exemptive orders for fund of funds arrangements that are captive to an
affiliated managed account program.\512\ This commenter stated these
kinds of captive funds of funds are simply conduits that advisers use
to deliver a more efficient range of investment strategies and achieve
a more consistent allocation of investment strategies across these
accounts. We recognize that rescinding such exemptive relief may cause
fund of funds arrangements that are captive to an affiliated managed
account program to restructure to comply with the conditions of rule
12d1-4.\513\ However, rule 12d1-4 provides appropriate flexibility and
conditions for affiliated fund of funds structures, including
structures that are captive to an affiliated managed account program.
Accordingly, such exemptive relief is rescinded, one year from the
effective date of the rule.
---------------------------------------------------------------------------

    \512\ Fidelity Comment Letter (referring to Fidelity Rutland
Square Trust, et al., Investment Company Act Release Nos. 28259
(Apr. 30, 2008) (notice) and 28287 (May 28, 2008) (order)).
    \513\ See section V.C.1.ii for an analysis of the anticipated
benefits and costs of rescinding exemptive orders; see also section
V.D.1 for the economic analysis of retaining existing exemptive
orders.
---------------------------------------------------------------------------

    We have also given relief from section 12(d)(1) in certain
circumstances that we believe are outside the scope of rule 12d1-4. The
major topical areas section 12(d)(1) exemptive relief that we believe
are outside the scope of rule 12d1-4 are as follows:
    Interfund Lending. As proposed, we are not rescinding the exemptive
relief from section 12(d)(1)(A) and (B) granted to allow certain
interfund lending arrangements. Commenters generally agreed with this
approach.\514\ We continue to believe that these arrangements do not
result in the pyramiding of funds or the related potential abuses that
rule 12d1-4 is designed to address.
---------------------------------------------------------------------------

    \514\ See, e.g., Voya Comment Letter.
---------------------------------------------------------------------------

    Affiliated Insurance Fund Relief. Commenters requested more clarity
with respect to certain orders allowing insurance funds to invest in
fixed income instruments issued by affiliates. For example, one
commenter requested clarification regarding the status of its 2002
exemptive relief, which permits its funds of funds to invest in
affiliated and unaffiliated underlying funds, other securities, and a
fixed interest contract issued by its affiliate.\515\ Another commenter
similarly requested clarification whether we are rescinding its
exemptive relief, a portion of which allows funds to invest in a
guaranteed rate investment contract issued by an affiliate.\516\ The
orders cited by these commenters grant exemptions from 12(d)(1)(A) and
12(d)(1)(B), as well as from section 17(a) for the purchase of the
guaranteed rate investment contract issued by an affiliate. As
described above, we are rescinding only the portion of the exemptive
orders granting fund of funds relief that falls within the scope of
rule 12d1-4. We agree with commenters that the relief granted under
sections 6(c) and 17(b) permitting investment in a fixed income
instrument issued by an affiliate is distinct from the fund of funds
relief granted in these orders. As noted above, we are not rescinding
relief under section 17 when the relief does not implicate fund of
funds arrangements. Accordingly, we are not rescinding this portion of
the exemptive relief, which is unrelated to the fund of funds exemptive
relief.
---------------------------------------------------------------------------

    \515\ Nationwide Comment Letter (referring to Nationwide Life
Insurance Co., Investment Company Act Release Nos. 25492 (Mar. 21,
2002) (notice) and 25528 (Apr. 16, 2002) (order)).
    \516\ Voya Comment Letter (referring to ING Partners Inc., et
al., Investment Company Release Nos. 27116 (Oct. 12, 2005) (notice)
and 27142 (Nov. 8, 2005) (order).
---------------------------------------------------------------------------

    Transaction-Specific Relief. From time to time, we have granted
exemptive relief to funds under section 12(d)(1) in order to engage in
a transaction that might otherwise violate such provision.

In many cases, this relief relates to fund reorganizations.\517\ This
transaction-specific relief does not involve ongoing fund of funds
arrangements where the concerns underlying section 12(d)(1) are most
pronounced and where the conditions of rule 12d1-4 will serve to
protect investors against those concerns. As a result, we do not
believe it is necessary to rescind such relief.
---------------------------------------------------------------------------

    \517\ See, e.g., Allied Capital Corporation, et al., Investment
Company Act Release Nos. 22902 (Nov. 21, 1997) (notice) and 22941
(order) (granting relief under sections 12(d)(1)(A) and 12(d)(1)(C),
among other provisions, to allow for the acquisition of investment
company subsidiaries in a merger).
---------------------------------------------------------------------------

    Grantor Trusts. One commenter requested we retain an exemptive
order pertaining to current and future automatic common exchange
security (``ACES'') trusts.\518\ ACES trusts are limited-life, grantor
trusts. We have previously granted exemptive relief to funds and
private funds to invest in a grantor trust (typically structured as a
closed-end fund) in excess of the section 12(d)(1) limits, along with
related relief.\519\ The grantor trusts in this line of exemptive
orders are not marketed to provide investors with either professional
investment asset management or the benefits of investment in a
diversified pool of assets. As a result, they do not result in the
pyramiding of funds or the related potential abuses that the rule is
designed to address, and therefore we are not rescinding this relief.
---------------------------------------------------------------------------

    \518\ DPW Comment Letter (citing Goldman, Sachs & Co.,
Investment Company Act Release Nos. 32460 (Jan. 31, 2017) (notice)
and 32514 (Feb. 28, 2017) (order) (``Goldman ACES Order'')).
    \519\ See, e.g., Goldman ACES Order; see also J.P. Morgan
Securities Inc., Investment Company Act Release Nos. 24060 (Sept.
29, 1999) (notice) and 24112 (Oct. 26, 1999) (order).
---------------------------------------------------------------------------

    Fund of Funds Arrangements with Managed Risk Provision and other
Relief Related to Section 12(d)(1)(E). One commenter requested that we
not rescind a fund of funds exemptive order that permits a ``managed
risk'' fund structure.\520\ This commenter stated that the relief
allows an insurance series fund that invests in one underlying fund in
excess of the limits in section 12(d)(1)(A) also to invest in cash,
cash equivalents, and certain hedging instruments in connection with a
risk-management strategy that is specifically designed to reduce the
volatility of the acquiring fund. Because of the fund's investment in
certain hedging instruments, the fund cannot rely on section
12(d)(1)(E) of the Act for purposes of an exception from the general
prohibition against three tiers. We are not rescinding exemptive relief
from sections 12(d)(1)(A) and (B) of the Act to the extent that the
relief effectively allows a feeder fund to rely on section 12(d)(1)(E)
without complying with certain aspects of section 12(d)(1)(E) of the
Act. Accordingly, we believe this relief is outside the scope of rule
12d1-4 with respect to the treatment of a fund for purposes of the
three-tier prohibition.\521\
---------------------------------------------------------------------------

    \520\ See Capital Group Comment Letter (referring to the
``managed risk fund provision'' in American Funds Insurance Series,
et al., Investment Company Act Release Nos. 31677 (June 17, 2015)
(notice) and 31715 (July 14, 2015) (order)).
    \521\ In addition, we did not proposed to rescind exemptive
relief related to section 12(d)(1)(F) and are not doing so. See FOF
Proposing Release supra footnote 6 at 95.
---------------------------------------------------------------------------

    We continue to believe that the one-year period for the termination
of our fund of funds exemptive relief is sufficient to give adequate
time for funds relying on impacted exemptive orders to bring their
future operations into conformity with section 12(d)(1)(G) or rule
12d1-4.
    The Commission does not believe that it is necessary to give
individual hearings to the holders of the prior orders or to any other
person.\522\ This rule is prospective in effect and is intended to set
forth for the entire industry the Commission's exemptive standards for
these types of fund of funds arrangements. Funds are able to request
Commission approval to operate as a fund of funds that does not meet
the requirements of the rule.
---------------------------------------------------------------------------

    \522\ See also id. at 97 (stating that ``The Commission does not
believe that it is necessary to give individual hearings to the
holders of the prior orders or to any other person.'').
---------------------------------------------------------------------------

    As discussed in the 2018 FOF Proposing Release, our staff has
previously stated that it would not recommend that the Commission take
enforcement action in certain situations relating to section 12(d)(1).
The 2018 FOF Proposing Release noted that the staff in the Division of
Investment Management were reviewing staff letters relating to section
12(d)(1) to determine whether any such letters should be withdrawn in
connection with any adoption of this rule. As we noted in the 2018 FOF
Proposing Release, some of the letters may be moot, superseded, or
otherwise inconsistent with the rule and, therefore, will be withdrawn.
    The staff of the Division of Investment Management has issued a
line of letters stating that the staff would not recommend enforcement
action to the Commission under sections 12(d)(1)(A) or (B) of the Act
if a fund acquires the securities of other funds in certain
circumstances. We understand that certain industry practices have
developed in connection with these letters. In particular, we
understand that: (i) Some funds have created three-tier master-feeder
structures for tax management, cash management, or portfolio management
purposes; (ii) other funds have invested in assets that may not be
securities, but have otherwise complied with the restrictions in rule
12d1-2; \523\ (iii) sponsors of UITs have deposited units of existing
trusts into portfolios of future UIT series; (iv) foreign pension funds
and profit sharing funds, and foreign subsidiaries and feeder funds
have invested in other funds beyond the limits of section 12(d)(1); and
(v) foreign funds have invested in other funds under section 12(d)(1)
to the same extent as private funds.
---------------------------------------------------------------------------

    \523\ The Commission has previously issued exemptive orders to
funds that rely on section 12(d)(1)(G) to allow those funds to
invest in futures contracts and other financial instruments. See,
e.g., KP Funds, et al., Investment Company Act Release Nos. 30545
(June 3, 2013) [78 FR 34413 (June 7, 2013)] (notice) and 30586 (July
1, 2013) (order); Financial Investors Trust and Hanson McClain
Strategic Advisors, Inc., Release Nos. 30521 (May 15, 2013) [78 FR
30346 (May 22, 2013)] (notice) and 30554 (order). Following those
orders, the staff of the Division of Investment Management issued a
no-action letter stating that it would not recommend enforcement
action to the Commission under section 12(d)(1)(A) or (B) of the Act
against a fund of funds that meets all of the provisions of section
12(d)(1)(G) and rule 12d1-2, except to the extent that it invests in
assets that might not be securities under the Act. See, e.g.,
Northern Lights Letter supra footnote 504.
---------------------------------------------------------------------------

    In the 2018 FOF Proposing Release, we asked that commenters detail
their concerns with the withdrawal of any of the letters. Commenters
stated preferences for retaining certain no-action letters, including
those that relate to three-tier structures, subject to the
circumstances described in those letters.\524\ Some commenters
requested that no-action letters relating to a foreign fund that
invests in a U.S. fund to comply with section 12(d)(l)(A)(i) but not
sections 12(d)(l)(A)(ii) and (iii) not be withdrawn.\525\ Other
commenters suggested that certain no-action letters be retained related
to the status of investment vehicles domiciled outside the U.S., where
such foreign funds are

acquired funds in fund of funds arrangements.\526\ Commenters expressed
views in favor of retaining no-action letters related to investments in
three tier ``central fund'' structures.\527\ Finally, other commenters
requested that the staff publicly indicate specifically which no-action
letters would be withdrawn.\528\
---------------------------------------------------------------------------

    \524\ See, e.g., Thrivent Comment Letter; ICI Comment Letter.
    \525\ Vanguard Comment Letter. The Commission previously stated
that a foreign fund that uses U.S. jurisdictional means in the
offering of securities it issues and relies on section 3(c)(1) or
3(c)(7) of the Act will be treated as a private fund for purposes of
section 12(d)(1). See 2018 FOF Proposing Release, at footnote 52,
citing ``Exemptions for Advisers to Venture Capital Funds, Private
Fund Advisers With Less Than $150 Million in Assets Under
Management, and Foreign Private Advisers,'' Investment Advisers Act
Release No. 3222, at note 294 and accompanying text (June 22, 2011)
[76 FR 39646 (July 6, 2011)]. Staff no-action letters stating that
the staff would not recommend enforcement action if a foreign fund
purchases securities of U.S. funds in excess of the limits of
section 12(d)(1) under certain facts and circumstances will not be
withdrawn. See, e.g., Dechert LLP, SEC No-Action Letter (pub. avail.
Aug. 4. 2009).
    \526\ Ropes Comment Letter (citing Touche, Remnant & Co., SEC
No-Action Letter (pub. avail. Aug. 27, 1984) and Red Rocks Capital,
LLC, SEC No-Action Letter (pub. avail. Jun. 3, 2011) (``Red
Rocks'')); Blackrock Comment Letter (citing Red Rocks; The France
Growth Fund, Inc., SEC Staff No-Action Letter (July 15, 2003); and
Templeton Vietnam Opportunities Fund, Inc., SEC Staff No-Action
Letter (Sept. 6, 1996).
    \527\ Capital Group Comment Letter (noting reliance on Northern
Lights Letter supra footnote 504).
    \528\ See, e.g., Voya Letter.
---------------------------------------------------------------------------

    As a result of these considerations, the no-action letters stating
that the staff would not recommend an enforcement action under specific
circumstances related to section 12(d)(1) will be withdrawn one year
from the effective date of the final rule. Importantly, as recognized
above, the final rule provides a consistent and rules-based mechanism
for fund of funds arrangements. As with the rescission of fund of funds
exemptive orders, the withdrawal of staff no-action letters will
include only those letters that fall within the scope of rule 12d1-4.
With respect to comments asking for specificity as to which no-action
letters will be withdrawn, we refer commenters to the resource provided
on the Division of Investment Management's website.\529\
---------------------------------------------------------------------------

    \529\ See supra footnote 30.
---------------------------------------------------------------------------

IV. Other Matters

    Pursuant to the Congressional Review Act,\530\ the Office of
Information and Regulatory Affairs has designated this rule a ``major
rule,'' as defined by 5 U.S.C. 804(2). If any of the provisions of
these rules, or the application thereof to any person or circumstance,
is held to be invalid, such invalidity shall not affect other
provisions or application of such provisions to other persons or
circumstances that can be given effect without the invalid provision or
application.
---------------------------------------------------------------------------

    \530\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

V. Economic Analysis

    We are mindful of the costs imposed by, and the benefits obtained
from, our rules. Section 2(c) of the Investment Company Act states that
when the Commission is engaging in rulemaking under the Investment
Company Act and is required to consider or determine whether the action
is necessary or consistent with the public interest, the Commission
shall consider whether the action will promote efficiency, competition,
and capital formation, in addition to the protection of investors. The
following analysis considers, in detail, the potential economic effects
that may result from the final rule,\531\ including the benefits and
costs to investors and other market participants as well as the broader
implications of the final rule for efficiency, competition, and capital
formation.
---------------------------------------------------------------------------

    \531\ For purposes of this section, we use the term ``final
rule'' to refer collectively to rule 12d1-4, the rescission of rule
12d1-2 and the exemptive orders, the amendment to rule 12d1-1, and
the amendments to Form N-CEN.
---------------------------------------------------------------------------

A. Introduction

    Rule 12d1-4 will allow funds to acquire the securities of another
fund in excess of the limits in section 12(d)(1) of the Act without
obtaining an exemptive order from the Commission. We are also
rescinding rule 12d1-2 under the Act and certain exemptive relief, and
amending rule 12d1-1 and Form N-CEN.\532\
---------------------------------------------------------------------------

    \532\ We expect that the amendments to Form N-CEN will have
immaterial economic effects. In particular, we expect that the
amendments to Form N-CEN will increase the annual estimated burden
hours associated with preparing and filing Form N-CEN by
approximately 0.1 hours for each fund (see infra section VI.D). In
addition, the amendments to Form N-CEN will facilitate the
supervision and regulation of the fund industry, which will
ultimately benefit fund investors, but any such effects are likely
small. Hence, the economic analysis focuses on the economic effects
of rule 12d1-4, the rescission of rule 12d1-2 and the exemptive
relief, and the amendment to rule 12d1-1.
---------------------------------------------------------------------------

    The final rule will affect funds' investment flexibility, increase
regulatory consistency and efficiency, and eliminate the need for
acquiring and acquired funds to obtain an exemptive order from the
Commission and incur the associated costs and delays. At the same time,
the final rule will impose one-time costs on funds that will need to
assess whether their operations are consistent with the final rule. In
addition, the conditions in rule 12d1-4 will impose certain ongoing
costs on funds, such as compliance, monitoring, and recordkeeping
costs. Finally, certain funds will be required to restructure
additional investments in other funds and incur the associated costs,
such as transaction costs, to ensure compliance with the final rule.

B. Economic Baseline

    The baseline against which the costs, benefits, and the effects on
efficiency, competition, and capital formation of the final rule are
measured consists of the current state of the fund market and the
current regulatory framework for funds of funds.
1. Current State of the Funds Market
    To establish a baseline for the economic analysis of the final
rule, we provide descriptive statistics on the current state of the
fund of funds market. In particular, we provide descriptive statistics
on funds, investment advisers, sponsors, and depositors of funds, and
fund investors because these are the persons that likely will be
affected by the final rule.
    First, we provide descriptive statistics on the number and size of
funds and funds of funds.\533\ We provide these statistics not only for
funds of funds but also for single-tier funds to provide an
understanding of the fund market as a whole and because the final rule
will affect both current funds of funds and single-tier funds that may
consider a fund of funds structure in the future. Master-feeder funds
created in reliance on section 12(d)(1)(E) and funds that only acquire
securities of money market funds in reliance on rule 12d1-1 are
excluded from our analysis because these fund of funds structures are
beyond the scope of rule 12d1-4.
---------------------------------------------------------------------------

    \533\ We use Form N-CEN and Form N-PORT filings with the
Commission as of May 2020 in our analysis. Form N-CEN provides
census-type information on an annual basis and is filed by all
registered investment companies, except for face amount certificate
companies (rule 12d1-4 will not be available to face amount
certificate companies). Form N-PORT provides portfolio holdings
information on a monthly basis and is filed by registered management
investment companies and ETFs organized as UITs. Hence, Form N-CEN
provides information for the universe of potentially affected funds,
with the exception of BDCs. Form N-PORT covers a subset of the
potentially affected funds covered by Form N-CEN but it provides
relevant portfolio holdings information for those funds, which is
unavailable in Form N-CEN, and thus data from Form N-PORT yields
additional insights on the fund market.
    As of the data collection date, all fund groups file Form N-CEN
but only large fund groups file Form N-PORT. Large fund groups are
funds that, together with other investment companies in the same
``group of related investment companies,'' have net assets of $1
billion or more as of the end of the most recent fiscal year of the
fund. Filing Form N-PORT began in April 2020 for small fund groups,
and this information became available to the Commission in July
2020, which was after the May 2020 cut-off date of our data
analysis. However, we do not believe that such data would
qualitatively change the results of our analysis. See Amendments to
the Timing Requirements for Filing Reports on Form N-PORT,
Investment Company Act Release No. 33384 (Feb. 27, 2019) [84 FR 7980
(Mar. 6, 2019)]. Nevertheless, large fund groups represent 84% of
all fund groups in terms of total assets. See infra sections
V.C.1.a.ii and V.C.1.b.v for discussion of differential effects of
the rule on smaller relative to larger fund complexes.
---------------------------------------------------------------------------

    Table 1 below shows the number and size of all funds and acquiring
funds of funds using data from Form N-CEN filings as of May 2020.\534\
A fund of

funds in Form N-CEN is a fund that acquires securities issued by any
other investment company in excess of the amounts permitted under
paragraph (A) of section 12(d)(1) of the Act but does not include a
fund that acquires securities issued by money market funds solely in
reliance on rule 12d1-1 under the Act.\535\
---------------------------------------------------------------------------

    \534\ Form N-CEN data does not allow us to identify and provide
statistics on acquired funds. BDCs do not file reports on Forms N-
CEN and so are excluded from Table 1. The UIT section of Form N-CEN
currently does not require a UIT to identify whether it is a fund of
funds, and so we lack information on acquiring UITs using Form N-CEN
data. We use the most recent Form N-CEN filing with the Commission
for each fund between September 2018 and May 2020 for this analysis
(i.e., the first and last month with Form N-CEN data available as of
the data collection date). We use all available Form N-CEN filings
to also capture delinquent filers in our analysis. Approximately 5%
of the funds in Table 1 were terminated during our sample period.
Open-end funds, ETFs organized as open-end funds, and ETMFs are
registered on Form N-1A. ETFs and ETMFs are identified using Item
C.3.a.i and C.3.a.ii in Form N-CEN filings. Closed-end funds are
registered on Form N-2. Variable annuity separate accounts organized
as UITs are series, or classes of series, of trusts registered on
Form N-4. Variable life insurance separate accounts organized as
UITs are series, or classes of series, of trusts registered on Form
N-6. ETFs registered as UITs are series, or classes of series, of
trusts registered on Form N-8B-2. Non-ETF UITs are trusts registered
on Forms N-4 or N-6. Management company separate accounts are trusts
registered on Form N-3. The statistics in Table 1 are generally
consistent with statistics on funds of funds provided by commenters.
See, e.g., ICI Comment Letter. One exception is a commenter that
stated that as of March 2019, there were 496 closed-end funds with
236 billion in net assets. See Advent Comment Letter. We lack
detailed information on commenter's estimation of these statistics
but we believe that these statistics are lower than the statistics
in Table 1 likely due to the different data sources and sample
period used. See Table 4 of the Proposing Release for statistics of
the number of acquiring funds by investment category.
    \535\ Hence, acquiring funds in Table 1 includes: Funds of funds
that were structured in reliance on section 12(d)(1)(F); funds of
funds that were structured in reliance on section 12(d)(1)(G); funds
of funds that were structured in reliance on section 12(d)(1)(G) and
rule 12d1-2; funds of funds that were structured in reliance on
exemptive relief on which rule 12d1-4 is based; and funds of funds
that were structured considering Commission staff letters.
---------------------------------------------------------------------------

    A trade association representing regulated investment companies
globally provided the Commission with the results of a survey of its
U.S. members and found that as of 2018, there were 1,359 funds of funds
with $2.8 trillion in assets under management.\536\ Of those funds, the
survey observed that 31% (i.e., 423 out of 1,359) of the funds of
funds, representing $829 billion in assets, will not be affected by the
final rule because they are structured solely in reliance on sections
12(d)(1)(E), 12(d)(1)(F), or 12(d)(1)(G), and the remaining 69% (i.e.,
936 out of 1,359) of the funds of funds, representing $2.0 trillion in
assets, will need to comply with the rule 12d1-4 conditions or
restructure their investments.\537\
---------------------------------------------------------------------------

    \536\ See ICI Comment Letter.
    \537\ For the purposes of this survey, a fund of funds is
defined as a fund that invests in at least one other fund in excess
of the limits of section 12(d)(1)(A) but does not include funds that
only invest in money market funds. Hence, our definition of
acquiring fund in Table 1 is similar to the definition of acquiring
fund in the ICI survey. The ICI survey sample appears to be a subset
of the sample of acquiring funds in Table 1. That is, the ICI sample
represents approximately 79% of the acquiring funds in Table 1 (79%
= 1,359 funds of funds in the ICI survey/1,719 acquiring funds in
Table 1). See ICI Comment Letter. Our data does not allow us to
distinguish whether the acquiring funds in Table 1 have been
structured in reliance on section 12(d)(1)(F); in reliance on
section 12(d)(1)(G); in reliance on section 12(d)(1)(G) and rule
12d1-2; in reliance on an exemptive order; or considering Commission
staff no-action letters.
---------------------------------------------------------------------------

    Another commenter, representing asset managers, conducted a survey
of its members and found that all 15 surveyed sponsors, representing
655 funds of funds and assets of $1.8 trillion, stated that they rely
on a variety of authorities (often in combination), including sections
12(d)(1)(F) (i.e., five sponsors), section 12(d)(1)(G) (i.e., 14
sponsors), rule 12d1-2 (i.e., 14 sponsors), exemptive orders (i.e., 14
sponsors), and/or structure funds of funds consistent with Commission
staff no-action letters (i.e., three sponsors).\538\ All 15 sponsors
indicated that they sponsor funds that invest in affiliated open-end
funds and UITs; \539\ 13 sponsors indicated that they sponsor funds
that invest in unaffiliated open-end funds and UITs; four sponsors
indicated that they sponsor funds that invest in affiliated central
funds; two sponsors indicated that they sponsor funds that invest in
affiliated unregistered funds; two sponsors indicated that they sponsor
funds that invest in unaffiliated closed-end funds; one sponsor
indicated that it sponsors funds that invest in unaffiliated BDCs; and
one sponsor indicated that it sponsors funds that invest in
unaffiliated unregistered funds.
---------------------------------------------------------------------------

    \538\ See SIFMA AMG Comment Letter. For purposes of this survey,
a fund of funds is a fund that invests substantially all of its
assets (i.e., > 85% of fund assets) in shares of other investment
companies. The survey also requested information regarding funds
that make investments in other investment companies beyond the
limits of section 12(d)(1)(A) but where those investments, in the
aggregate, represent less than 85% of fund assets. Fifty-nine of
those funds hold more than 3% of an acquired fund's shares. Eight
out of the 15 respondents sponsor funds that invest less than 85% of
their assets in other funds, and those funds rely on a variety of
authorities (often in combination), including section 12(d)(1)(F)
(i.e., three sponsors), section 12(d)(1)(G) (i.e., seven sponsors),
rule 12d1-1 (i.e., three sponsors), exemptive orders (i.e., eight
sponsors), and/or rule 12d1-2 (i.e., eight sponsors). All 8 sponsors
indicated that they sponsor funds that invest in affiliated open-end
funds and UITs; seven sponsors indicated that they sponsor funds
that invest in unaffiliated open-end funds and UITs; three sponsors
indicated that they sponsor funds that invest in affiliated central
funds; two sponsors indicated that they sponsor funds that invest in
unaffiliated closed-end funds; two sponsors indicated that they
sponsor funds that invest in unaffiliated BDCs; one sponsor
indicated that it sponsors funds that invest in unaffiliated
unregistered funds; and one sponsor indicated that it sponsors funds
that invest in affiliated unregistered funds. The data provided by
the commenter is sponsor-level (rather than fund-level) data and so
we cannot use this data to estimate how many of the acquiring and
acquired funds in our sample will be affected by the final rule.
    \539\ According to the survey, the funds of funds that invest in
affiliated open-end funds in reliance on section 12(d)(1)(G) also
invest in unaffiliated money market funds, unaffiliated registered
investment companies, individual securities such as stocks and
bonds, and non-securities such as certain derivatives or real
estate.

           Table 1--Descriptive Statistics for all Funds and Acquiring Funds Using Form N-CEN Filings
----------------------------------------------------------------------------------------------------------------
                                                               Funds                      Acquiring funds
                                                 ---------------------------------------------------------------
                                                                  Net assets (bn                  Net assets (bn
                                                      Number            $)            Number            $)
----------------------------------------------------------------------------------------------------------------
Open-end funds..................................          13,135          26,328           1,687           2,180
    ETFs registered as open-end funds \540\.....           2,194           5,689             105              16
    ETMFs registered as open-end funds..........              28              14               2            0.04
Closed-end funds................................             736             320              29              10
UITs............................................             720           2,237  ..............  ..............
    Variable annuity separate accounts                       430           1,561  ..............  ..............
     registered as UITs.........................
    Variable life insurance separate accounts                243             165  ..............  ..............
     registered as UITs.........................
    ETFs registered as UITs.....................              47             509  ..............  ..............
Management company separate accounts............              14             225               3            0.05
                                                 ---------------------------------------------------------------

    Total.......................................          14,605          29,110           1,719           2,190
----------------------------------------------------------------------------------------------------------------

    This table reports descriptive statistics for all funds and
acquiring funds using data from Form N-CEN filings with the Commission
as of May 2020. A fund of funds is a fund that acquires securities
issued by any other investment company in excess of the amounts
permitted under paragraph (A) of section 12(d)(1) of the Act but does
not include a fund that acquires securities issued by money market
funds solely in reliance on rule 12d1-1 under the Act (see Item C.3.e
in Form N-CEN filings). Master-feeder funds are excluded from this
analysis (see Item C.3.f in Form N-CEN). The UIT section of Form N-CEN
currently does not require a UIT to identify if it is a fund of funds
so information on acquiring UITs is marked as missing in this Table.
For open-end funds, closed-end funds, and management company separate
accounts, total net assets is the sum of monthly average net assets
across all funds in the sample during the reporting period (see Item
C.19.a in Form N-CEN). For UITs, we use the total assets as of the end
of the reporting period (see Item F.11 in Form N-CEN), and for UITs
with missing total assets information, we use the aggregated contract
value for the reporting period instead (see Item F.14.c in Form N-CEN).
---------------------------------------------------------------------------

    \540\ The reported net assets of ETFs registered as open-end
funds in Table 1 likely are overstated because reporting on whether
or not a fund is an ETF on Form N-CEN is at the series level, not
the class level. Hence, all share classes within an open-end fund
that has ETF share classes are attributed to the ETF category.
---------------------------------------------------------------------------

    Table 2 below shows the number and size of funds, acquiring funds,
and acquired funds using data from Form N-PORT filings with the
Commission as of May 2020.\541\ Form N-PORT is only filed by registered
management investment companies and ETFs that are organized as UITs.
Hence, the sample of funds in Table 2 (i.e., registered management
investment companies and ETFs organized as UITs) is narrower than the
sample of funds in Table 1 (i.e., all registered investment companies)
because Form N-CEN and Form N-PORT do not apply to the same scope of
funds.\542\ Each acquiring fund represented in Table 2 is a registered
management investment company or ETF organized as a UIT that invests a
non-zero percentage of its assets in registered investment companies or
BDCs, while each acquired fund is a registered investment company in
which a registered management investment company or ETF organized as a
UIT invests.\543\ Hence, the definition of acquiring funds in Table 1
is broader than the definition of acquiring funds in Table 2.\544\
---------------------------------------------------------------------------

    \541\ BDCs do not file reports on Form N-PORT and are therefore
excluded from the definition of acquiring funds in Tables 2 and 3.
We use the most recent Form N-PORT filing with the Commission for
each fund filed between May 2019 and May 2020 for this analysis
(i.e., the first and last month with Form N-PORT data available as
of the data collection date). See supra footnote 534 for definition
of fund categories. Total net assets in Form N-CEN may be different
from total net assets in Form N-PORT because Form N-CEN reports
average assets estimated over the reporting period while Form N-PORT
reports point-in-time assets as of the reporting date.
    \542\ See supra footnote 534.
    \543\ Hence, acquiring funds in Table 2 includes funds of funds
that were structured in reliance on section 12(d)(1)(A), funds of
funds that were structured in reliance on section 12(d)(1)(F), funds
of funds that were structured in reliance on section 12(d)(1)(G),
funds of funds that were structured in reliance on exemptive relief
on which rule 12d1-4 is based, and funds of funds that were
structured considering Commission staff letters.
    \544\ The Form N-PORT data allows us to use a broader definition
of acquiring funds in Table 2 compared to Table 1 (i) to provide a
more complete picture of the fund of funds market; and (ii) for
comparability purposes with the acquiring fund statistics in the
2018 FOF Proposing Release.
---------------------------------------------------------------------------

    Untabulated analysis shows that out of the 4,750 acquiring funds in
Table 2, 1,435, or 30%, invested in at least one acquired fund beyond
the limits of section 12(d)(1).\545\ These 1,435 acquiring funds
invested, on average, in nine unique acquired funds beyond the section
12(d)(1) limits.
---------------------------------------------------------------------------

    \545\ We define acquiring funds that invest in at least one
acquired fund beyond the limits of section 12(d)(1) using Form N-CEN
data as of May 2020.
---------------------------------------------------------------------------

    Also, untabulated analysis shows that 954, or 20%, of all acquiring
funds in Table 2 appear to be relying on the statutory exemption in
section 12(d)(1)(G) to structure a fund of funds arrangement.\546\
Finally, untabulated analysis shows that from the 16,797 acquiring-
acquired fund pairs in Table 2, for which the acquiring fund invests in
the acquired fund beyond the limits of section 12(d)(1)(A), 7,400
acquiring-acquired fund pairs have a different primary investment
adviser.\547\
---------------------------------------------------------------------------

    \546\ We define 12(d)(1)(G) acquiring funds as open-end funds or
UITs that invest at least 10% of their assets in other open-end
funds or UITs that are in the same group of investment companies. We
identify funds that are in the same group of investment companies
using Item B.5 in Form N-CEN filings with the Commission as of May
2020. On one hand, our methodology may overestimate the number of
12(d)(1)(G) acquiring funds to the extent that certain funds rely on
exemptive orders rather than 12(d)(1)(G) to invest in funds within
the same group of investment companies beyond the limits of section
12(d)(1)(A). On the other hand, our methodology may underestimate
the number of 12(d)(1)(G) acquiring funds because the definition of
the group of investment companies in Form N-CEN is narrower than the
definition under 12(d)(1)(G). In particular, ``[f]amily of
investment companies'' is defined in Item B.5 of Form N-CEN as any
two or more registered funds that (i) share the same investment
adviser or principal underwriter; and (ii) hold themselves out to
investors as related companies for purposes of investment and
investor services. ``Group of investment companies'' is defined in
section 12(d)(1)(G) as any two or more registered funds that hold
themselves out to investors as related companies for purposes of
investment and investor services. See 15 U.S.C. 80a-12(d)(1)(G)(ii).
    \547\ Based on investment adviser data in Item C.9 of Form N-CEN
as of May 2020.
---------------------------------------------------------------------------

    As Table 2 shows, there were 2,151 unique top-tier acquiring funds
in multi-tier (i.e., more than two-tier) fund of funds structures and
986 unique second-tier acquired funds in multi-tier fund of funds
structures.\548\ Out of the 2,151 unique top-tier acquiring funds in
multi-tier structures in Table 2, untabulated analysis shows that 721
are top-tier acquiring funds in structures that are four tiers or more,
149 are top-tier acquiring funds in structures that are five tiers or
more, and 78 are top-tier acquiring funds in structures that are six
tiers.\549\ In the case of four-tier structures, the average investment
of the top-tier acquiring fund in the fourth-tier acquired funds is
equal to 0.006% of the top-tier acquiring fund's assets; in the case of
five-tier structures, the average investment of the top-tier acquiring
fund in the fifth-tier acquired funds is equal to 0.00006% of the top-
tier acquiring fund's assets; and in the case of six-tier structures,
the average investment of the top-tier acquiring

fund in the sixth-tier acquired funds is practically zero.\550\
---------------------------------------------------------------------------

    \548\ The 2,151 top-tier acquiring funds in multi-tier
structures include funds of funds that are structured both within
and beyond the limits of section 12(d)(1).
    \549\ We have not identified any multi-tier structures that are
more than 6 tiers.
    \550\ We estimate the top-tier acquiring fund's investment in
the bottom-tier acquired funds by accounting for the top-tier
acquiring fund's investment in the second-tier acquired funds, the
second-tier acquired funds' investments in the third-tier acquired
funds, and so on. For example, in the case of three-tier structures,
if the top-tier acquiring fund invests 5% of its assets in one
second-tier acquired fund, and the second-tier acquired fund invests
5% of its assets in one third-tier acquired fund, then the top-tier
acquiring fund's investment in the bottom-tier acquired fund is
equal to 0.25% = 5% x 5%.
---------------------------------------------------------------------------

    When looking at only multi-tier structures in which at least one
acquiring fund in each level invests in at least one acquired fund
beyond the limits of section 12(d)(1), there are 23 top-tier acquiring
funds in structures that are three tiers or more and one top-tier
acquiring fund in a structure that is four tiers.\551\ In the case of
the 23 top-tier acquiring funds in multi-tier structures that are three
tiers or more, the average investment of the top-tier acquiring fund in
the third-tier acquired funds is equal to 2.93% of the top-tier
acquiring fund's assets, and in the case of the one top-tier acquiring
fund in a multi-tier structure that is four tiers, the average
investment of the top-tier acquiring fund in the fourth-tier acquired
funds is equal to 0.00003% of the top-tier acquiring fund's
assets.\552\
---------------------------------------------------------------------------

    \551\ We define acquiring funds that invest in at least one
acquired fund beyond the limits of section 12(d)(1) using Form N-CEN
data as of May 2020. There are no multi-tier funds of funds beyond
four tiers that are structured beyond the limits of section
12(d)(1). Our data does not allow us to distinguish whether the
identified multi-tier structures were structured in reliance on one
of the exceptions to the complex structures condition in our
exemptive orders.
    \552\ See supra footnote 550.
---------------------------------------------------------------------------

    A commenter also observed that as of 2018, out of the 1,359 funds
of funds representing $2.8 trillion in assets under management, 198
funds of funds representing $287 billion in assets under management
utilized a multi-tier structure.\553\
---------------------------------------------------------------------------

    \553\ See ICI Comment Letter. The proportion of acquiring funds
that are top-tier acquiring funds in multi-tier structures in Table
2 (i.e., 45% = 2,151/4,750) is different from the proportion of
acquiring funds that are top-tier acquiring funds in multi-tier
structures provided by the commenter (i.e., 15% = 198/1,359)
potentially due to different definitions of acquiring funds and top-
tier acquiring funds in multi-tier structures. In particular, the
commenter defines acquiring funds as funds that invest in at least
one other fund in excess of the limits of section 12(d)(1)(A) while
Table 2 defines acquiring funds as funds that invest a non-zero
percentage of their assets in other funds. The commenter does not
provide information on how it defines top-tier acquiring funds in
multi-tier structures.
---------------------------------------------------------------------------

    Another commenter found that out of the 655 funds of funds \554\
that were sponsored by 15 survey respondents, 223, or 34%, hold more
than 3% of an acquired fund's shares.\555\ The commenter also found
that out of the 15 surveyed sponsors, eight sponsors, or 53%, indicated
that they employ multi-tier structures.\556\ Out of the eight sponsors
that employ multi-tier structures, seven sponsors employ three-tiered
structures, and one sponsor employs a four-tiered structure. Seven
sponsors operate these multi-tier structures pursuant to exemptive
orders; three sponsors rely on section 12(d)(1)(G); three sponsors rely
on rule 12d1-2; two sponsors rely on section 12(d)(1)(A); two sponsors
structure funds considering staff no-action letters; one sponsor relies
on section 12(d)(1)(F); and one sponsor relies on rule 12d1-1.\557\
---------------------------------------------------------------------------

    \554\ See supra footnote 537 for the commenter's definition of
funds of funds.
    \555\ See SIFMA AMG Comment Letter. The 34% (= 223/655) of
acquiring funds that invest in other funds beyond the limits in
section 12(d)(1) provided by the commenter is higher than our 30% (=
1,435/4,750) estimate using Form N-PORT and Form N-CEN data, and the
difference may be due to the different samples used for the two
analyses.
    \556\ See SIFMA AMG Comment Letter. The commenter provided
statistics on multi-tier structures in terms of sponsors (rather
than funds), and so we are unable to compare with precision the
statistics provided by the commenter to our statistics on multi-tier
structures in Table 2. Nevertheless, the 53% of surveyed sponsors
employing multi-tier structures is largely consistent with the 45%
(= 2,151/4,750) of acquiring funds that are top-tier acquiring funds
in multi-tier structures in Table 2.
    \557\ See SIFMA AMG Comment Letter. The data provided by the
commenter is sponsor-level (rather than fund-level) data and so we
cannot use this data to estimate how many of the multi-tier
structures in our sample will be affected by the final rule or the
extent to which they will be affected. In addition, our data does
not allow us to distinguish whether the multi-tier structures in our
sample were created in reliance on sections 12(d)(1)(A),
12(d)(1)(F), 12(d)(1)(G), rule 12d1-2, exemptive orders, or
considering staff no-action letters.

                        Table 2--Descriptive Statistics for Funds, Acquiring Funds, and Acquired Funds Using Form N-PORT Filings
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                       Funds                      Acquiring funds                 Acquired funds
                                                         -----------------------------------------------------------------------------------------------
                                                                          Net assets (bn                  Net assets (bn                  Net assets (bn
                                                              Number            $)            Number            $)            Number            $)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                            Panel A: Statistics on Funds, Acquiring Funds, and Acquired Funds
--------------------------------------------------------------------------------------------------------------------------------------------------------
Open-end funds..........................................          11,170          24,458           4,514           8,349           2,925          14,743
    ETFs................................................           1,898           6,361             649           2,364             729           6,053
    ETMFs...............................................              21              18               4               3               3              17
Closed-end funds........................................             600             310             231             115             458             242
ETFs registered as UITs.................................               5             436  ..............  ..............               4             436
UITs registered as separate accounts....................  ..............  ..............  ..............  ..............               5              50
Management company separate accounts....................              13             208               5             144  ..............  ..............
                                                         -----------------------------------------------------------------------------------------------
        Total...........................................          11,788          25,412           4,750           8,608           3,392          15,471
--------------------------------------------------------------------------------------------------------------------------------------------------------

                                               Multi-tier structures
                                         -------------------------------
                                             Number of
                                             acquiring       Number of
                                               funds      acquired funds
------------------------------------------------------------------------
              Panel B: Statistics on Multi-Tier Structures
------------------------------------------------------------------------
Open-end funds..........................           2,074             813
    ETFs................................             148             278
    ETMFs...............................               2               1
Closed-end funds........................              74             173
ETFs registered as UITs.................  ..............  ..............
UITs registered as separate accounts....  ..............  ..............

Management company separate accounts....               3  ..............
                                         -------------------------------
        Total...........................           2,151             986
------------------------------------------------------------------------
This table reports descriptive statistics for all funds, acquiring
  funds, and acquired funds using data from Form N-PORT filings with the
  Commission as of May 2020. Panel A presents statistics on all funds,
  acquiring funds, and acquired funds, and Panel B presents statistics
  on multi-tier structures. A fund of funds is a fund that invests a non-
  zero percentage of its assets in securities issued by other registered
  investment companies but does not include a fund that solely invests
  in money market funds. Master-feeder funds, defined as structures
  where the acquiring fund invests more than 98% of its assets in
  another registered investment company, are excluded from this
  analysis. Multi-tier structures are funds of funds with more than two
  tiers. Acquiring funds in multi-tier structures are the unique top-
  tier acquiring funds in a multi-tier structure, and acquired funds in
  multi-tier structures are the unique second-tier acquired funds in
  multi-tier structures. Total net assets is the sum of total net assets
  across all funds in the sample during the reporting period (see Item
  B.1.c in Form N-PORT).

    Our review of BDC filings show that as of December 2019, there were
83 BDCs with $123 billion in total gross assets, out of which 45 BDCs
with 83 billion in total gross assets were listed on a national
securities exchange.\558\ Approximately 44% of the BDCs were acquiring
BDCs and 60% were acquired BDCs in fund of funds structures.\559\ We
have not granted exemptive relief to BDCs as acquiring funds so we
believe that all acquiring BDCs invest in other funds within the
12(d)(1) limits.
---------------------------------------------------------------------------

    \558\ Estimates of the number of BDCs and their gross assets are
based on a staff analysis of Form 10-K and Form 10-Q filings as of
December 2019, which are the most recent available filings as of the
data collection date. Our estimates exclude BDCs that may be
delinquent or have filed extensions for their filings, wholly-owned
subsidiaries of other BDCs, and BDCs in master-feeder structures.
These statistics are generally consistent with statistics on BDCs
provided by commenters. See, e.g., SBIA Comment Letter; IPA Comment
Letter.
    \559\ We define acquiring BDCs as BDCs that reported non-zero
AFFEs in Forms 497, N-2, or N-2A filed with the Commission between
January 2019 and May 2020. 44% = 14 BDCs that reported non-zero
AFFEs in Forms 497, N-2, or N-2A filed with the Commission between
January 2019 and May 2020/32 BDCs that filed Forms 497, N-2, or N-2A
with the Commission between January 2019 and May 2020. Only BDCs
traded on an exchange file Forms 497, N-2, or N-2A. The remaining
BDCs file Forms 10-K but BDCs are not required to report their AFFEs
on Form 10-K. For those BDCs that did not file a Form 497, N-2, or
N-2A with the Commission between January 2019 and May 2020, our
review of the schedule of investment companies in Forms 10-K filed
with the Commission between January 2019 and May 2020 yielded one
acquiring BDC additional to the 14 acquiring BDCs identified from
our review of Forms 497, N-2, or N-2A. We estimate the number of
acquired BDCs using Form N-PORT filings as of May 2020. 60% = 50
BDCs acquired BDCs identified using Form N-PORT data as of May 2020/
83 BDCs that filed forms 10-K or 10-Q as of December 2019.
---------------------------------------------------------------------------

    Table 3 below shows the percentage of acquiring funds that invest
between 0 and 5%, 5 and 10%, 10 and 25%, 25 and 50%, 50 and 75%, 75 and
90%, 90 and 95%, and above 95% of their total assets in other funds as
of May 2020.\560\ The table shows that the majority of acquiring funds
invest either less than 10% or more than 95% of their assets in other
funds. The reason for the concentration of acquiring funds below the
10% level is likely that a 10% investment in other funds is within the
section 12(d)(1)(A) statutory limits. Funds that invest above the 95%
threshold likely rely either on section 12(d)(1)(G) or (F) or on
exemptive orders to invest in other funds beyond the section
12(d)(1)(A) statutory limits.
---------------------------------------------------------------------------

    \560\ In addition to other funds, acquiring funds may invest in
private funds, cash and cash equivalents, derivatives, individual
equity and debt securities, asset-backed securities, etc. We do not
aggregate fund holdings across advisory groups for the purposes of
this analysis.

                               Table 3--Percentage of Acquiring Funds That Invest Certain % of Their Assets in Other Funds
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     [0-5%]      (5-10%]      (10-25%]     (25-50%]     (50-75%]     (75-90%]     (90-95%]    above 95%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Open-end funds..................................           47            8            7            8            4            5            3           17
    ETFs........................................           70            2            4            6            4            6            2            6
    ETMFs.......................................           25           25            0           25           25            0            0            0
Closed-end funds................................           82            6            7            1            2            0            0            0
Management company separate accounts............          100            0            0            0            0            0            0            0
--------------------------------------------------------------------------------------------------------------------------------------------------------
This table reports the percentage of acquiring funds by fund type that invest between 0 and 5%, 5 and 10%, 10 and 25%, 25 and 50%, 50 and 75%, 75 and
  90%, 90 and 95%, and above 95% of their total assets in other funds using data from Form N-PORT filings with the Commission as of May 2020. UITs,
  except for ETFs registered as UITs, do not file Form N-PORT filings with the Commission and thus are excluded from this table. We have not identified
  any ETFs registered as UITs that are acquiring funds. Fund investments in money market funds and master-feeder structures are excluded from this
  analysis. Percentages may not sum up to 100 due to rounding error.

    The total net assets of funds of funds have generally increased
over time. According to the 2020 ICI Fact Book, the total net assets of
open-end funds of funds increased from $680 billion to $2.54 trillion
between December 2009 and December 2019, and the total net assets of
exchange-traded funds of funds increased from $824 million to $13,444
million between December 2009 and December 2019.\561\
---------------------------------------------------------------------------

    \561\ Open-end funds of funds are open-end funds that invest
primarily in other open-end funds. ETF funds of funds are ETFs that
invest primarily in other ETFs. See 2020 ICI Fact Book, supra
footnote 4, at 206 and 244.
---------------------------------------------------------------------------

    Table 4 Panel A shows descriptive statistics for the expense ratio,
front-end load, and deferred charges for single-tier funds (i.e., all
funds excluding acquiring funds), and Table 4 Panel B shows descriptive
statistics for the expense ratio, front-end load, and deferred charges
for acquiring funds as of July 2020.\562\ The expense ratio in Table 4
includes acquired fund fees and

expenses. Untabulated analysis based on the expense data in Table 4
shows that the equal-weighted average expense ratio for acquiring open-
end funds, UITs, and ETFs is statistically significantly higher than
the equal-weighted average expense ratio for single-tier open-end
funds, UITs, and ETFs, respectively.\563\ For BDCs and registered
closed-end funds, there is no statistically significant difference in
the operating expenses of acquiring and single-tier funds. There are no
acquiring ETMFs with expense data in our sample. Our results are
qualitatively similar when we compare the value-weighted (instead of
the equal-weighted) average of the expense ratio for single-tier and
acquiring funds. Nevertheless, the results of the statistical
comparison of the expense ratio for single-tier and acquiring funds
should be interpreted with caution because our analysis does not
control for differences in the characteristics of single-tier and
acquiring funds, such as differences in their investment strategy,
which could potentially affect fund fees and expenses.
---------------------------------------------------------------------------

    \562\ In Table 4 and Figure 1 of this release (i.e., fee and
expense analysis), we identify acquiring funds (excluding BDCs)
using Morningstar Holdings data instead of Form N-CEN or Form N-PORT
data, similar to Table 3 and Figure 1 of the Proposing Release. The
reason is that Form N-CEN and Form N-PORT data only becomes
available in 2019 but the analysis in Figure 1 requires
identification of acquiring funds starting from 2015. We use the
same data to identify acquiring funds in both Table 4 and Figure 1
to allow for data comparability in the fee and expense analysis. We
define acquiring BDCs as BDCs that reported non-zero AFFEs in Forms
497, N-2, or N-2A filed with the Commission between January 2019 and
May 2020 (see supra footnote 559). The number of observations in
Table 4 is different than the number of observations in Table 1
because (i) we lack expense data for some of the funds; and (ii)
there are differences in the unit of observation in Morningstar and
Form N-CEN (see infra footnote 564).
    \563\ We use a two-tailed t-test and a 95% confidence interval
to examine whether the differences in the equal-weighted averages of
fees and expenses for acquiring and single-tier funds are
statistically significant. A 95% confidence interval is frequently
used for hypothesis testing in scientific work (see, e.g., David H.
Kaye & David A. Freedman, Reference Guide on Statistics, in The
Reference Manual on Scientific Evidence (2nd ed., 2000), at 83).
    \564\ The difference in the number of UITs reported in Table 1
compared to Table 4 is likely due to the fact that Form N-CEN data
(i.e., Table 1) is aggregated at the trust level while Morningstar
(i.e., Table 4) reports unique UIT series, which we are unable to
aggregate at the trust level due to data limitations.
    \565\ The BDC expense ratio statistics are higher in Table 4 of
this release compared to Table 3 of the 2018 FOF Proposing Release.
In the 2018 FOF Proposing Release we collected BDC expense data from
the most recent available Forms 497, N-2, or N-2A, while in this
release we collect BDC expense data only from Forms 497, N-2, or N-
2A that were filed between January 2019 and May 2020 to avoid using
stale data in our analysis.

        Table 4--Expense Ratio, Front-End Load, and Deferred Charges for Single-Tier and Acquiring Funds
----------------------------------------------------------------------------------------------------------------
                               Equal-weighted    Value-weighted                      Standard
                                    mean              mean            Median         deviation           N
----------------------------------------------------------------------------------------------------------------
                                           Panel A: Single-Tier Funds
----------------------------------------------------------------------------------------------------------------
Expense Ratio:
    Open-end funds..........              0.92              0.47            0.89            0.47           5,124
    UITs \564\..............              0.32              0.30            0.26            0.30           3,316
    ETFs....................              0.52              0.13            0.49            0.32           2,003
    ETMFs...................              0.74              0.77            0.78            0.25              16
    Closed-end funds........              2.29              1.96            1.86            1.90             192
    Management company                    0.33              0.35            0.32            0.03               7
     separate accounts......
    BDCs \565\..............             12.00             11.00           12.20            4.17              18
Front-End Load:
    Open-end funds..........              1.42              1.67            0.83            1.44           2,490
    UITs....................              3.72              3.16            3.90            1.04           1,342
    ETFs....................  ................  ................  ..............  ..............  ..............
    ETMFs...................  ................  ................  ..............  ..............  ..............
    Closed-end funds........              2.13              1.61            1.57            1.97              19
    Management company        ................  ................  ..............  ..............  ..............
     separate accounts......
    BDCs....................              2.98              2.92            2.00            1.87               9
Deferred Charges;
    Open-end funds..........              0.05              0.04            0.03            0.07           2,035
    UITs....................              1.86              1.94            2.18            0.56           1,784
    ETFs....................  ................  ................  ..............  ..............  ..............
    ETMFs...................  ................  ................  ..............  ..............  ..............
    Closed-end funds........              0.12              0.16            0.13            0.08               5
    Management company        ................  ................  ..............  ..............  ..............
     separate accounts......
    BDCs....................  ................  ................  ..............  ..............  ..............
----------------------------------------------------------------------------------------------------------------
                                            Panel B: Acquiring Funds
----------------------------------------------------------------------------------------------------------------
Expense Ratio:
    Open-end funds..........              0.98              0.56            0.91            0.57           2,837
    UITs....................              1.71              1.56            1.79            0.88             874
    ETFs....................              0.63              0.20            0.54            0.40             503
    ETMFs...................  ................  ................  ..............  ..............  ..............
    Closed-end funds........              2.07              1.91            1.91            0.79              79
    Management company        ................  ................  ..............  ..............  ..............
     separate accounts......
    BDCs....................             12.02             10.06           12.98            3.89              14
Front-End Load:
    Open-end funds..........              1.43              1.28            0.86            1.47           1,359
    UITs....................              1.00              1.00            1.00            0.00              19
    ETFs....................  ................  ................  ..............  ..............  ..............
    ETMFs...................  ................  ................  ..............  ..............  ..............
    Closed-end funds........              1.24              1.08            1.13            1.02              11
    Management company        ................  ................  ..............  ..............  ..............
     separate accounts......
    BDCs....................              2.75              2.00            2.00            1.82               5
Deferred Charges:
    Open-end funds..........              0.08              0.05            0.04            0.09           1,066
    UITs....................              2.09              2.14            2.25            0.46             872
    ETFs....................  ................  ................  ..............  ..............  ..............
    ETMFs...................  ................  ................  ..............  ..............  ..............

    Closed-end funds........              0.30              0.16            0.32            0.16               3
    Management company        ................  ................  ..............  ..............  ..............
     separate accounts......
    BDCs....................  ................  ................  ..............  ..............  ..............
----------------------------------------------------------------------------------------------------------------
This table reports descriptive statistics for the expense ratio, front-end load, and deferred charges in
  percentage points for single-tier funds (i.e., all funds excluding acquiring funds) in Panel A, and for
  acquiring funds in Panel B as of July 2020. Expense ratio is the percentage of fund assets, net of
  reimbursements, used to pay for operating expenses and management fees, including 12b-1 fees, administrative
  fees, and all other asset-based costs incurred by the fund, except brokerage costs. Sales charges are not
  included in the expense ratio. The expense ratio for acquiring funds is retrieved from the acquiring fund's
  prospectus and it includes the acquired funds' expense ratio. The front-end load is a one-time deduction from
  an investment made into the fund. Deferred charges are imposed when investors redeem shares. The analysis is
  conducted at the fund level using asset-weighted average values for multiple-class portfolios. We exclude
  funds with zero expense ratios, front-end loads, and deferred charges for the estimation of the descriptive
  statistics in each respective panel. There are no acquiring ETMFs with expense ratio data in our sample. There
  are also no acquiring management company separate accounts in our sample. ETFs, ETMFs, and management company
  separate accounts do not charge front-end loads or deferred charges. BDCs charge a front-end load, which
  includes selling commissions and dealer management fees, but they do not charge deferred charges. We identify
  acquiring open-end funds, UITs, ETFs, ETMFs, and closed-end funds using Morningstar Holdings data and
  acquiring BDCs as BDCs that reported non-zero AFFEs in Forms 497, N-2, or N-2A filed with the Commission
  between January 2019 and May 2020. Expense data for open-end funds, UITs, ETFs, ETMFs, and closed-end funds is
  retrieved from Morningstar Direct, and data for BDCs is retrieved from Forms 497, N-2, or N-2A. Data is
  winsorized at the 1% and 99% levels, with the exception of the BDC data, which is not winsorized because there
  are no outliers.

    There is some evidence of a decrease in the expense ratio for
certain funds of funds over time. In particular, according to an ICI
report, the equal-weighted (value-weighted) average of the expense
ratio of target date open-end funds has decreased from 1.23% (0.67%) in
2008 to 0.78% (0.37%) in 2019.\566\
---------------------------------------------------------------------------

    \566\ Trends in the Expenses and Fees of Funds, 2019, ICI Res.
Persp., Mar. 2020, at 13.
---------------------------------------------------------------------------

    Figure 1 Panels A-C below show the equal-weighted average of the
expense ratio for acquiring open-end funds, ETFs, and closed-end funds
between 2015 and 2019.\567\ Due to data limitations, the expense ratio
in Figure 1 does not include acquired fund fees and expenses. As Panel
A shows, the expense ratio for open-end acquiring funds has decreased
from 0.91 in 2015 to 0.80 in 2019, but this decrease is not
statistically significant.\568\ As Panel B shows, the expense ratio for
acquiring ETFs has increased from 0.51 in 2015 to 0.53 in 2019, with a
peak equal to 0.57 in 2016, but this decrease is not statistically
significant. Finally, as Panel C shows, the expense ratio of closed-end
acquiring funds has monotonically increased from 1.39 in 2015 to 2.31
in 2019 and this increase is statistically significant at the 1% level.
The time-series trends for the expense ratio of acquiring ETFs and
closed-end funds are qualitatively similar when we examine the value-
weighted (instead of the equal-weighted) average of the expense ratio
whereas the trend for the expense ratio of acquiring open-end funds
exhibits a slight increase although this is not statistically
significant.
---------------------------------------------------------------------------

    \567\ See supra footnote 552 for definition of acquiring funds.
    \568\ In this and all subsequent analysis, to examine if there
is a statistically significant time trend in the data, we regress
the variable of interest to a year trend variable, and we test
whether the coefficient on the trend variable is statistically
different from zero. We use a two-tailed t-test and a 95% confidence
interval. See supra footnote 563.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P

[GRAPHIC] [TIFF OMITTED] TR19NO20.000

[GRAPHIC] [TIFF OMITTED] TR19NO20.001

BILLING CODE 8011-01-C
    As a baseline for understanding the effects of the voting
provisions of rule 12d1-4 on acquiring funds, we study how frequently
funds held shareholder meetings in 2019. Our review of filings with the
Commission showed that 12% of all open-end funds, no UITs, 68% of all
closed-end funds, and 86% of BDCs held at least one shareholder meeting
in 2019.\569\ Further, 12% of the acquired open-end funds, no acquired
UITs, 92% of the acquired closed-end funds, and 94% of the acquired
BDCs held at least one shareholder meeting in 2019.\570\
---------------------------------------------------------------------------

    \569\ We identify funds that held a shareholder meeting in 2019
as funds that filed at least one Form DEF14A with the Commission in
2019. Our sample of funds is the same as in Table 1 above. Acquired
funds are defined as in Table 2 above.
    Separate accounts are excluded from this analysis because rule
12d1-4 will not include specific voting provisions when an insurance
product separate account is part of the acquiring fund advisory
group or acquiring fund sub-advisory group.
    \570\ Our sample of acquired funds is the same as in Table 2
above.
---------------------------------------------------------------------------

    The final rule will also affect investment advisers to funds. As of
March 2020, there were 1,720 investment advisers that provide portfolio
management services to registered investment companies and BDCs and
these investment advisers managed assets equal to $28,629 billion.\571\
Approximately 17% of all investment advisers provided portfolio
management services to acquiring funds and 33% to acquired funds.\572\
---------------------------------------------------------------------------

    \571\ Based on Item 5.D. of Form ADV filed with the Commission
as of March 2020.
    \572\ Based on Item C.9. of Form N-CEN filed with the Commission
as of May 2020. Our sample of acquiring funds is the same as in
Table 1 above and the sample of acquired funds is the same as in
Table 2 above. BDCs do not file Form N-CEN and thus are excluded
from this analysis.
---------------------------------------------------------------------------

    The final rule will also affect UIT depositors and sponsors. As of
May 2020, there are 150 UIT unique depositors and 14 unique UIT
sponsors.\573\
---------------------------------------------------------------------------

    \573\ Based on Items F.1 and F.4 of Forms N-CEN filed with the
Commission as of May 2020. We lack data on acquiring UITs and so we
do not provide counts of depositors and sponsors to acquiring UITs
(see supra Tables 1 and 2).
---------------------------------------------------------------------------

    Lastly, the final rule will impact current and prospective
individual investors that invest in funds. As of December 2019, there
were 59.7 million U.S. households and 103.9 million individuals that
owned U.S. registered investment companies.\574\
---------------------------------------------------------------------------

    \574\ See 2020 ICI Fact Book, supra footnote 4.
---------------------------------------------------------------------------

2. Current Regulatory Framework
    The existing regulatory framework for funds of funds comprises the
current set of statutory provisions and rules governing funds of funds,
the exemptive orders we have granted to allow certain funds of funds,
and certain industry practices that have developed in connection with
staff-level views provided in certain staff no-action letters. Below we
discuss in more detail the fund of funds exemptive order process \575\
and we list the current set of statutory provisions and rules governing
funds of funds as well as relevant staff no-action letters.\576\
---------------------------------------------------------------------------

    \575\ See supra section II.C and infra section V.C.1.b for
detailed discussion of the exemptive order conditions.
    \576\ See supra section I.A for detailed discussion of the
relevant statutory provisions and rules and supra sections II.C.3.d
and III for detailed discussion of relevant staff no-action and
interpretive letters.

---------------------------------------------------------------------------

a. Exemptive Order Process
    Certain funds rely on individual exemptive orders granted by the
Commission to invest in other funds beyond the limits of section
12(d)(1). The process of obtaining an exemptive order imposes direct
administrative costs on funds associated with the preparation and
revision of an application and consultations with Commission staff. We
estimate that the administrative cost associated with obtaining an
exemptive order permitting an acquiring fund to invest in an acquired
fund beyond the limits of section 12(d)(1) is approximately
$100,000.\577\ Once a fund adviser/sponsor obtains exemptive relief to
structure a fund of funds, the adviser/sponsor may apply this relief to
multiple funds of funds. The administrative cost associated with the
exemptive order process may be shared between the fund adviser/sponsor
and the fund, and thus this administrative cost may be passed down to
investors in the form of management fees or expenses. Nevertheless, we
lack data and the commenters did not provide any data that would allow
us to estimate how the administrative cost associated with the
exemptive order process is split between the fund adviser/sponsor and
the fund.
---------------------------------------------------------------------------

    \577\ The $100,000 estimate reflects the current administrative
cost associated with obtaining an exemptive order. This cost may
decrease following the adoption of amendments to establish an
expedited review procedure for applications for orders that are
substantially identical to recent precedent. See infra note 579 and
associated text.
---------------------------------------------------------------------------

    The exemptive order process also imposes indirect costs on funds
and their advisers/sponsors because it introduces delays and
uncertainty to fund investments. For non-ETF (ETF) fund of funds
applications that received exemptive orders in 2019, the average time
from the date a fund filed its initial application for exemptive relief
to the date the Commission issued the related exemptive order was 127
(378) days and the average number of total filings (i.e., both initial
and amended filings) was 1.5 (3).\578\ On July 6, 2020, the Commission
adopted amendments to establish an expedited review procedure for
applications for orders that are substantially identical to recent
precedent as well as a rule to establish an internal timeframe for
review of applications outside of such expedited procedure. As a
result, we expect that future delays associated with the application
process, including for any funds of funds applications, will decrease
significantly following the effective date of these amendments.\579\
---------------------------------------------------------------------------

    \578\ ETF fund of funds exemptive order applications are
typically submitted as part of the applications related to the
formation and operation of ETFs, and these unrelated aspects of the
applications could bias the cited statistics on the duration and the
number of filings of the fund of funds exemptive order process. In
addition, the statistics for the processing times and number of
filings of ETF fund of funds exemptive order applications are skewed
upwards by applications for non-transparent ETFs, which are
relatively novel products. When we exclude non-transparent ETF fund
of funds applications that received exemptive orders in 2019, the
average time from the date a fund filed its initial application for
exemptive relief to the date the Commission issued the related
exemptive order was 196 days and the average number of filings was
2. There is variation in the duration of the exemptive order process
from the date of the initial filing to the date the order is issued.
For non-ETF (ETF) fund of funds applications that received exemptive
orders in 2019, the duration of the exemptive order process varied
from 84 (58) to 155 (2,269) days from the date of the first filing
to the date the order was issued, and the number of the filings
varied from 1 (1) to 2 (12). Data is retrieved from the Investment
Company Act Notices and Orders: Category Listing, available at
https://www.sec.gov/rules/icreleases.shtml (accessed on July 29,
2020).
    \579\ The effective date of this rule will be on June 14, 2021.
See Amendments to Procedures With Respect to Applications Under the
Investment Company Act of 1940, Investment Company Act Release No.
33921 (July 6, 2020) [85 FR 57089 (Sept. 15, 2020)].
---------------------------------------------------------------------------

    Until the Commission grants exemptive relief, fund advisers/
sponsors are not permitted to create certain funds of funds and so
acquiring funds must forgo certain investments in other funds. In
addition, the exemptive order process may lead to uncertainty regarding
whether the fund will be able to obtain exemptive relief and regarding
the exact terms of the exemptive relief.
    As a result of the direct and indirect costs of the exemptive order
process, acquiring funds might forgo certain investments in other funds
or funds of funds might not be launched in the first place because the
fund may conclude that the costs of seeking an exemptive order exceed
the anticipated benefits of the investment in another fund beyond the
limits of section 12(d)(1).
    Funds relying on exemptive orders to develop funds of funds also
must comply with the terms and conditions of the exemptive relief.
These terms and conditions are designed to prevent the historical
abuses that led Congress to enact section 12(d)(1). Existing orders
include conditions designed to mitigate the risks of undue influence,
duplicative and excessive fees, and overly complex structures.\580\
---------------------------------------------------------------------------

    \580\ See supra section II.C and infra section V.C.1.b for
detailed discussion of the conditions of the exemptive orders. In
addition to the exemptive order conditions, fund investors in
management investment companies are protected from potential abusive
practices that section 12(d)(1) was designed to prevent as a result
of the fiduciary obligations of acquiring and acquired funds' boards
of directors and investment advisers.
---------------------------------------------------------------------------

b. Summary of Relevant Statutory Provisions, Rules, and Industry
Practices Associated With Staff No-Action Letters
    As an alternative to obtaining an exemptive order, some funds have
relied on statutory provisions and rules, and have considered staff-
level views expressed in staff no-action letters to structure fund of
funds arrangements beyond the limits of section 12(d)(1)(A) and (B). In
particular, funds of funds can rely on section 12(d)(1)(G) and rule
12d1-2, section 12(d)(1)(E), and 12(d)(1)(F).\581\ In addition, the
staff of the Division of Investment Management has issued a line of
letters stating that the staff would not recommend enforcement action
to the Commission under sections 12(d)(1)(A) or (B) of the Act if a
fund acquires the securities of other funds in certain circumstances.
We understand that certain industry practices have developed in
connection with the staff-level views provided in these letters.\582\
---------------------------------------------------------------------------

    \581\ See supra section I.A for detailed discussion of relevant
statutory provisions and rules.
    \582\ See supra sections II.C.3.d and III for detailed
discussion of relevant staff no-action and interpretive letters.
---------------------------------------------------------------------------

C. Benefits and Costs and Effects on Efficiency, Competition, and
Capital Formation

    Where possible, we have attempted to quantify the costs, benefits,
and effects on efficiency, competition, and capital formation expected
to result from the final rule. In some cases, however, we are unable to
quantify the economic effects because we lack the information necessary
and commenters have not made data available to provide a reasonable
estimate. For example, we are unable to estimate the number of new
funds of funds that potentially will be created as a result of the
adoption of the final rule, because we do not have information about
the extent to which the exemptive order application process and the
conditions associated with exemptive relief limit the creation of funds
of funds. Further, we do not have information needed to estimate likely
changes in investor demand for funds of funds following the adoption of
the final rule. In those circumstances, in which we do not have the
requisite data to assess the impact of the final rule quantitatively,
we have qualitatively analyzed the economic impact of the final rule.

1. Benefits and Costs
a. General Economic Effects \583\
---------------------------------------------------------------------------

    \583\ See supra footnote 532 for a discussion of the economic
effects of the N-CEN reporting requirements.
---------------------------------------------------------------------------

i. Change in Funds' Investment Flexibility
    The final rule will have opposing effects on funds' investment
flexibility. On one hand, rule 12d1-4 will expand funds' investment
flexibility by expanding the scope of permissible acquiring and
acquired funds relative to the current exemptive orders.\584\ In
particular, our current exemptive orders permit registered funds to
invest only in certain other funds beyond the limits of section
12(d)(1), but rule 12d1-4 will expand the scope of permissible acquired
funds by permitting both registered funds and BDCs to invest in all
other registered funds and BDCs beyond the limits of section 12(d)(1)
subject to certain conditions. Hence, relative to current exemptive
orders, rule 12d1-4 will additionally allow (i) open-end funds to
invest in unlisted BDCs and registered closed-end funds; (ii) UITs to
invest in unlisted closed-end funds and listed and unlisted BDCs; (iii)
closed-end funds to invest in open-end funds, UITs, and listed and
unlisted BDCs and registered closed-end funds; (iv) BDCs to invest in
open-end funds, UITs, ETMFs, and listed and unlisted BDCs and
registered closed-end funds; and (v) ETFs to invest in ETMFs and
unlisted BDCs and registered closed-end funds. By expanding the scope
of permissible acquiring and acquired funds, rule 12d1-4 will enhance
acquiring funds' investment flexibility and will increase acquired
funds' access to financing.\585\
---------------------------------------------------------------------------

    \584\ See, e.g., ICI Comment Letter for similar arguments.
    \585\ A commenter argued that by expanding the scope of
permissible acquiring and acquired funds, rule 12d1-4 will encourage
the creation of funds of funds that ``expose investors to excessive
costs and poor performance and other risks associated with overly
complex structures'' and ``the Commission has proposed this
expansion without any serious analysis of what would result from
such a sweeping change or explanation of why it would be in
investors' best interest.'' See CFA Comment Letter. See supra
section II.A.1 for discussion of this comment letter, including a
discussion of why we believe the conditions of rule 12d1-4 will
address the concerns raised.
---------------------------------------------------------------------------

    In addition, rule 12d1-4 will expand funds' investment flexibility
and, more specifically, their ability to create multi-tier structures
in the following way. Our current exemptive orders provide an exception
from the three-tier limitation for investments in funds that are
wholly-owned and controlled by the acquired fund as long as the
investment adviser to the acquired fund is also the investment adviser
to the wholly-owned subsidiary, while rule 12d1-4 does not include the
requirement that the acquired fund and the wholly-owned subsidiary
share the same investment adviser.
    Finally, an existing staff no-action letter considers acquired fund
investments of up to 10% of its assets in other funds, including
``central funds,'' subject to certain conditions, including a condition
that the 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.\586\ In contrast, rule 12d1-4 will permit an acquired
fund to invest up to 10% of its assets in other funds, regardless of
the size of the investment in any one fund, the affiliation with the
acquired fund, or the purpose of the investment. Hence, rule 12d1-4
will expand funds' investment flexibility relative to the baseline by
(i) permitting acquired funds' investments in both affiliated and
unaffiliated funds (i.e., compared to the no-action letter, which only
regards acquired fund investments in affiliated funds); and (ii) not
imposing the 5% limit on investments in any single fund.
---------------------------------------------------------------------------

    \586\ See Franklin Templeton No-Action Letter, supra footnote
421. Central funds are affiliated funds commonly created by an
adviser for the purpose of efficiently managing exposure to a
specific asset class.
---------------------------------------------------------------------------

    On the other hand, the conditions of rule 12d1-4, the rescission of
rule 12d1-2, and the withdrawal of certain staff letters \587\ will
decrease certain funds' investment flexibility by restricting their
ability to create certain multi-tier structures, and thus may require
certain acquiring funds to change their investments in acquired funds
over time compared to the baseline.\588\ In particular, our current
exemptive orders prohibit an acquired fund from investing in other
funds beyond the limits in section 12(d)(1), but they do not expressly
prohibit a fund from investing in an acquiring fund beyond the limits
of section 12(d)(1). In addition, section 12(d)(1)(G) requires an
acquired fund to have a policy that prohibits it from acquiring any
securities of a registered open-end fund or UIT in reliance on section
12(d)(1)(G) or (F), but section 12(d)(1)(G) does not require the
acquired fund to have a policy that prohibits it from acquiring the
securities of a fund in excess of the limits in section 12(d)(1)(A) in
reliance on an exemptive order issued by the Commission.\589\
---------------------------------------------------------------------------

    \587\ See supra section III.
    \588\ See, e.g., SBIA Comment Letter; ICI Comment Letter; DPW
Comment Letter; PIMCO Comment Letter; Fidelity Comment Letter;
Guggenheim Comment Letter; TRP Comment Letter; Dechert Comment
Letter; MFS Comment Letter; PGIM Comment Letter; Ropes Comment
Letter; SIFMA AMG Comment Letter; ABA Comment Letter; Fidelity Fixed
Income Trustees Comment Letter for related discussion that rule
12d1-4, the rescission of rule 12d1-2 and certain exemptive orders,
and the withdrawal of certain staff no-action letters as proposed
may limit funds' ability to structure certain multi-tier fund of
funds arrangements that are currently permissible.
    \589\ Our analysis shows 73 three-tier structures for which the
top-tier acquiring fund is a 12(d)(1)(G) fund and the second-tier
acquired fund invests in the third tier beyond the 12(d)(1)(A)
limits. See supra footnote 545 for methodology used to identify
12(d)(1)(G) funds. The results of this analysis should be
interpreted with caution because our data does not allow us to
distinguish whether the second-tier acquired fund invests in the
third tier beyond the 12(d)(1)(A) limits in reliance on exemptive
orders.
---------------------------------------------------------------------------

    Further, our exemptive orders permit acquired funds to invest in
other funds beyond the statutory limits for short-term cash management
purposes.\590\ Some of these orders have allowed an acquired fund to
invest in short-term bond funds for these purposes.\591\ Rule 12d1-4
will permit acquired funds to invest in funds in reliance on rule 12d1-
1 beyond the statutory limits, regardless of the purpose of the
investment.\592\ This condition of rule 12d1-4 will increase funds'
investment flexibility to create multi-tier structures to the extent
that acquired funds invest in funds in reliance on rule 12d1-1 above
the statutory limits for purposes other than cash management. An
acquired fund could also invest up to 10% of its assets in short-term
bond funds pursuant to the 10% Bucket.\593\ However, this condition of
rule 12d1-4 will decrease funds' flexibility to create multi-tier
structures relative to existing exemptive orders to the extent an
acquired fund may no longer rely on a cash management exception to
invest in excess of the statutory limits in short-

term bond funds.\594\ Accordingly, on balance, the rule preserves
substantial flexibility for acquired funds to invest in underlying
funds for cash management purposes with an exception for investments in
underlying funds pursuant to rule 12d1-1 and a separate 10% Bucket for
investments in underlying funds that do not comply with the terms of
rule 12d1-1.
---------------------------------------------------------------------------

    \590\ See, e.g., Federated Investment Management Company,
Investment Company Act Release Nos. 30093 (June 1, 2012) [77 FR
34095 (June 8, 2012)] (notice) and 30123 (Jun. 26, 2012) (order);
Diamond Hill Capital Management, Inc., et al., Investment Company
Act Release Nos. 31433 (Jan. 28, 2015) [80 FR 5825 (Feb. 3, 2015)]
(notice) and 31472 (Feb. 24, 2015) (order).
    \591\ See supra footnote 590. Relatedly, the staff stated in the
Thrivent No-Action letter 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. See supra footnote 423.
    \592\ See rule 12d1-4(b)(3)(ii)(B).
    \593\ An acquired fund may wish to invest in money market funds,
short-term bond funds, or other cash management funds for various
portfolio management purposes, including for cash management,
liquidity management, to seek a higher level of return on
investments used to collateralize derivatives (or other) positions,
and to achieve greater diversification and trading efficiency. See
Guggenheim Comment Letter.
    \594\ As a result of this restriction in funds' investment
flexibility, acquired funds may (i) invest more in money market
funds instead of short-term bond funds, which may reduce fund
returns; (ii) invest in funds that charge separate advisory fees or
cease to waive their own fees, potentially resulting in higher costs
for fund investors; and/or (iii) make direct investments in short-
term bonds, which may increase transaction costs and decrease those
funds' ability to diversify. The remaining enumerated exceptions to
the complex rule condition of rule 12d1-4 (i.e., rule 12d1-
4(b)(3)(ii)(A)-(E)) are similar to the conditions in our exemptive
orders and thus likely will not materially affect funds' ability to
create multi-tier structures.
---------------------------------------------------------------------------

    Our analysis shows 23 multi-tier structures in which at least one
acquiring fund in each level invests in at least one acquired fund
beyond the section 12(d)(1) limits, and thus may be affected by the
final rule.\595\ Nevertheless, our analysis of multi-tier structures
should be interpreted with caution because we lack data that would
allow us to identify whether existing multi-tier structures that were
created under the complex structures conditions in our exemptive orders
or in consideration of the existing no-action letters will comply with
the conditions of rule 12d1-4. Further, like the limits under section
12(d)(1) of the Act, the complex structures investment prohibitions of
rule 12d1-4 are applicable at acquisition. Accordingly, only funds that
seek to increase their investments in other funds beyond the statutory
limits will be limited by the rule's complex structures
prohibitions.\596\
---------------------------------------------------------------------------

    \595\ See supra footnote 551.
    \596\ See supra footnote 416.
---------------------------------------------------------------------------

    Several commenters argued that the rescission of rule 12d1-2 will
decrease the investment flexibility of funds that currently rely on
section 12(d)(1)(G) and rule 12d1-2 to structure affiliated fund of
funds arrangements.\597\ Funds that currently rely on section
12(d)(1)(G) and rule 12d1-2 can now rely on rule 12d1-4 to structure
the same arrangements instead. In particular, rule 12d1-4, unlike
section 12(d)(1)(G), does not limit acquiring funds' ability to invest
in securities other than securities issued by affiliated funds. Thus, a
fund that wishes to invest in affiliated funds beyond the limits of
section 12(d)(1) can also invest in (i) unaffiliated fund securities up
to the limits in section 12(d)(1)(A) or (F); (ii) securities of money
market funds in reliance on rule 12d1-1; and (iii) stocks, bonds, and
other securities subject to the conditions of rule 12d1-4, rather than
section 12(d)(1)(G) and rule 12d1-2. The funds that will choose to
operate in accordance with rule 12d1-4, however, will need to comply
with the rule's conditions and incur the costs associated with these
conditions.\598\ In addition, we believe that many of the commenter
concerns related to potential changes in funds' investment flexibility
as a result of the rescission of rule 12d1-2 will be alleviated because
we are not adopting the proposed redemption limit.
---------------------------------------------------------------------------

    \597\ See, e.g., Allianz Comment Letter; PIMCO Comment Letter;
Thrivent Comment Letter; Hancock Comment Letter; Fidelity Comment
Letter; NYC Bar Comment Letter; Nuveen Comment Letter; Chapman
Comment Letter; Russell Comment Letter; SIFMA AMG Comment Letter;
ABA Comment Letter; Fidelity Fixed Income Trustees Comment Letter.
    \598\ See infra section V.C.1.b for detailed discussion of the
costs and benefits associated with the conditions of rule 12d1-4.
Funds that currently rely on section 12(d)(1)(G) and rule 12d1-2
will only be required to restructure their portfolio if they choose
to continue relying on section 12(d)(1)(G) to avoid compliance with
the conditions of rule 12d1-4. See, e.g., Allianz Comment Letter
(stating that funds ``may be compelled to restructure to avoid the
most challenging aspects of the Proposal.'').
---------------------------------------------------------------------------

    The final rule will require some existing funds of funds to change
their portfolios to ensure compliance with the final rule, and these
portfolio changes may impose the following costs on acquiring funds:
(i) Legal and transaction costs to restructure their portfolios; (ii)
sale of the shares of acquired funds at potentially depressed prices;
(iii) tax implications, which will depend on whether the acquiring fund
will sell shares of acquired funds at a gain or a loss; (iv) disruption
in the acquiring funds' investment strategy; and (v) disclosure costs
to the extent that funds will change their investment strategy.\599\
The prohibition of certain multi-tier structures may also result in
less efficient fund of funds structures (i.e., funds of funds with
fewer investment options, higher administrative costs, higher
transaction costs, and/or lower returns) to the detriment of acquiring
fund investors.\600\
---------------------------------------------------------------------------

    \599\ We do not quantify these costs because we lack data that
would allow us to provide meaningful estimates of the costs and
commenters did not provide any relevant data. Some additional
difficulties with quantification are: (i) The magnitude of certain
costs depends on market conditions and market conditions are
unpredictable (e.g., sale of shares at depressed prices); (ii)
certain costs are inherently difficult to quantify because they are
not well defined (e.g., disruption in the acquiring funds investment
strategy); and (iii) funds have some discretion as to whether and
when they will incur the costs associated with the restructuring of
their portfolios (i.e., the rule imposes an acquisition test) and so
it is difficult to predict the magnitude of the costs associated
with restructuring.
    \600\ See, e.g., PIMCO Comment Letter; ABA Comment Letter for
similar arguments.
---------------------------------------------------------------------------

    The final rule will also impose costs on acquired funds that will
lose the investments of the acquiring funds in them. As a result,
acquired funds may be unable to achieve economies of scale in portfolio
management, resulting in decreased efficiencies and increased operating
costs for acquired fund shareholders. Acquired funds will also bear
costs associated with selling assets in their portfolios to meet any
redemptions by acquiring funds, assuming that acquiring fund
redemptions are not made in kind. Finally, certain funds may opt for
more complex, costly, and unregulated structures to avoid the rule
12d1-4 conditions.\601\ For example, some funds may opt to invest
directly in multiple securities, rather than investing in other funds
that hold such securities, which may increase the funds' complexity and
cost of operations. Nevertheless, we believe that any such costs to
funds and their investors will be moderated by benefits associated with
improved investor protection, and a more efficient regulatory framework
for funds of funds, under the final rule.\602\
---------------------------------------------------------------------------

    \601\ See, e.g., Hancock Comment Letter (noting that ``[S]ome of
these structures may be unregulated or may be more complex or have
higher costs. For example, we believe that some investment managers
may elect to rely more heavily upon unregistered products or may use
multiple portfolio sleeves within a single registered fund, which
could potentially introduce additional costs and administrative
complexities'').
    \602\ For example, rule 12d1-4 will impose the undue influence
finding requirement on both affiliated and unaffiliated funds, which
may enhance investor protection. See infra sections V.C.1.b and
V.C.2.i for detailed discussion of the effects of the final rule on
regulatory efficiency and investor protection.
---------------------------------------------------------------------------

ii. Eliminate the Need To Apply for an Exemptive Order
    Rule 12d1-4 will permit prospective acquiring funds to acquire the
securities of other funds beyond the limits of section 12(d)(1)(A) of
the Act and will permit prospective acquired funds to sell their shares
to acquiring funds beyond the limits of section 12(d)(1)(B) of the Act
without the expense and delay of obtaining an exemptive order, subject
to certain conditions.\603\ Assuming that the number of exemptive
orders granted by the Commission

would stay the same absent the final rule, we estimate that by removing
the need to obtain an exemptive order, the final rule will eliminate
annual aggregate administrative costs to prospective acquiring and
acquired funds of approximately $4.2 million relative to the
baseline.\604\ Any cost savings to prospective acquiring and acquired
funds derived from eliminating the need to apply for an exemptive order
likely will be more pronounced for smaller funds or smaller fund
complexes because (i) the administrative cost of the exemptive order
application process likely does not vary with fund size, and thus may
constitute a higher percentage of a smaller fund's assets; and (ii) the
same exemptive order can be used by multiple funds within a fund
complex, and there may be fewer funds to benefit from an exemptive
order within smaller fund complexes.\605\
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    \603\ Existing funds of funds that currently rely on exemptive
orders that provide relief similar to rule 12d1-4 have already
incurred the cost of the exemptive order process. Hence, these funds
will not benefit from eliminating the need to apply for an exemptive
order under rule 12d1-4.
    \604\ In 2019, the Commission granted 4 non-ETF fund of funds
orders and 38 ETF fund of funds orders (see supra footnote 578 for
the source of the exemptive order data). Hence, the final rule could
result in annual aggregate administrative cost savings to funds of
funds equal to $4,200,000, i.e., $4,200,000 = (4 non-ETF fund of
funds orders + 38 ETF fund of funds orders) x $100,000
administrative cost per exemptive order. The cost savings associated
with removing the need to apply for exemptive relief for ETF fund of
funds arrangements as discussed here are separate from the cost
savings associated with removing the need to apply for exemptive
relief for ETFs as discussed in the ETF adopting release. See 2019
ETF Adopting Release, supra footnote 25, at 57207. The direct
administrative costs associated with the need to apply for an
exemptive order are one-time costs and each exemptive order can be
used by multiple funds within the same fund complex.
    \605\ See, e.g., MFDF Comment Letter for a similar argument.
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    Rule 12d1-4 also will remove the delay incurred by funds and their
sponsors when applying for an exemptive order. As mentioned above, the
average time it took a non-ETF (ETF) fund to obtain exemptive relief in
2019 was 127 (378) days.\606\ If funds are not required to apply for an
exemptive order, prospective acquiring funds will not be required to
forgo investments in other funds while awaiting exemptive relief, which
ultimately will permit these funds to achieve an efficient allocation
of fund assets sooner and will permit these funds to better time their
investments in other funds (i.e., potentially purchase shares at more
favorable prices). Further, by removing the delay associated with the
exemptive order process, prospective acquiring funds will be able to
bring new products to the market faster, which will expand investors'
investment opportunities and may therefore foster capital
formation.\607\ Prospective acquired funds also will benefit because
the acquiring funds' investments in them will increase their assets
more quickly, and as a result the acquired funds may achieve economies
of scale more quickly, ultimately benefitting the existing and future
shareholders of the acquired funds, which may also foster capital
formation.\608\
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    \606\ See supra footnote 578 for the source of the exemptive
order data.
    \607\ See infra section V.C.2.iii for detailed discussion of the
effect of the final rule on capital formation.
    \608\ See supra footnote 607.
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    Rule 12d1-4 also will remove the uncertainty associated with the
exemptive order process.\609\ Uncertainty related to the exemptive
order process may negatively affect fund investment decisions, thus
potentially suppressing fund investment and growth.\610\ Nevertheless,
the effects of the final rule on uncertainty likely will be limited by
the fact that the terms of exemptive relief for funds of funds have
become to a large extent standardized and the approval of applications
for exemptive relief has become somewhat routine.
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    \609\ See supra section V.B.2.a for detailed discussion of costs
associated with the exemptive order process.
    \610\ Academic literature provides evidence consistent with the
idea that uncertainty has negative effects on investment and growth.
See, e.g., Nicholas Bloom, Stephen Bond, & John Van Reenen,
Uncertainty and Investment Dynamics, 74 Rev. Econ. Stud. 391 (2007);
Nicholas Bloom, The Impact of Uncertainty Shocks, 77 Econometrica
623 (2009); Scott R. Baker, Nicholas Bloom, & Steven J. Davis,
Measuring Economic Policy Uncertainty, 131 Q. J. Econ. 1593 (2016).
The cited studies examine the effect of uncertainty on the economy
in general, rather than the effect of uncertainty on funds.
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    Investors may benefit from these direct and indirect cost
reductions. For example, prospective fund advisers, sponsors, and other
service providers may pass cost savings associated with no longer
having to request exemptive relief through to investors by lowering
fees and expenses. The degree of potential reduction of fund fees and
expenses depends on the level of competition in the fund industry. To
the extent that the fund industry is competitive, we believe that fund
advisers, sponsors, and other service providers will pass on to
investors a higher percentage of cost savings arising from the final
rule. Conversely, if the level of competition is low, fund advisers,
sponsors, and other service providers will retain a higher percentage
of cost savings arising from the final rule rather than passing these
cost savings on to investors. Academic literature provides conflicting
evidence regarding the level of competition in the fund industry. On
one hand, several papers provide some evidence that the U.S. fund
industry is competitive and that greater competition in the fund
industry is associated with lower fund fees and expenses.\611\ On the
other hand, several papers suggest that price competition is not
prevalent in the fund industry.\612\ We believe there are two potential
explanations as to why prior literature provides conflicting evidence
on the level of competition in the fund industry. First, prior
literature uses different sample periods, focuses on different market
segments, and uses different units of observation (i.e., individual
funds versus fund families). Second, it is possible that funds do not
compete solely on fees, but instead compete on performance and
services.
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    \611\ See, e.g., John C. Coates, IV & R. Glenn Hubbard,
Competition in the Mutual Fund Industry: Evidence and Implications
for Policy (Harvard John M. Olin Ctr. for L., Econ., and Bus.,
Discussion Paper No. 592, Aug. 2007); Sunil Wahal & Albert (Yan)
Wang, Competition among Mutual Funds, 99 J. Fin. Econ. 40 (2011);
Ajay Khorana & Henri Servaes, What Drives Market Share in the Mutual
Fund Industry, 16 Rev. Fin. 81 (2012); Burton G. Malkiel, Asset
Management Fees and the Growth of Finance, J. Econ. Persp., Spring
2013, at 97. Further, an ICI study suggests that the fund of funds
industry is competitive: ``Mutual fund expense ratios also have
fallen because of economies of scale and competition.'' See 2020 ICI
Fact Book, supra footnote 4, at 121.
    \612\ See, e.g., John P. Freeman & Steward L. Brown, Mutual Fund
Advisory Fees: The Cost of Conflicts of Interest, 26 J. Corp. L. 609
(2001) (arguing that there is lack of price competition in the fund
industry). See also Brad M. Barber, Terrance Odean, & Lu Zheng, Out
of Sight, Out of Mind: The Effects of Expenses on Mutual Fund Flows,
78 J. Bus. 2095 (2005) (finding no relation between fund operating
expenses and fund flows); Javier Gil-Bazo & Pablo Ruiz-Verd[uacute],
The Relation between Price and Performance in the Mutual Fund
Industry, 64 J. Fin. 2153 (2009) (showing that funds with worse
before-fee performance charge higher fees).
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    Further, the cost savings to prospective funds associated with
avoiding the exemptive order process under rule 12d1-4 may potentially
increase the rate at which new funds of funds become available to
investors.\613\ The Commission granted 4 non-ETF fund of funds orders
and 38 ETF fund of funds orders in 2019.\614\ We are unable to estimate
the number of new funds of funds that will be created following the
adoption of the final rule, but we believe that the number of new funds
of funds will be higher than the number of funds of funds that were
created as a result of the exemptive orders granted in 2019 because the
final rule permits the establishment of funds

of funds without the cost of the exemptive order process.
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    \613\ We expect that the effect of the final rule on the number
of acquiring BDCs will be limited because BDCs are prohibited from
making any investment unless, at the time of the investment, at
least 70% of the BDC's total assets are invested in securities of
certain specific types of companies, which do not include funds (see
supra footnote 39).
    \614\ See supra footnote 604.
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    Academic research suggests that investment decisions are sensitive
to the number of available investment opportunities.\615\ Hence,
investor demand for funds of funds may increase as a result of the
increased number of funds of funds under the final rule. In particular,
investors may increase their investments in funds of funds by either
decreasing their investments in other asset classes or increasing their
investment rate. More specifically, as an alternative to investing in
funds of funds, investors may meet their investment objectives by
assembling a portfolio of funds through non-discretionary or
discretionary separate accounts with a broker/dealer or investment
adviser or by investing directly in funds without the intermediation of
broker/dealers or investment advisers. Nevertheless, funds of funds may
represent an efficient alternative to such a strategy because fund of
funds investors can avoid minimum investment requirements, invest in
funds that have been closed to new investors, invest in funds that are
restricted to a particular investor type, avoid certain transaction
costs, and enjoy lower recordkeeping and monitoring costs relative to
investors that directly invest in multiple funds.\616\ As a result, the
entry of new funds of funds that do not replicate existing investment
opportunities may increase investor demand for funds of funds because
those funds will provide investors the opportunity to obtain
diversified exposure to different asset classes through a single,
professionally managed portfolio at a potentially lower cost compared
to investing in a portfolio of funds through discretionary or non-
discretionary separate accounts.
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    \615\ See Shlomo Benartzi & Richard H. Thaler, Naive
Diversification Strategies in Defined Contribution Saving Plans, Am.
Econ. Rev., Mar. 2001, at 79 (presenting survey evidence and plan-
level statistics that support the idea that retirement plan
investors practice ``1/n'' diversification across all available
investment alternatives). But see Gur Huberman & Wei Jiang, Offering
versus Choice in 401(k) Plans: Equity Exposure and Number of Funds,
61 J. Fin. 763 (2006) (demonstrating that individual-level analysis
of 401(k) plan data yields different results from plan-level
analysis, showing that individuals are less sensitive to the overall
number of investment alternatives, but may practice ``1/n'' within a
smaller subset of alternative investments).
    \616\ See, e.g., Edwin J. Elton et al., Target Date Funds:
Characteristics and Performance, 5 Rev. Asset Pricing Stud. 254
(2015) (showing that ``additional expenses charged by TDFs are
largely offset by the low-cost share classes they hold, not normally
open to their investors.'').
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iii. Assess Compliance With the Final Rule
    Existing acquired and acquiring funds relying on exemptive orders
on which rule 12d1-4 is based will incur a one-time administrative cost
to assess whether their operations are consistent with rule 12d1-4 by
examining differences between the exemptive order conditions they are
currently required to meet and the conditions of rule 12d1-4. Further,
existing acquiring funds currently relying on section 12(d)(1)(G) and
rule 12d1-2 to structure funds of funds will be required to decide
whether to continue relying on section 12(d)(1)(G) and amended rule
12d1-1 or instead operate in accordance with rule 12d1-4 and comply
with the rule's conditions. We believe this assessment will result in a
one-time cost equal to $3,315 per fund and an aggregate one-time cost
of $7.6 million for all affected funds.\617\
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    \617\ We estimate that assessing the requirements of rule 12d1-4
will require 5 hours of a compliance manager ($304 per hour) and 5
hours of a compliance attorney ($359 per hour), resulting in a cost
of $3,315 (= 5 hours x $304 + 5 hours x $359) per fund. The
Commission's estimates of the relevant wage rates in the tables
below are based on salary information for the securities industry
compiled by the Securities Industry and Financial Markets
Association's Office Salaries in the Securities Industry 2013. The
estimated wage figures are modified by Commission staff to account
for an 1,800-hour work-year and inflation, and multiplied by 5.35 to
account for bonuses, firm size, employee benefits, overhead, and
adjusted to account for the effects of inflation. See Securities
Industry and Financial Markets Association, Report on Management &
Professional Earnings in the Securities Industry 2013 (``SIFMA
Report'') for the source of salary data. The total cost for the
1,211 acquiring and 1,069 acquired funds that will be subject to
rule 12d1-4 will thus be $7.6 million. $7.6 million = (1,211
acquiring funds that may be required to assess compliance with the
rule + 1,069 acquired funds that may be required to assess
compliance with the rule) x $3,315 one-time costs to assess
compliance with the final rule per fund. Our estimate is likely an
upper bound of the cost associated with assessing compliance with
the final rule because we count separately the cost for acquiring
and acquired funds but certain acquiring funds may also be acquired
funds that will be subject to the final rule, and vice versa, and
there may be synergies to assess compliance with the final rule for
those funds. 1,211 acquiring funds that will be subject to rule
12d1-4 = [1,719 acquiring registered investment companies that
invest in other funds beyond the section 12(d)(1) limits (see Table
1 in supra section V.B.1) + 37 acquiring BDCs (see supra footnotes
558 and 559 and associated text)] x 69% of acquiring funds that
invest in other funds beyond the section 12(d)(1) limits and will be
subject to rule 12d1-4 as estimated by a commenter (see supra
footnote 537 and associated text). Our calculation assumes that the
commenter's sample is representative of the acquiring funds in Table
1. 1,069 acquired funds that will be subject to rule 12d1-4 = [3,392
acquired registered investment companies that have a non-zero
investment from other funds (see Table 2 in supra section V.B.1) +
50 acquired BDCs (see supra footnotes 558 and 559 and associated
text)] x 45% of acquired funds for which there is at least one
acquiring fund that invests in them beyond the 3% limit of section
12(d)(1) x 69% of acquired funds that have investments from other
funds in them beyond the 3% limit of section 12(d)(1) and will be
subject to rule 12d1-4 as estimated by a commenter (see supra
footnote 537 and associated text). Our calculation assumes that the
commenter's estimate of acquiring funds that will be subject to rule
12d1-4 is also applicable to acquired funds.
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b. Effects of New and Omitted Conditions
    Rule 12d1-4 will include new conditions relative to the conditions
in our current exemptive orders and rule 12d1-2, and will omit certain
conditions contained in our exemptive orders that are not necessary in
light of the new conditions of rule 12d1-4. The new conditions of rule
12d1-4 are designed to limit the acquiring funds' undue influence over
the acquired funds, limit duplicative fees for acquiring fund
investors, limit the creation of complex fund structures, and
ultimately encourage effective oversight of fund of funds structures.
The rule 12d1-4 conditions augment certain conditions in our exemptive
orders, which will likely enhance investor protections. We expect,
however, that the implementation and monitoring of these new conditions
will impose certain incremental one-time and ongoing costs on funds and
their investors.\618\ We discuss the benefits and costs of each of the
new conditions of rule 12d1-4 and the conditions of existing exemptive
orders that rule 12d1-4 omits in detail below.\619\
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    \618\ See also Guggenheim Comment Letter (noting that the
conditions of rule 12d1-4 will ``likely result in significant
additional compliance, investment and practical costs and burdens
that ultimately may result in increased fund expenses. We note that
the proposed conditions would necessitate meaningful investments in
technology, personnel, training and other compliance-related
resources to monitor holdings of acquired funds, particularly when
such `advisory groups' involve large diversified financial services
institutions.''). Some of the costs discussed by the commenter may
be no longer relevant given the changes in the rule's conditions
relative to the 2018 FOF Proposing Release.
    \619\ See supra section II.C for discussion of the rule's
conditions. In this section, we compare the conditions of rule 12d1-
4 to the conditions of our current exemptive orders. Hence, the
discussion in this section describes the effects of rule 12d1-4 on
(i) funds that currently rely on our exemptive orders to invest in
other funds beyond the limits of section 12(d)(1) but will be
subject to rule 12d1-4 following the rescission of our exemptive
orders; and (ii) funds that would otherwise choose to rely on our
exemptive orders in the future to invest in other funds beyond the
limits of section 12(d)(1) but will be subject to rule 12d1-4
following the final rule adoption. Any effects discussed in this
section will be more pronounced for funds that currently rely on
section 12(d)(1)(G) and rule 12d1-2 to invest in affiliated funds
beyond the limits of section 12(d)(1) but will be subject to rule
12d1-4 following the final rule adoption, because the conditions of
section 12(d)(1)(G) and rule 12d1-2 are less costly than the
conditions in our current exemptive orders. In particular, in
contrast to our exemptive orders, funds relying on section
12(d)(1)(G) and rule 12d1-2 to invest in affiliated funds beyond the
limits of section 12(d)(1) are not required to enter into a
participation agreement or make certain findings and adopt
procedures to prevent overreaching and undue influence by the
acquiring fund and its affiliates. Further, the conditions aimed at
mitigating excessive and duplicative fees under section 12(d)(1)(G)
are more limited in scope than the fee conditions in our exemptive
orders. See, e.g., Invesco Comment Letter for a discussion of
compliance burdens associated with the rescission of rule 12d1-2 and
the potential reliance of affiliated funds of funds on rule 12d1-4
instead of section 12(d)(1)(G) and rule 12d1-2.

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i. Undue Influence--Control
    Rule 12d1-4 mandates that the acquiring fund and its advisory group
will not control (individually or in the aggregate) an acquired fund.
Control is presumed when a fund owns more than 25% of the voting