we believe it
is appropriate to rescind this relief, one year from the effective date
of the rule. For similar reasons, we believe it is appropriate to
rescind the exemptive relief that acquired funds have relied on to
invest in ``central funds.'' \509\ We believe that the 10% Bucket
provided in rule 12d1-4, when combined with the enumerated exceptions
discussed above, will provide appropriate flexibility for beneficial
multi-tier arrangements while limiting the harms that Congress sought
to prevent. Accordingly, the central funds exemptive relief falls
within the scope of rule 12d1-4 and is rescinded, one year from the
effective date of the rule.\510\ As discussed above, some existing
multi-tier structures, including ``central funds'' arrangements that
currently rely on existing exemptive relief, may be required to modify
their investments to ensure compliance with rule 12d1-4.\511\ However,
unlimited ability to enter into multi-tier arrangements could lead to
complex structures in which an acquiring fund shareholder finds it
difficult to determine the nature and value of the holdings ultimately
underlying his or her investment.
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    \506\ Some of these orders pre-date the implementation of
section 12(d)(1)(G), while other orders also included this relief
for certain affiliated fund of funds arrangements after the
implementation of section 12(d)(1)(G). See, e.g., Franklin Templeton
Fund Manager, et al., Investment Company Act Release Nos. 21964 (May
20, 1996) (notice) and 22022 (June 17, 1996) (order); Aberdeen Asset
Management Inc., et al., Investment Company Act Release Nos. 28429
(Sept. 30, 2008) (notice) and 28475 (Oct. 28, 2008) (order). See
also supra section II.B for a general discussion of exemptive relief
related to affiliated structures.
    \507\ See, e.g., Sierra Asset Management Portfolios, et al.,
Investment Company Act Release Nos. 22842 (Oct. 7, 1997) (notice)
and 22869 (Oct. 31, 1997) (order).
    \508\ See PGIM Comment Letter (referring to its exemptive order
permitting acquired funds (and acquiring funds) to invest in a
public or private short-term bond fund for cash management
purposes).
    \509\ See supra footnote 421 and accompanying text describing
central funds. See also PIMCO Comment Letter (referring to PIMCO
Funds, et al., Investment Company Act Release Nos. 25220 (Oct. 22,
2001) (notice) and 25272 (Nov. 19, 2001) (order)). See also supra
footnote 424 for commenters addressing central fund arrangements,
including related to the Thrivent No-Action Letter.
    \510\ As discussed in more detail below, certain staff no-action
letters in connection with this rulemaking, including Franklin
Templeton Investments, SEC Staff No-Action Letter (Apr. 3, 2015)
(``FTI Letter'') will be withdrawn. The FTI Letter permits
underlying funds to rely on 12(d)(1)(G) to invest in a central fund
that invests in floating rate securities.
    \511\ See section II.C.3.d, noting that as of June 2018, we
identified 231 three-tier structures for which both the first- and
second-tier funds invested in other funds beyond the limits in
section 12(d)(1) that may need to restructure their holdings over
time to continue to maintain the same investment, to the extent that
the acquired funds in such structures invest more than 10% of their
assets in underlying funds, exclusive of investments in underlying
funds that are made pursuant to the enumerated exceptions described
above; see also 2018 FOF Proposing Release, supra footnote 6, at
150.
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    Captive Funds. One commenter requested that the Commission retain