larger impact during periods of market stress or high volatility.
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    \122\ The acquiring fund could redeem shares in multiple
transactions within a 30-day period, provided that, taken together,
they represent less than 3% of the acquired fund's outstanding
shares.
    \123\ If the section 12(d)(1)(A)(i) limits are exceeded, the
acquiring fund could not redeem any shares from the acquired fund
beyond the rule's limits until the acquiring fund disposes of shares
it acquired in excess of the 3% statutory limit. Once the acquiring
fund does not hold any shares in excess of 3%, the acquiring fund
could redeem any remaining acquired fund shares it held.
    \124\ We understand that most acquiring funds purchase ETFs,
ETMFs, listed closed-end funds, and listed BDCs in secondary market
transactions. In some cases, UITs also may have secondary market
trading. Secondary market transactions would not involve redemptions
from the acquired fund. However, an acquiring fund might seek to
redeem ETF or ETMF shares from an ETF or ETMF in a primary market
transaction through one or more authorized participants. When
transacting with an ETF or ETMF in the primary market, an acquiring
fund would be subject to, among other things, the redemption
restrictions discussed herein, which could result in acquiring funds
being treated differently than other market participants seeking to
engage in primary market transactions with an ETF or ETMF.
    \125\ See infra section VI. From January 2017 to June 2018,
0.16% of the monthly redemptions of unlisted acquired funds exceeded
the proposed 3% redemption limit. During that same period, 0.76% of
the monthly redemptions of listed acquired funds exceeded the
proposed 3% redemption limit. For these purposes, open-end funds and
UITs are included in the figures for unlisted acquired funds and
ETFs, ETMFs, listed closed-end funds, and listed BDCs are included
in the figures for listed acquired funds. We estimate the percentage
of fund redemptions that are above the 3% limit in any 30-day period
using the quarterly fund holding information in Morningstar
Investment Company Holdings database between January 2017 and June
2018, and assuming that the changes in quarterly portfolio holdings
occur evenly across the three months in each quarter. Our analysis
does not distinguish between changes in holdings as a result of
primary and secondary market transactions.
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    Section 12(d)(1)(F) of the Act includes a redemption provision, but
limits redemptions to only 1% of the acquired fund's total outstanding
securities during a 30-day period.\126\ However, a fund relying on
section 12(d)(1)(F) of the Act only may acquire up to 3% of an acquired
fund, whereas proposed rule 12d1-4 would permit an acquiring fund to
acquire up to 25% of an acquired fund.\127\ We believe a 3% redemption
limit, rather than a 1% limit, would have a less significant impact on
an acquiring fund's liquidity, particularly if the acquiring fund is
not able to trade the acquired fund's shares on the secondary
market.\128\ The

proposed 3% redemption limit would provide funds and their advisers
with greater flexibility to manage a fund's investments, while
continuing to protect acquired funds from undue influence. In addition,
we believe a 3% redemption limit is appropriate for proposed rule 12d1-
4 because an acquiring fund that does not seek an exemption from
section 12(d)(1)(A) would be able to redeem up to 3% of an acquired
fund's total outstanding shares.\129\
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    \126\ See section 12(d)(1)(F)(ii) (providing that no issuer of a
security purchased or acquired by a registered investment company
pursuant to that section is obligated to redeem such security in an
amount exceeding 1% of the issuer's total outstanding securities
during any period of less than thirty days).
    \127\ Acquiring funds could rely on proposed rule 12d1-4 to hold
more than 25% of an acquired fund's outstanding voting securities
when they are part of the same group of investment companies or when
the acquiring fund's sub-adviser (or a control affiliate) acts as
the acquired fund's adviser or depositor. Because acquiring funds
that fall within the exceptions in rule 12d1-4(b)(1)(iii) are not
constrained in their ability to control a fund and could acquire
more than 25% of an acquiring fund's outstanding voting securities,
we propose to subject these types of acquiring funds to the
redemption limitation in proposed rule 12d1-4(b)(2).
    \128\ An acquiring fund that holds more than 3% of an acquired
fund's total outstanding shares should take this limitation into
account when classifying this portfolio investment as part of its
liquidity risk management program under 17 CFR 270.22e-4 (rule 22e-4
under the Act). See Investment Company Liquidity Risk Management
Programs, Investment Company Act Release No. 32315 (Oct. 13, 2016)
[81 FR 82142 (Nov. 18, 2016)] (``Liquidity Release'').
    \129\ An acquiring fund that relies on the statutory exemption
to section 12(d)(1)(A) in section 12(d)(1)(G) of the Act, however,
may acquire more than 3% of an acquired fund's shares without being
subject to any redemption limits if that acquired fund is in the
same group of investment companies and structured as an open-end
fund or UIT.
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    We acknowledge that the provision in section 12(d)(1)(F)(ii) is
permissive (i.e., acquired funds have the option to limit redemptions
in this manner), while the proposed condition in rule 12d1-4 is
mandatory. An acquiring fund, however, could influence an acquired fund
to eliminate (or never establish) a limit on redemptions if the
redemption condition were merely permissive. We therefore propose a
mandatory limit on submitting redemptions as a more effective means to
mitigate the threat of undue influence than an optional limit.
    The Commission proposed stricter redemption limits in 2008, in part
because that proposal related to investments in ETFs and we anticipated
that most acquiring funds would transact in ETF shares on the secondary
market.\130\ Under that proposal, an acquiring fund that acquired more
than 3% of an ETF's outstanding shares in reliance on rule 12d1-4 would
have been prohibited from redeeming any of those shares. Commenters on
the 2008 proposal generally supported the proposed condition.\131\ One
commenter, however, recommended that we modify the redemption condition
to provide for volume and time limitations on redemption, rather than
rendering particular shares ineligible for redemption.\132\
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    \130\ See 2008 Proposing Release, supra footnote 13.
    \131\ See, e.g., Comment Letter of Independent Directors Council
(May 19, 2008) (``IDC Letter'') (``The proposed conditions,
particularly the condition limiting the ability of an acquiring fund
to redeem ETF shares, offer an efficient means to address the same
policy concerns relating to undue influence by an acquiring fund of
an ETF that the director-related conditions of the exemptive orders
were designed to address.''); Comment Letter of Mutual Fund
Directors Forum (May 21, 2008) (``MFDF Letter''); SSgA Letter.
    \132\ The commenter asserted that it would be difficult to
implement a tracking method for particular shares to abide by the
redemption prohibition in the 2008 proposal. See MFA Letter
(suggesting a redemption limit of 1% of an ETF's shares per month
during any month the acquiring fund holds more than 3% of the ETF's
outstanding shares).
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    Under the 2008 proposal, an ETF, its principal underwriter, and a
broker or a dealer that relied on the rule to sell the ETF's shares in
excess of section 12(d)(1)(B) limits also would have been prohibited
from redeeming those shares acquired by another fund that exceeded the
3% limit in section 12(d)(1)(A)(i).\133\ In proposing this limit, the
Commission acknowledged that it may be difficult for these entities to
know whether a redemption order is submitted by such an entity and
included a safe harbor for each of those entities if certain conditions
were met.\134\ Commenters agreed such identification would be difficult
and objected to this condition.\135\
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    \133\ See 2008 Proposing Release, supra footnote 13, at n.221
and accompanying text. Section 12(d)(1)(B) applies to a registered
open-end investment company (and any principal underwriter thereof
or broker-dealer).
    \134\ See id. The proposed safe harbor was available for each of
those entities if it had: (i) Received a representation from the
acquiring fund that none of the ETF's shares the acquiring fund is
redeeming includes any shares that it acquired in excess of 3% of
the ETF's shares in reliance on the proposed rule; and (ii) no
reason to believe that the acquiring fund is redeeming ETF shares
that the acquiring fund acquired in excess of 3% of the ETF's shares
in reliance on the proposed rule. See id.
    \135\ See, e.g., ICI Letter; Comment Letter of Morgan, Lewis &
Bockius LLP (July 28, 2008) (``Morgan Lewis Letter''); BGFA Letter
(noting that section 12(d)(1)(B) of the Act (from which this
provision would provide an exemption) only prohibits acquired funds
from knowingly selling shares in excess of the 3% limit in section
12(d)(1)(A)(i)).
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    Our proposal would not prohibit an acquired fund from redeeming, or
its principal underwriter or a broker or dealer from submitting for
redemption, shares held by an acquiring fund that exceed the 3% limit
in section 12(d)(1)(A)(i). The proposed 30-day limit on redemptions for
acquiring funds would reduce the risk of undue influence through the
threat of large-scale redemptions, without requiring an acquired fund
to track whether a redemption order was submitted by an acquiring fund
that holds more than 3% of the acquired fund's shares. Instead, the
acquiring fund would need to track its redemptions of acquired fund
shares.
    We request comment on the proposed redemption condition.
     Should we prohibit, as proposed, an acquiring fund that
acquires more than 3% of an acquired fund's outstanding shares (i.e.,
the statutory limit) from redeeming or submitting for redemption, or
tendering for repurchase, more than 3% of an acquired fund's total
outstanding shares in any 30-day period? Should either of these
proposed limits be higher (e.g., 5% or 10%) or lower (e.g., 1%)? Should
the period be longer or shorter than 30 days? Should the same limit
apply for all types of acquired funds under the rule? How should the
rule handle a situation where an acquiring fund initially holds less
than 3% of an acquired fund, but comes to hold more than 3% as a result
of a decline in assets of the acquired fund? Should this provision of
the proposed rule apply to an acquiring fund that ``holds'' more than
3% of an acquired fund's outstanding shares, instead of an acquiring
fund that ``acquires'' that amount?
     Should the redemption limit apply to funds that are not
traded on the secondary market? Alternatively, should the redemption
limit be higher for acquired funds that are not traded on the secondary
market? Would eliminating this condition increase the risk that
acquiring funds could exert undue influence over acquired funds through
the threat of large-scale redemptions? Should there be an exception to
the redemption limit for redemptions in kind?
     Should the redemption limit apply to an acquiring fund
that is part of the same group of investment companies as the acquired
fund? Should the redemption limit apply to an acquiring fund when the
acquiring fund's investment sub-adviser or any person controlling,
controlled by, or under common control with such investment sub-adviser
acts as the acquired fund's investment adviser or depositor?
Alternatively, should we except these entities from the redemption
condition for the same reasons we propose to except them from the
control and voting conditions?
     Are we correct that acquiring funds typically buy and sell
ETF shares on the secondary market? Are there instances where acquiring
funds transact with an ETF in the primary market through an authorized
participant? Would the proposed redemption condition affect the
efficiency of the arbitrage mechanism for ETFs? If so, how? For
example, would the proposed limitation contribute to premiums or
discounts to NAV? How would the proposed redemption limitation affect
ETMFs?
     How would the proposed redemption limitation affect
acquiring fund's portfolio management? Where an acquiring fund holds
more than 3% of the shares of an acquired fund, would the proposed
redemption condition unduly impede the ability of acquiring funds to
dispose of acquired fund shares, including during periods of market
stress or high volatility? Do acquiring funds realize significant

benefits from the ability to redeem acquired fund shares in these
circumstances? Would the proposed limitation disrupt acquiring funds'
ability to change underlying funds from time to time? Would the
proposed limitation contribute to changes in how acquiring funds
allocate their assets to acquired funds? For example, would acquiring
funds be more likely to invest in larger funds, or in ETFs rather than
mutual funds, in order to avoid the redemption limit? Would the
proposed redemption condition create a competitive disadvantage for
smaller acquired funds or acquired funds that are not traded on the
secondary market?
     How would the proposed redemption limitation affect an
acquiring fund's liquidity risk management?
     Would acquiring funds incur significant costs from a
mandatory prohibition on redemption of acquired fund shares once the 3%
statutory limit has been exceeded? Should the proposed redemption
limitation, like the one in section 12(d)(1)(F) of the Act, be
voluntary at the election of an acquired fund? If so, what other
safeguards could be added to protect against undue influence?
     If an acquiring fund redeems shares in multiple
transactions, should the acquiring fund calculate the total percentage
redeemed by adding the percentage total of each redemption or should we
provide alternative guidance regarding this calculation? For example,
should a fund calculate the percentages as of the time of the latest
redemption?
     Should the proposed redemption limit apply to an acquiring
fund's advisory group, rather than each acquiring fund individually, in
order to address the potential for large-scale redemptions that could
originate from a fund group? Alternatively, should the proposed
redemption limit apply, on an aggregate basis, to affiliated acquiring
funds, or acquiring funds with the same exact portfolio managers, or
that have in common at least one portfolio manager, as listed in the
registration statement? If so, should the redemption limit be higher
(e.g., no more than 5% of the acquired fund's total outstanding shares
during any 30-day period)? What are the benefits and drawbacks of such
an approach? How would this condition affect fund operations? How would
funds design compliance policies and procedures to comply with this
condition? Would it be difficult to track this type of redemption
limit? If so, why? Would this better protect against undue influence in
acquired funds? If so, how?
     Notwithstanding that the proposed condition limits the
ability of an acquiring fund to redeem, rather than limiting the
ability of an acquired fund to honor redemption requests, should we
provide exemptions from section 22(e) of the Act in connection with
this condition?
     Does the proposed condition appropriately limit the threat
of redemption that an acquiring fund could otherwise use to unduly
influence or control an acquired fund? If not, are there other
conditions that would better address the risks associated with undue
influence or control? For example, do the conditions in our existing
orders more effectively limit the ability of an acquiring fund to
unduly influence or control an acquired fund? Should we codify those
conditions (including the procedural requirements, board findings, and
participation agreements) instead of or in addition to including a
redemption condition in the rule?
     As discussed above, we believe that participation
agreements would not be necessary in light of the proposed conditions
of rule 12d1-4. Are there benefits to participation agreements,
however, that suggest we should include this requirement? For example,
do participation agreements help funds determine who is investing in
the funds above the statutory limits? Do participation agreements
require the parties to a fund of funds arrangement to provide
information necessary for compliance with other provisions of the Act?
For example, do participation agreements require acquiring funds and
acquired funds to provide lists of affiliates to aid in monitoring
compliance with section 17(a)? How would funds use this information in
complying with the conditions in proposed rule 12d1-4? Without
participation agreements, would an acquired fund have sufficient
information about the acquiring funds that hold its shares? Would funds
continue to enter into participation agreements even if not required
under the rule?
     Should an acquired fund, its principal underwriter, and a
broker or a dealer that relies on the rule be prohibited from redeeming
(or from submitting an order to redeem) acquiring fund shares that
exceed the 3% limit in section 12(d)(1)(A)(i)? Should this prohibition
apply only to an acquired fund that is a registered open-end fund,
along with its principal underwriter and broker or dealer since section
12(d)(1)(B) applies to only those entities? Would an acquired fund
(along with its principal underwriter, and a broker or a dealer that
relies on the rule) have difficulty identifying acquiring funds
investing in the acquired fund in reliance on rule 12d1-4? If we
included this prohibition, should we also include the related safe
harbors for an acquired fund, its principal underwriter, and a broker
or dealer that we proposed in 2008? \136\ Alternatively, should we
consider including a knowledge qualifier in the prohibition, similar to
the one included in section 12(d)(1)(B) itself? For example, should we
prohibit an acquired fund (or its principal underwriter, or a broker or
a dealer) only from knowingly redeeming shares acquired by the
acquiring fund in excess of the 3% limit in section 12(d)(1)(A)(i)?
---------------------------------------------------------------------------

    \136\ See supra footnote 134.
---------------------------------------------------------------------------

     Are there alternative approaches to a redemption
limitation that we should consider? For example, should we consider
requiring acquired funds relying on the rule to set a redemption limit
based on their evaluation of the effect of large redemptions on the
acquired fund? If so, what parameters should we establish for such an
evaluation? Would this approach raise investor protection concerns? For
example, should we require the acquired fund to evaluate historical
redemptions to determine what limit on redemptions is appropriate?
Should we require acquired funds to disclose the redemption limit on
Form N-CEN?
     Alternatively, should we consider requiring the acquiring
fund to provide advance notice to an acquired fund prior to a large
redemption? If so, what threshold should trigger this notice
requirement (e.g., 3% or higher), and how far in advance should the
acquiring fund provide notice? Similarly, should we require an
acquiring fund to provide notice to an acquired fund before investing
in the fund in reliance on rule 12d1-4? Should we consider permitting
an acquired fund to impose redemption fees on acquiring funds that make
redemptions over a certain limit? \137\ If so, what should that limit
be?
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    \137\ Funds are currently permitted to impose redemption fees in
certain circumstances. See Mutual Fund Redemption Fees, Investment
Company Act Release No. 26782 (Mar. 11, 2005) [70 FR 13328 (Mar. 18,
2005)] (adopting rule 22c-2 under the Act).
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3. Duplicative and Excessive Fees
    We are proposing conditions in rule 12d1-4 that are designed to
prevent duplicative and excessive fees in fund of funds arrangements, a
key concern underlying the enactment of section 12(d)(1).\138\ The
conditions vary based

on the structural characteristics of the acquiring fund, but generally
hinge on a determination that the arrangement's aggregate fees do not
implicate the historical abuses that section 12(d)(1) was intended to
prevent. We believe that the proposed condition would help serve to
protect acquiring fund investors from duplicative fees.
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    \138\ See Investment Trust Study, supra footnote 13 at ch. 7,
2725-39, 2760-75, 2778-93. The Investment Trust Study observed that
controlling persons profited from duplicative fees at the acquiring
and acquired fund levels. Additionally, complex multi-tier fund
structures made it difficult for shareholders to understand who
controlled their fund, to assess the true value of their
investments, or to assess the nature of a fund's investment risks.
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a. Management Companies
    In cases where the acquiring fund is a management company, proposed
rule 12d1-4 would require the acquiring fund's adviser to determine
that it is in the best interest of the acquiring fund to invest in the
acquired fund.\139\ The proposed rule would require the adviser to make
this determination before investing in acquired funds in reliance on
the rule, and thereafter with such frequency as the board of directors
of the acquiring fund, by resolution, deems reasonable and appropriate,
but in any case, no less frequently than annually. The proposed rule
also would require the adviser to report its finding and the basis for
the finding to the board.
---------------------------------------------------------------------------

    \139\ Proposed rule 12d1-4(b)(3)(i). This condition would apply
to open-end funds, ETFs structured as open-end funds, ETMFs, closed-
end funds, and BDCs.
---------------------------------------------------------------------------

    Investment Adviser Review and Reporting. In finding that it is in
the best interest of the acquiring fund to invest in an acquired fund,
the proposed rule would require the acquiring fund's investment adviser
to evaluate: (i) The complexity of the fund of funds structure; and
(ii) the aggregate fees associated with the fund's investment in an
acquired fund. We believe it is appropriate to require the acquiring
fund's investment adviser to make these evaluations because whether to
invest in an acquired fund to achieve a fund's investment objective,
rather than other types of assets, is a question of portfolio
management. The acquiring fund's board of directors would be required
to review these arrangements, and any conflicts they may present, as
part of its oversight responsibilities. The proposed evaluations are
designed both to help guard against the construction of a complex
structure that could be confusing to the acquiring fund's shareholders
and to prevent excessive layering of fund costs.\140\
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    \140\ In addition, acquiring funds (other than those structured
as UITs, discussed below) would be subject to our disclosure
requirements for fund investments in other funds, which require all
registered funds and BDCs to disclose in their prospectus fee tables
expenses paid by both the acquiring and acquired funds so that
shareholders can evaluate the costs of investing in a fund that
invests in other funds. See Instruction 3(f) to Item 3 of Form N-1A;
Instruction 10.a to Item 3 of Form N-2. The Commission adopted these
disclosure requirements when it adopted rules 12d1-1, 12d1-2 and
12d1-3. See Fund of Funds Adopting Release, supra footnote 17, at
n.67 and accompanying text. We request comment on these disclosure
requirements at the end of this section.
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    In evaluating the complexity of a fund of funds structure, an
adviser should consider the complexity of an acquiring fund's
investment in an acquired fund versus direct investment in assets
similar to the acquired fund's holdings. The adviser should consider
whether the resulting structure would make it difficult for
shareholders to appreciate the fund's exposures and risks. The adviser
should consider whether an investment in an acquired fund would
circumvent the acquiring fund's investment restrictions and
limitations. The adviser also should consider whether an acquired fund
invests in other funds.\141\
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    \141\ See infra section II.C.4.
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    In evaluating the fees associated with the fund's investment in
acquired funds, an adviser should consider the fees of all tiers in the
fund of funds arrangement with an eye towards duplication. As part of
this analysis, an adviser should consider whether the acquired fund's
advisory fees are for services that are in addition to, rather than
duplicative of, the adviser's services to the acquiring fund. The
adviser should consider sales charges and other fees, including fees
for recordkeeping, sub-transfer agency services, sub-accounting
services, or other administrative services. In particular, the adviser
should consider whether these fees could be duplicative or excessive
when evaluating an investment in a particular acquired fund. While not
required under proposed rule 12d1-4, fee waivers would be one way to
mitigate the duplicative fee concerns.\142\ Additionally, the adviser
should consider reviewing acquired fund share classes to ensure that
the acquiring fund is not holding a more expensive share class if a
less expensive one is available to the acquiring fund.
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    \142\ See, e.g., Allianz Funds Multi-Strategy Trust, et al.,
Investment Company Act Release Nos. 32533 (Mar. 15, 2017) [82 FR
14580 (Mar. 21, 2017)] (notice) and 32598 (Apr. 11, 2017) (order)
and related application (providing that the acquiring fund adviser
(or sub-adviser) will waive fees otherwise payable to it by an
acquiring fund in an amount at least equal to any compensation
(including fees received pursuant to any plan adopted by an acquired
fund pursuant to rule 12b-1 under the Act) received from certain
acquired funds by the adviser or sub-adviser, or an affiliated
person of the adviser or sub-adviser, other than any advisory fees
paid to the adviser, sub-adviser, or an affiliated person by the
acquired fund, in connection with the investment by the acquiring
fund in the acquired fund).
     Rule 12b-1 under the Act permits a fund to use fund assets to
pay broker-dealers and others for providing services that are
primarily intended to result in the sale of the fund's shares. Among
other things, rule 12b-1 requires that, before using fund assets to
pay for distribution expenses, a fund must adopt a written plan
describing all material aspects of the proposed financing of
distribution. 17 CFR 270.12b-1.
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    The proposed rule does not require an acquiring fund's adviser to
make these evaluations in connection with every investment in an
acquired fund. For example, in developing policies and procedures
reasonably designed to prevent violations of the federal securities
laws by the fund, an adviser to a fund that invests regularly in
acquired funds as part of its strategy could consider establishing
parameters for routine investments in acquired funds, and review
individual transactions that are outside of those parameters.\143\ Any
such policies and procedures should be tailored to the investment
objectives and strategies of an individual fund. For example, an
adviser to a fund that typically invests in fixed income securities of
non-U.S. issuers, but periodically invests in an acquired fund to
equitize cash before it can invest a large purchase of fund shares, may
decide to make the evaluations in connection with each investment in an
acquired fund.
---------------------------------------------------------------------------

    \143\ See rule 38a-1; see also 17 CFR 275.206(4)-7 (rule 206(4)-
7 under the Advisers Act).
---------------------------------------------------------------------------

    Board Oversight. A management company's board of directors provides
an additional layer of protection for an acquiring fund and its
investors against the abuses historically associated with fund of funds
arrangements. To enable effective board oversight, the proposed rule
requires an acquiring fund's adviser to report to the acquiring fund's
board of directors its finding that the fund of funds arrangement is in
the best interest of the fund and the basis for the finding.\144\ The
proposed rule requires this reporting before investing in acquired
funds in reliance on the rule, and with such frequency as the board of
directors of the acquiring fund deems reasonable and appropriate
thereafter, but in any case, no less frequently than annually.\145\ The
frequency of any such review and reporting by the adviser would be
determined by resolution of the board, which we believe is in the best
position to understand when such a review would be appropriate and the
frequency thereof.
---------------------------------------------------------------------------

    \144\ Proposed rule 12d1-4(b)(3)(i).
    \145\ Proposed rule 12d1-4(b)(3)(i).
---------------------------------------------------------------------------

    The proposed rule would not require the acquiring fund's board to
find that advisory fees are based on services

provided that are in addition to, rather than duplicative of, the
services provided by an adviser to an acquired fund. Similarly, the
proposed rule would not require an acquiring fund's adviser to waive
fees in connection with the receipt of compensation from the acquired
fund. While these conditions are required by our exemptive orders, we
believe they are redundant in light of a fund adviser's and board's
fiduciary duties and statutory obligations.\146\ As we stated in
connection with our omission of a similar condition in rule 12d1-1, an
acquiring fund board already has a responsibility to see that the fund
is not being overcharged for advisory services regardless of any
findings we require.\147\ Section 15(c) of the Act requires the board
of directors of the acquiring fund to evaluate any information
reasonably necessary to evaluate the terms of the acquiring fund's
advisory contracts (which information would include fees, or the
elimination of fees, for services provided by an acquired fund's
adviser).\148\ Section 36(b) of the Act also imposes on fund advisers a
fiduciary duty with respect to their receipt of compensation.\149\ We
believe that to the extent advisory services are being performed by
another person, such as the adviser to an acquired fund, this fiduciary
duty would require an acquiring fund's adviser to charge a fee that
bears a reasonable relationship to only the services that the acquiring
fund's adviser is providing, not taking into account services performed
by an adviser to an acquired fund.\150\ In addition, when an adviser to
an acquiring fund (or an affiliate of an adviser) receives compensation
from, or related to, an acquired fund in connection with an investment
by the acquiring fund, the adviser has a conflict of interest. The
adviser has a fiduciary duty to the acquiring fund under the Advisers
Act with respect to this conflict.\151\ Accordingly, we do not believe
that the elimination of these conditions would lead to an increase in
the costs ultimately borne by acquiring fund investors.
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    \146\ Our exemptive orders require the acquiring fund's adviser
to waive fees otherwise payable to it by an acquiring fund in an
amount at least equal to any compensation (including fees received
pursuant to any plan adopted by an unaffiliated fund pursuant to
rule 12b-1 under the Act) received from an unaffiliated fund by the
adviser, or an affiliated person of the adviser, other than advisory
fees paid to the adviser or its affiliated person by an unaffiliated
fund, in connection with the investment by the acquiring fund in the
unaffiliated fund. See also supra footnote 117 (defining
``unaffiliated fund'' for these purposes).
    \147\ See Fund of Funds Adopting Release, supra footnote 17, at
n.52 and accompanying text.
    \148\ 15 U.S.C. 80a-15(c); see also Fund of Funds Adopting
Release, supra footnote 17, at n.52 and accompanying text.
    \149\ 15 U.S.C. 80a-36(b).
    \150\ See Fund of Funds Adopting Release, supra footnote 17, at
n.52.
    \151\ See Proposed Commission Interpretation Regarding Standard
of Conduct for Investment Advisers, Request for Comment on Enhancing
Investment Adviser Regulation, Investment Advisers Act Release No.
4889 (Apr. 18, 2018) [83 FR 21203 (May 9, 2018)].
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    The 2008 Proposing Release took a different approach with respect
to the fee conditions discussed above. Then, as now, we did not propose
to require the acquiring fund board to find that advisory fees are
based on services provided that are in addition to, rather than
duplicative of, the services provided by an adviser to an acquired
fund.\152\ Further, we did not propose to require an acquiring fund's
adviser to waive fees in connection with the receipt of compensation
from the acquired fund. Instead, our 2008 proposal limited sales
charges and service fees charged by the acquiring fund to those set
forth in Financial Industry Regulatory Authority's (``FINRA'') rule
2341 (``FINRA sales charge rule'') to prevent duplicative fees.\153\
The FINRA sales charge rule takes into consideration sales charges and
certain servicing fees charged at both levels of a fund of funds
arrangement.
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    \152\ See 2008 Proposing Release, supra footnote 13, at n.234
(``As we noted in the proposing and adopting releases for rule 12d1-
1 explaining our exclusion of a similar condition from rule 12d1-1,
an acquiring fund board is already obligated to protect the fund
from being overcharged for services provided to the fund regardless
of any special findings we might require.''). The 2008 proposal
would have limited fees using an approach based on the FINRA sales
charge rule.
    \153\ See id. See also FINRA rule 2341. The proposal also
included specific fee conditions for insurance product separate
accounts, which are discussed below.
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    We do not believe it is necessary, however, to include a similar
condition in proposed rule 12d1-4. Fund of funds arrangements involving
open-end funds and certain closed-end funds already are subject to the
FINRA sales charge rule.\154\ Even in circumstances where the
arrangement is not subject to the sales charge rule, we believe the fee
conditions in proposed rule 12d1-4 effectively capture concerns
regarding duplicative or excessive fees. In particular, proposed rule
12d1-4 would require acquiring funds to consider fees, which could
include expenses such as fees for recordkeeping, sub-transfer agency
services, sub-accounting services, or other administrative services
that are not covered by the sales charge rule, when finding it is in
the best interest of the acquiring fund to invest in the acquired
funds.\155\
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    \154\ FINRA rule 2341 does not apply to registered closed-end
funds (other than interval funds relying on rule 23c-3 under the
Act), BDCs, or UITs (other than ``single payment'' investment plans
that are issued by a UIT). See FINRA rule 2341(d).
    \155\ See proposed rule 12d1-4(b)(3)(i) (requirement to evaluate
aggregate fees of the arrangement). See also FINRA Notice to Members
92-41: SEC Approval of Amendments to Article III, Section 26 of the
NASD Rules of Fair Practice Regarding Limitations on Mutual Fund
Asset-Based Sales Charges (Aug. 1992) (definitions of ``sales
charges'' and ``service fees'' under FINRA Rule 2341 do not include
fees for recordkeeping, transfer agency services, accounting
services, or other administrative services), available at http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=1684.
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    Recordkeeping Requirements. The proposed rule would require the
acquiring fund to maintain and preserve a written record of the
adviser's finding, the basis for the finding, and the adviser's reports
to the board.\156\ These records must be maintained and preserved for
at least five years, the first two in an easily accessible place.\157\
Funds currently have compliance program-related recordkeeping
procedures in place that incorporate this type of retention period, and
consistency with that period would minimize any compliance burden to
funds related to the preservation of the records.\158\ We believe that
these recordkeeping requirements would allow for external examinations
of advisers' determinations without placing an undue burden on fund
advisers or boards of directors.
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    \156\ Proposed rule 12d1-4(c)(1).
    \157\ See id.
    \158\ The retention period is consistent with the period
provided in rules 22e-4 and 38a-1(d) under the Act.
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b. UITs
    Proposed rule 12d1-4 sets forth an alternative fee condition when
the acquiring fund in a fund of funds arrangement is a UIT.
Specifically, on or before the date of initial deposit of portfolio
securities into a registered UIT, the UIT's principal underwriter or
depositor must evaluate the complexity of the structure and the
aggregate fees associated with the UIT's investment in acquired funds,
and find that the fees of the UIT do not duplicate the fees of the
acquired funds that the UIT holds or will hold at the date of
deposit.\159\
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    \159\ Proposed rule 12d1-4(b)(3)(ii).
---------------------------------------------------------------------------

    The proposed condition for acquiring UITs under rule 12d1-4 differs
from the condition applicable to acquiring management companies for
several reasons. First, by statute, a UIT is unmanaged and its
portfolio fixed.\160\

Unlike a management company, a UIT does not have a board of directors,
officers, or an investment adviser to render advice during the life of
the trust. Accordingly, we do not propose to apply the best interest
determination requirement to UITs. Second, acquiring UITs typically
raise different fee concerns than management companies. A UIT, for
example, does not bear investment advisory fees and the payments UITs
make are limited by section 26 of the Act.\161\
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    \160\ See 15 U.S.C. 80a-4(2) (defining a UIT, in part, to mean
an investment company organized under a trust indenture or similar
instrument that issues redeemable securities, each of which
represents an undivided interest in a unit of specified securities).
    \161\ Section 26(a)(2)(C) of the Act requires that the trust
indenture for a UIT prohibit payments to the depositor or to any
affiliated person thereof, except payments for performing
bookkeeping and other administrative services of a character
normally performed by the trustee or custodian itself. 80 U.S.C.
80a-26(a)(2)(C). UIT ETFs have exemptive relief that allow the ETF
to pay certain enumerated expenses that would be prohibited under
section 26(a)(2)(C). See 2018 ETF Proposing Release, supra footnote
34, at n.52 and accompanying text.
---------------------------------------------------------------------------

    Due to the unmanaged nature of UITs and the fixed nature of their
portfolios, we believe it would be inconsistent with their structure
and portfolios to require UITs to re-evaluate their acquired fund
finding over time. The requirement only applies, therefore, at the time
of the UIT's creation. Nevertheless, this determination generally
should consider taking into account the planned structure of the UIT's
holdings. In particular, if the UIT tracks an index, the determination
should consider the index design and whether the index design is likely
to lead to the UIT holding acquired funds with duplicative fees or
overly complex structures. We believe that requiring a UIT's principal
underwriter or depositor to evaluate the complexity of the structure
and aggregate fees associated with the UIT's investment in acquired
funds, and to make a finding that the UIT's fees do not duplicate the
fees of the acquired funds that the UIT holds or will hold at the date
of deposit, is an appropriately calibrated means to protect investors,
given a UIT's unmanaged structure.\162\
---------------------------------------------------------------------------

    \162\ See supra section II.C.3.a. (discussing examples of
factors that could be considered as part of such an evaluation).
---------------------------------------------------------------------------

    In making this evaluation, the depositor could decide to waive fees
payable to it by the UIT on account of any compensation (including any
distribution fees) received by the UIT's depositor or any affiliated
person from the acquired fund. Our exemptive orders have required UIT
depositors to deposit only acquired funds that do not assess a sales
load or that waive any sales loads.\163\ We believe that fee waivers
would be one way to mitigate the duplicative fee concerns, and would
allow UIT depositors and affiliates to rely on processes that they may
already have in place as a result of the exemptive order conditions.
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    \163\ See, e.g., Elkhorn Securities, LLC, et al., Investment
Company Act Release Nos. 31022 (Apr. 17, 2014) [79 FR 22720 (Apr.
17, 2014)] (notice) and 31043 (May 13, 2014) (order) and related
application. UITs also have agreed as a condition to their exemptive
orders to voluntarily comply with the FINRA sales charge rule, even
though that rule does not apply to UITs. See, e.g., Ausdal UIT, et
al., Investment Company Act Release Nos. 32922 (Dec. 14, 2017) [82
FR 60426 (Dec. 20, 2017)] (notice) and 32953 (Dec. 26, 2017) (order)
and related application. As discussed above, we believe the
conditions in proposed rule 12d1-4 more effectively capture concerns
regarding complex structures and duplicative or excessive fees.
---------------------------------------------------------------------------

    The proposed condition would apply only at the time of initial
deposit for UITs that are formed after the proposed rule's effective
date.\164\ We do not believe it is necessary to exclude UITs that are
already in existence from relying on proposed rule 12d1-4 as acquiring
funds. UITs that serve as separate account vehicles funding variable
annuity and variable life insurance contracts would be subject to
additional fee conditions, as discussed below.\165\ The majority of
UITs fall into this category.\166\ In addition, we believe that
existing UIT ETFs are unlikely to rely on proposed rule 12d1-4 as
acquiring funds because they replicate the components of broad-based
securities indexes that do not currently include funds.\167\ Even if
funds were to become significant components of these indexes in the
future, we believe that acquiring funds that invest in broad-based
securities indexes are unlikely to raise complex structure concerns
because the funds replicate the relevant index.\168\ If an index were
to include funds, the UIT ETF would simply acquire those funds as part
of replicating the broader index. Such an arrangement also is unlikely
to raise duplicative fee concerns because existing UIT ETFs do not bear
advisory fees, sales loads, or other types of service fees at the UIT
ETF level. Finally, UITs that do not serve as variable insurance
contract separate account vehicles or that are not ETFs typically have
a limited term of 12-18 months.\169\ Given this short term, the number
of UITs that have not made the finding required by proposed rule 12d1-4
would quickly decrease over time.
---------------------------------------------------------------------------

    \164\ See proposed rule 12d1-4(b)(3)(ii).
    \165\ See proposed rule 12d1-4(b)(3)(iii).
    \166\ According to UIT annual Form N-SAR filings, as of December
2017, insurance UITs made up 673 of the total 719 registered UITs.
    \167\ There are eight existing UIT ETFs that had total assets of
approximately $374 billion as of December 31, 2017, representing 80%
of UIT assets. All existing UIT ETFs seek to track the performance
of a broad-based securities index by investing in the component
securities of the index in the same approximate portions as the
index.
    \168\ The exemptive relief that has been granted to UIT ETFs
provides that the trustee will make adjustments to the ETF's
portfolio only pursuant to the specifications set forth in the trust
formation documents in order to track changes in the ETF's
underlying index. The trustee does not have discretion when making
these portfolio adjustments. See 2018 ETF Proposing Release, supra
footnote 34, at nn. 46-47 and accompanying text.
    \169\ This estimate is based on staff sampling of equity UIT
prospectuses.
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    Recordkeeping Requirements. The proposed rule would require an
acquiring fund that is a UIT to maintain and preserve a written record
of its principal underwriter's or depositor's finding under proposed
rule 12d1-4(b)(3)(ii) and the basis for the finding.\170\ UITs
currently have compliance program-related recordkeeping procedures in
place that incorporate this type of retention period, and consistency
with that period would minimize any compliance burden to funds related
to the preservation of the records.\171\ Although the proposed
retention period would differ from the period required for certain UIT
findings under rule 22e-4 and the general recordkeeping requirements in
rule 31a-2, we believe it is appropriate have consistent recordkeeping
requirements under rule 12d1-4.\172\ We also believe that these
recordkeeping requirements would allow for external examinations of the
principal underwriter's or depositor's determinations without placing
an undue burden on those entities.
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    \170\ Proposed rule 12d1-4(c)(2). These records must be
maintained and preserved for at least five years, the first two in
an easily accessible place. Id.
    \171\ The retention period is consistent with the period
provided in rule 38a-1(d) under the Act.
    \172\ See rule 22e-4(c) (requiring a UIT to maintain a record of
the determination that the portion of the illiquid investments that
the UIT holds or will hold at the date of deposit that are assets is
consistent with the redeemable nature of the securities it issues
for the life of the trust and for five years thereafter). See also
Liquidity Release, supra footnote 128.
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c. Separate Accounts Funding Variable Insurance Contracts
    With respect to a separate account funding variable insurance
contracts that invests in an acquiring fund, the proposed rule would
require an acquiring fund to obtain a certification from the insurance
company issuing the separate account that it has determined that the
fees borne by the separate account, acquiring fund and acquired fund,
in the aggregate, are consistent with the standard set forth in section
26(f)(2)(A) of the Act.\173\ The standard set forth in section
26(f)(2)(A) of the Act provides that the fees must be

reasonable in relation to the services rendered, the expenses expected
to be incurred, and the risks assumed by the insurance company.
---------------------------------------------------------------------------

    \173\ Proposed rule 12d1-4(b)(3)(iii).
---------------------------------------------------------------------------

    The proposed requirement relating to separate account fees is based
on the limits in our fund of funds exemptive relief. Our exemptive
orders are subject to conditions providing that each acquiring fund
will represent in its participation agreements with an acquired fund
that no insurance company sponsoring a registered separate account
funding variable insurance contracts will be permitted to invest in the
acquiring fund unless the insurance company has made a certification to
the acquiring fund. Specifically, the insurance company must certify to
the acquiring fund that the aggregate of all fees and charges
associated with each variable insurance contract that invests in the
acquiring fund are reasonable in relation to the services rendered, the
expenses expected to be incurred, and the risks assumed by the
insurance company. Because the proposed rule would not require
participation agreements, however, proposed rule 12d1-4 requires that
the acquiring fund obtain a certification from the insurance company
issuing a separate account that the required reasonableness
determination was made.
    Our 2008 Proposing Release also included reasonableness
determinations for separate accounts, which commenters generally
supported.\174\ As discussed above, we believe it is appropriate to
require an acquiring fund to obtain a certification from each insurance
company that issues separate accounts that a reasonableness
determination was made in order to better protect investors from
duplicative or excessive fees.
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    \174\ See 2008 Proposing Release, supra footnote 13. See, also,
BGFA Letter; IDC Letter; ICI Letter (supporting the proposed
reasonableness determination, but suggesting that additional fee
limits for separate accounts were unnecessary). Commenters supported
our proposed exclusion of the two conditions from the exemptive
orders that address the layering of fees. See ICI Letter; IDC
Letter; MFDF Letter.
---------------------------------------------------------------------------

    Recordkeeping Requirements. The proposed rule would require an
acquiring fund to maintain and preserve a written record of each
certification obtained by the acquiring fund under proposed rule 12d1-
4(b)(3)(iii).\175\ As noted above for the other proposed recordkeeping
requirements under proposed rule 12d1-4, we believe that consistency
with the retention period that funds have in place for other
requirements under the Act and our rules would minimize any compliance
burden to funds related to the preservation of the records. We also
believe that these recordkeeping requirements would allow for external
examinations of compliance with this condition without placing an undue
burden on the acquiring funds.
---------------------------------------------------------------------------

    \175\ Proposed rule 12d1-4(c)(3). These records must be
maintained and preserved for at least five years, the first two in
an easily accessible place. Id.
---------------------------------------------------------------------------

    We request comment on the proposed fee conditions.
     Would the proposed fee conditions sufficiently reduce the
risk of acquiring fund shareholders paying excessive or duplicative
fees? Should those conditions vary for management companies, UITs, and
insurance product separate accounts as proposed? Alternatively, should
all acquiring funds be subject to the same fee condition and if so
which condition? Should closed-end funds and BDCs be subject to any
special fee conditions with respect to the adviser's determination, or
generally?
     Are there other conditions we should consider? For
example, should the rule include a condition requiring the waiver of
certain fees similar to the one included in our orders? Should the rule
include a condition requiring an acquiring fund board to find that the
advisory fees charged under an advisory contract are based on services
provided that will be in addition to, rather than duplicative of, the
services provided by an adviser to an acquired fund?
     Should we require, as proposed, an acquiring fund's
investment adviser to determine that it is in the best interest of the
acquiring fund to invest in an acquired fund? Should we prescribe the
frequency of these determinations? Should we provide additional
guidance or requirements in the rule regarding the considerations that
an investment adviser should or must take into account when making this
determination? Should we require that advisers develop policies and
procedures related to fund of funds arrangements before relying on the
rule? What parameters, if any, should we place on board oversight of an
investment adviser's determinations under rule 12d1-4?
     Alternatively or in addition to the proposed requirements
in rule 12d1-4(b)(3)(i), should we require an acquiring fund's
investment adviser to make a determination regarding the reasonableness
of fees that more closely tracks the determination we propose to
require for insurance product separate accounts?
     Are we correct in our belief that the elimination of the
fee waiver conditions in our exemptive orders would not lead to an
increase in the costs ultimately borne by acquiring fund investors? If
not, why not?
     Are the proposed conditions associated with separate
accounts appropriate to address concerns regarding layering fees in the
three-tier structure typically utilized by insurance product separate
accounts? Should we include the reasonableness determinations for
separate accounts? Alternatively, should we cap the asset-based sales
charges and services fees that may be charged on an aggregate basis by
both the acquiring fund and the acquired fund in these arrangements?
     Should we condition proposed rule 12d1-4 on compliance
with the FINRA sales charge rule? Should we subject all acquiring funds
to the limits in the FINRA sales charge rule, even if that rule does
not currently apply to them?
     Should we require, as proposed, that an acquiring fund
maintain and preserve written records regarding the finding made under
rule 12d1-4(b)(3) for a period of not less than five years (the first
two years in an easily accessible place)? Should we require any
additional records to be maintained or preserved? Should the records be
required to be maintained and preserved for a longer or shorter period
of time? For example, should we require UITs to maintain and preserve
written records regarding the depositor's finding under proposed rule
12d1-4(b)(3)(ii) for the life of the UIT and for five years thereafter,
consistent with other rules under the Act?
     Should we set forth new expense disclosure requirements
for acquiring funds structured as UITs? Should such requirements track
the disclosure requirements in place for other types of acquiring
funds? Are there additional disclosure requirements we should consider?
     An acquiring fund is currently required to disclose the
fees and expenses it incurs indirectly from investing in shares of one
or more acquired funds. In Form N-1A, for example, an open-end fund
investing in another fund is required to include in its prospectus fee
table an additional line item titled ``Acquired Fund Fees and
Expenses'' (``AFFE'').\176\ The AFFE disclosure was designed to provide
investors with: (i) A better understanding of the actual costs of
investing in a fund that invests in shares of another fund; and (ii)
relevant

information to compare directly the costs of investing in alternative
funds of funds or of investing in a fund that invests in one or more
other funds to a fund that does not.\177\ Since we adopted the AFFE
disclosure requirement, however, concerns have been expressed with
respect to disclosure of fees and expenses of certain acquired funds,
e.g., private funds other than hedge funds, and BDCs.\178\ Has the AFFE
disclosure requirement been effective? Why or why not?
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    \176\ See Instruction 3(f)(i) to Item 3 of Form N-1A. Form N-2
has a similar disclosure relating to AFFE. See Instruction 10.a to
Item 3.1 of Form N-2. A fund may include AFFE in the line item for
``Other Expenses'' rather than in a separate line item if the
aggregate expenses attributable to acquired funds does not exceed
0.01%.
    \177\ See Funds of Funds Adopting Release, supra footnote 17, at
text accompanying n.67 and nn. 53, 88.
    \178\ See, e.g., ICI Comment Letter to File No S7-12-18, https://www.sec.gov/comments/s7-12-18/s71218-4560073-176206.pdf; House
Report to [Omnibus Spending Bill/H.R. 3280] (July 17, 2017), https://www.congress.gov/congressional-report/115th-congress/house-report/234/1?overview=closed; Fidelity Management & Research Company,
Petition for Rulemaking (Dec. 28, 2006), https://www.sec.gov/rules/petitions/2006/petn4-528.pdf (``Fidelity Petition'').
---------------------------------------------------------------------------

     Do investors understand the AFFE disclosure? Has the AFFE
disclosure requirement helped investors understand the fees and
expenses associated with their investment in an acquiring fund? If so,
how? For example, has the AFFE disclosure helped in fund selection or
fund comparison? Are there ways that we could improve the AFFE
disclosure consistent with our intent in adopting the AFFE disclosure
requirement? Can we make the disclosure easier to understand or more
comparable across pooled vehicles of the same or different types? Are
there additional disclosures (e.g., as words, graphics, or pictures)
that we should require to clarify how AFFE is calculated in order to
help investors to understand the fees and expenses associated with such
an investment?
     For purposes of the AFFE disclosure, the definition of
``acquired funds'' includes investment companies and private funds. Is
AFFE disclosure appropriate for all types of acquired funds or should
we exempt certain types of acquired funds from the definition of
acquired fund for purposes of AFFE disclosure? If so, which types of
acquired funds should be exempted and why? Alternatively, are there
pooled investment vehicles or other entities with structures similar to
investment companies and private funds that are not included in the
definition of ``acquired fund'' but should be? If so, which entities
and why?
     Is AFFE disclosure appropriate for every type of fee and
expense of every type of acquired fund or should specific types of
acquired fund fees or expenses be excluded from the disclosure? If so,
which fees and/or expenses and why? Some have commented, for example,
that expenses of certain funds are operationally distinct and thus do
not raise expense duplication concerns.\179\ For example, closed-end
funds, and particularly BDCs, finance a portion of their portfolios
through borrowing, which is not typical for open-end funds, and the
interest paid is included in the fund's expense ratio. Would the
exclusion of certain fees or expenses affect the way that acquired
funds characterize expenses? Are there concerns, other than expense
duplication, that warrant disclosure of acquired fund fees and
expenses? Should we instead require two disclosures: One without such
fees and expenses and one with such fees and expenses?
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    \179\ See Fidelity Petition, supra footnote 178. As in this
release, we previously noted Congressional concerns regarding
potentially duplicative fees at the acquiring and acquired fund
levels. See supra Funds of Funds Adopting Release, supra footnote
17, at nn.51-53 and accompanying text; Fund of Funds Proposing
Release, supra footnote 16, at n.4 and accompanying text and n.68.
---------------------------------------------------------------------------

     Alternatively, should the AFFE disclosure be aligned with
the restrictions imposed by Congress on the acquisition limitations
imposed by section 12(d)(1)(A)? For example, should we require AFFE
disclosures only for acquiring funds that invest in acquired funds in
excess of the limits of section 12(d)(1)(A)? Would such an alternative
disclosure allow investors to fully understand the acquiring fund's
fees and expenses?
     Has the AFFE disclosure requirement affected investment or
other decisions of acquiring funds? If so, in what ways?
     Are there ways that we can improve the calculation of
AFFE? If so, how should we modify the calculation and why? For example,
acquiring funds that have been in operation for less than a year are
required to calculate AFFE using the number of days in the fund's
fiscal year. Should we revise the AFFE calculation to reflect the
number of days the acquiring fund has been in operation, which we
believe would be more accurate?
     Should AFFE take into account fees and expenses of a fund
held by an acquired fund?
4. Complex Structures
    As discussed above, one Congressional concern underlying section
12(d)(1) was that complex multi-tier fund structures may lead to
excessive fees and investor confusion. As a result, our exemptive
orders have included conditions designed to address complex structure
concerns, and proposed rule 12d1-4 also would include conditions
designed to prevent the creation of complex structures that could cause
investor confusion or result in duplicative and excessive fees. We
believe that the proposed complex structure conditions would protect
acquiring fund investors from unduly complex structures.
    Proposed rule 12d1-4's complex structure conditions generally are
more comprehensive than the conditions in our orders to address certain
multi-tier arrangements that have emerged.\180\ Our fund of funds
exemptive orders prohibit an acquired fund (i.e., the lower tier in a
traditional fund of funds structure) 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 (i.e., the top tier
in a traditional fund of funds structure) beyond the limits in section
12(d)(1). Proposed rule 12d1-4 contains conditions designed to restrict
fund of funds arrangements to two tiers (other than in limited
circumstances).
---------------------------------------------------------------------------

    \180\ As discussed in more detail below, we have observed target
date funds that invest, in reliance on section 12(d)(1)(G) of the
Act, in acquired funds that then invest in ETFs in reliance on an
exemptive order. See infra section V.
---------------------------------------------------------------------------

a. Limitations on Other Funds' Acquisitions of Acquiring Funds
    Proposed rule 12d1-4 would include a condition designed to prevent
an acquiring fund from also being an acquired fund under the rule or
under section 12(d)(1)(G) of the Act. Specifically, the proposed rule
would prohibit a fund that is relying on section 12(d)(1)(G) of the Act
(15 U.S.C. 80a-12(d)(1)(G)) or the proposed rule from acquiring, in
excess of the limits in section 12(d)(1)(A), the outstanding voting
securities of a fund that discloses in its most recent registration
statement that it may be an acquiring fund in reliance on proposed rule
12d1-4.\181\ This proposed provision would limit the ability of funds
relying on section 12(d)(1)(G) or rule 12d1-4 to acquire the securities
of acquiring funds, and, as a result, would significantly limit funds'
ability to create multi-tier arrangements.
---------------------------------------------------------------------------

    \181\ See proposed rule 12d1-4(b)(4)(ii). See also section
12(d)(1)(G)(v) (granting the Commission authority to prescribe rules
or regulations with respect to acquisitions under section
12(d)(1)(G) as necessary and appropriate for the protection of
investors).
---------------------------------------------------------------------------

    This condition, however, would not prevent another fund from
investing all of its assets in an acquiring fund in reliance on section
12(d)(1)(E). We do not believe three-tier structures involving a
master-feeder arrangement

present the risk that section 12(d)(1) was designed to address. For
example, this type of three-tier structure would permit a target date
fund (itself an acquiring fund) to simply act as a conduit through
which an insurance product separate account invests.
    This condition also would not prevent other funds from acquiring
the voting securities of an acquiring fund in amounts under 3%,
effectively creating a type of three-tier structure.\182\ We would not,
however, expect multiple funds holding less than 3% of the acquiring
fund to implicate the historical abuses, such as undue influence, that
section 12(d)(1) is intended to prevent.
---------------------------------------------------------------------------

    \182\ A fund could acquire the securities of an acquiring fund
within the limits of section 12(d)(1)(A). Funds relying on section
12(d)(1)(F) could acquire up to 3% of the outstanding voting
securities in an unlimited number of funds. See section 12(d)(1)(F).
---------------------------------------------------------------------------

    The proposed rule would require a fund that relies on rule 12d1-4
(or wants to preserve investment flexibility to rely on the rule) to
disclose in its registration statement that it is (or may be) an
acquiring fund for purposes of rule 12d1-4.\183\ The proposed
disclosure requirement is designed primarily to put other funds seeking
to rely on rule 12d1-4 on notice that a fund they seek to acquire is
itself an acquiring fund. This disclosure would allow a fund to limit
its acquisition of the acquiring fund's securities accordingly.\184\
Funds investing in reliance on section 12(d)(1)(G) likely would have
less need for this disclosure. In such arrangements, we believe that
the acquiring fund would have, or be able to obtain, sufficient
information to know which other funds within the same group of
investment companies are acquiring funds under rule 12d1-4.
---------------------------------------------------------------------------

    \183\ See proposed rule 12d1-4(b)(4)(i).
    \184\ As discussed above, proposed rule 12d1-4(b)(3) also would
require an acquiring fund's investment adviser or principal
underwriter or depositor to evaluate the complexity of the fund of
funds structure.
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    Proposed rule 12d1-4 differs from the complex structures provision
we proposed in 2008, which would have required an acquired fund to have
a ``disclosed policy'' limiting three-tier arrangements.\185\ Instead,
the proposed rule would both require certain disclosure and prohibit
the acquisition of an acquiring fund's outstanding voting securities by
other funds. We believe that these conditions would help prevent the
construction of a complex multi-tier structure more effectively than
the current participation agreement requirements in our exemptive
orders.\186\ Thus, the proposed rule would eliminate the need for
acquiring funds to negotiate participation agreements with each
acquired fund to ensure that the acquired fund's investments would not
violate the conditions of the acquiring fund's order.
---------------------------------------------------------------------------

    \185\ Our 2008 proposal would have required an acquired fund to
have a disclosed policy that prohibits it from investing more than
10% of its assets in other investment companies in reliance on
section 12(d)(1)(F) and 12(d)(1)(G) of the Act. See 2008 Proposing
Release, supra footnote 13, at n.225 and accompanying text. Some
commenters supported this approach. See Comment Letter of Katten
Muchin Rosenman LLP (May 30, 2008) (``Katten Letter'') (stating that
the proposed condition was consistent with the Commission's long-
held position that a three-tiered fund arrangement increases
structural complexity as well as the likelihood of possible abuses
section 12(d)(1) was designed to prevent); NY Bar Letter. On the
other hand, one commenter opposed prohibiting three-tiered
structures, arguing that they can provide more efficient and cost-
effective exposure to certain market segments. See ICI Letter.
    \186\ See supra footnote 120 and accompanying text.
---------------------------------------------------------------------------

    We considered other conditions that would limit fund investments in
acquiring funds. For example, we considered proposing a condition that
would prevent an acquiring fund, and any principal underwriter, from
knowingly selling the acquiring fund's securities to another fund in
excess of the limits in section 12(d)(1)(B) of the Act, except in
limited circumstances. We were concerned, however, that some acquiring
funds may have limited ability to know the identity of their investors
in order to comply with this condition.\187\ We also were concerned
that this condition could affect funds that are traded on secondary
markets differently than other funds, causing certain inadvertent
effects on competition.\188\
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    \187\ A fund may not have information regarding beneficial
owners whose shares are held in omnibus accounts registered in the
name of intermediaries for the benefit of such investors.
    \188\ For example, including a knowledge qualifier in this
condition could result in secondary market transactions in ETF
shares that are outside the condition's scope. Eliminating the
knowledge qualifier, however, could make this condition unworkable
in connection with omnibus accounts.
---------------------------------------------------------------------------

b. Limitations on Acquired Funds' Acquisition of Other Funds and
Private Funds
    Proposed rule 12d1-4 would include a condition designed to limit
fund of funds arrangements where the acquired fund is itself an
acquiring fund. The proposed rule generally would prohibit arrangements
where an acquired fund invests in other investment companies or private
funds in excess of the limits in section 12(d)(1)(A).\189\ However, the
proposed condition would allow arrangements where the acquired fund
invests in other funds in certain enumerated circumstances.\190\
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    \189\ See proposed rule 12d1-4(b)(4)(iii) (providing that an
acquiring fund must not acquire the securities of an acquired fund
that invests in excess of the limits in section 12(d)(1)(A) of the
Act (15 U.S.C. 80a-12(d)(1)(A)) in other funds or private funds,
unless the acquired fund's investment falls within certain covered
exceptions).
    \190\ See proposed rule 12d1-4(b)(4)(iii)(A)-(E).
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    Our exemptive orders directly prohibit acquired funds from
acquiring securities of any other investment company or private fund,
with certain limited exceptions.\191\ Proposed rule 12d1-4 would limit
the acquired fund's ability to invest in certain other funds consistent
with those orders. For example, the proposed condition would prohibit
an arrangement where an acquired fund invests beyond the statutory
limits in both investment companies and private funds.\192\ We believe
that the limitation on investments in private funds is an appropriate
means to protect against the creation of overly complex structures. The
proposed condition also would allow three-tier structures in
circumstances that we believe do not raise the same concerns for
complex structures as other fund of funds transactions.\193\
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    \191\ See, e.g., Highland Capital Management, L.P., et al.,
Investment Company Act Release Nos. 29890 (Dec. 19, 2011) [76 FR
80424 (Dec. 23, 2011)] (notice) and 29918 (Jan. 17, 2012) (order)
and related application (``Highland Capital''). Brinker Capital
Destinations Trust, et al., Investment Company Act Release Nos.
32478 (Feb. 14, 2017) [82 FR 11277 (Feb. 21, 2017)] (notice) and
32534 (Mar. 16, 2017) (order) and related application (``Brinker
Capital'').
    \192\ See proposed rule 12d1-4(b)(4)(iii).
    \193\ See proposed rule 12d1-4(b)(4)(iii)(A)-(E).
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    Our exemptive orders generally have included the same
exceptions.\194\ Specifically, proposed rule 12d1-4 would permit
arrangements where an acquired fund invests in another fund

beyond the statutory limits for short-term cash management purposes or
in connection with interfund lending or borrowing transactions.\195\
The proposed rule also would permit arrangements where an acquired fund
invests all of its assets in a master fund or invests in a wholly-owned
subsidiary.\196\ Finally, the exceptions would permit arrangements
where an acquired fund receives fund shares as a dividend or as a
result of a plan of reorganization.\197\
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    \194\ The enumerated circumstances have differed depending on
the terms of the order. For example, some orders provide that an
acquired fund will not invest in funds in excess of the limits in
section 12(d)(1)(A)(i)-(iii), except to the extent permitted by
Commission exemptive relief to purchase shares of other investment
companies for short-term cash management purposes. See, e.g.,
Highland Capital, supra footnote 191. Other orders provide that an
acquired fund will not invest in funds in excess of the limits in
section 12(d)(1)(A) except to the extent the acquired fund: (i)
Acquires securities of another investment company in compliance with
section 12(d)(1)(E) and either is an affiliated fund or is in the
same group of investment companies as the corresponding master fund;
(ii) receives securities as a dividend or as a result of a plan of
reorganization of a company; (iii) acquires securities of another
investment company pursuant to exemptive relief from the Commission
to: (a) Purchase shares of one or more investment companies for
short-term cash management purposes, or (b) engage in interfund
borrowing and lending transactions; or (iv) invests in a wholly-
owned subsidiary of the underlying fund subject to certain
conditions. See, e.g., Brinker Capital, supra footnote 191.
    \195\ Proposed rule 12d1-4(b)(4)(iii)(B) and (E).
    \196\ Proposed rule 12d1-4(b)(4)(iii)(A) and (C).
    \197\ Proposed rule 12d1-4(b)(4)(iii)(D). See also section
12(d)(1)(D) (exempting from section 12(d)(1) securities received as
a dividend, as a result of an offer of exchange approved under
section 11, or as a result of a plan of reorganization).
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    These exceptions are limited in scope and designed to capture
circumstances where an acquired fund may invest in another fund to
efficiently manage uninvested cash, to address specific regulatory or
tax limitations, or to facilitate certain transactions. We do not
believe that permitting these arrangements would create an overly
complex structure that could confuse investors, nor do we believe that
these arrangements raise concerns regarding undue influence or layering
of fees. For example, an acquired feeder fund's investment in its
master fund would be entirely transparent because the feeder fund would
disclose the master fund's portfolio holdings in its shareholder
reports.\198\ Similarly, permitting an acquired fund to invest in a
wholly-owned subsidiary would allow the acquired fund to gain exposure
to certain asset classes.\199\ Because the wholly-owned subsidiary's
financial statements are consolidated with the financial statement of
the acquired fund, we do not believe that this arrangement would be so
complex that investors could not understand the nature of these
exposures.\200\ In addition, interfund transactions are subject to (and
would continue to be subject to) conditions specifically designed to
address the concerns that they present under the terms of their
interfund lending orders.\201\ Although we acknowledge that three-tier
structures may, in certain circumstances, provide efficient and cost-
effective exposure to certain market segments, we continue to believe
that three-tier structures can obfuscate the fund's investments, fees,
and related risks.\202\ We thus believe it is appropriate to prohibit
three-tier structures, except in these limited circumstances.
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    \198\ Master-feeder arrangements typically rely on section
12(d)(1)(E) of the Act to operate. See supra footnote 19 and
accompanying text. The acquired feeder fund in this example would be
a pass-through entity.
    \199\ For example, wholly-owned subsidiaries are typically
organized under the laws of the Cayman Islands as an exempted
company or under the laws of another non-U.S. jurisdiction in order
to invest in commodity-related instruments and certain other
instruments for tax and other reasons. See, e.g., Consulting Group
Capital Markets Fund, et al., Investment Company Act Release Nos.
32940 (Dec. 15, 2017) [82 FR 60463 (Dec. 20, 2017)] (notice) and
32966 (Jan. 9, 2018) (order) and related application.
    \200\ In this type of arrangement, the acquired fund controls
the wholly-owned subsidiary and the investment adviser to the
acquired fund is also the investment adviser to the wholly-owned
subsidiary. The acquired fund consolidates its financial statements
with the wholly-owned subsidiary's financial statements, provided
that U.S. GAAP or other applicable accounting standards permit
consolidation and acquired fund's total annual fund operating
expenses include the wholly-owned subsidiaries' expenses. See id.
    \201\ See, e.g., Franklin Alternative Strategies Funds, et al.,
Investment Company Act Release Nos. 33095 (May 10, 2018) [83 FR
22720 (May 16, 2018)] (notice) and 22117 (June 5, 2018) (order) and
related application (permitting funds to participate in an interfund
lending facility).
    \202\ See 2008 Proposing Release, supra footnote 13, at n.226
and accompanying and following text.
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    We request comment on the proposed limits on complex structures.
     Are the proposed conditions on complex structures
sufficient to prevent investor confusion and other abuses that may be
present in a complex structure? If not, what limits should the rule
include?
     Should we prohibit other funds from acquiring the
securities of an acquiring fund in reliance on section 12(d)(1)(G) or
rule 12d1-4 as proposed? Are there other alternatives we should
consider?
     Should we prohibit an acquired fund from investing in
other investment companies or private funds as proposed?
     As proposed, should we permit arrangements where an
acquired fund invests in other investment companies and private funds
in certain enumerated circumstances? Alternatively, should we strictly
prohibit arrangements where an acquired fund invests in other funds in
excess of the limits in section 12(d)(1)(A)? Should we eliminate any of
those circumstances? If so, which ones? Should we provide additional
guidance regarding these types of investments? Are the limitations
appropriately calibrated to mitigate complex structure concerns,
including concerns related to transparency and potential investor
confusion? Should we adopt different limits? For example, should we
only impose a 10% limit on an acquiring fund's investment in other
funds?
     Should the complex structures conditions include limits on
investments in private funds, given that section 12(d)(1) does not
limit a registered fund's investments in private funds? Should the rule
instead limit investments in funds only, consistent with the statutory
cap on investment in all funds under section 12(d)(1)(A)? Should the
overall limit be 10% or should that limit be higher or lower? Why?
     As proposed, should the complex structures condition allow
an exception for acquired funds' investment in subsidiaries that are
wholly-owned and controlled by the acquired fund? Should we include
additional conditions on acquired funds' investments in wholly-owned
subsidiaries? For example, should we limit the expenses of such
subsidiaries? Should we limit acquired funds' use of such subsidiaries?
If so, what limitations should we establish and why?
     Should we include a disclosure requirement in the complex
structures condition as proposed? Should the disclosure be in an
acquiring fund's registration statement? Are there other more
appropriate places that the fund should make such a disclosure? Should
we require particular placement of this disclosure, and if so, where?
Would the proposed disclosure help ensure that funds are not
circumventing the limitations on multi-tier structures in proposed rule
12d1-4? Should we require additional disclosures when a fund of funds
structure involves more than two tiers? For example, should an
acquiring fund be required to disclose certain fees and expenses
associated with a third-tier fund?
     Should we condition proposed rule 12d1-4 on providing
additional disclosure about an acquiring fund's investment in an
acquired fund more generally? Should we require the additional
disclosure only if an acquiring fund's investment in an acquired fund
is above a certain threshold? If so, what threshold and why? What types
of disclosures should we require to ensure consistency of disclosure
across fund of funds structures? For example, how much detail should an
acquiring fund give regarding its investment in an acquired fund? Would
such disclosures assist investors to better understand the fund's
structure?
     To avoid three-tier structures including private funds as
a third tier, should the proposed rule prohibit an acquiring fund from
relying on the rule to invest in a fund that invests in private funds
in excess of the limits in section 12(d)(1)? Would a fund's current
disclosure of its investments in private funds be sufficient to put
other funds on notice that they should not rely on the rule to invest
in such a fund? Should we instead include a specific disclosure

requirement for the fund investing in private funds? If so, what should
the fund be required to disclose and where should the disclosure be
made?
     Should the proposed rule include additional limits on an
acquiring fund's ability to serve as an investment for other funds?
     Should there be an exception that allows acquired funds to
equitize cash by investing in other funds (e.g., short-term investments
in ETFs) beyond the statutory limits or other exceptions? Should the
proposed rule permit other types of multi-tier arrangements?
     Should we include an exception for offers of exchange
approved under section 11 of the Act?
     Should we prohibit an acquiring fund, and any principal
underwriter thereof, from selling or otherwise disposing of any
security issued by the acquiring fund to any investment company or any
company or companies controlled by such other investment company in
excess of the limits in section 12(d)(1)(B) of the Act? Would such an
approach have a negative effect on competition? How would this
condition affect acquiring funds that are not subject to section
12(d)(1)(B) of the Act? Are there other limits that we should consider?
     Should we allow funds relying on section 12(d)(1)(G) to
create three-tier master feeder structures? Should the proposed rule
permit acquired funds relying on section 12(d)(1)(G) to invest in a
third-tier ``central fund'' in order to centralize the portfolio
management of floating rate or other instruments? \203\ Should the
proposed rule include conditions specifically related to such relief?
If so, what conditions? For example, should the proposed rule require
that the acquired funds' investments in the central fund be subject to
the limits in section 12(d)(1)(A)(ii) and (iii)? Should the proposed
rule require the acquired fund to waive certain management fees? Which
fees and why? Should the proposed rule prohibit the central fund from
charging sales loads, redemption fees, or distribution fees? Should the
proposed rule subject the central fund to the acquisition limits under
section 12(d)(1)(A)? Should the proposed rule require any board
findings? If so, what findings and why?
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    \203\ In several staff no-action letters, the staff has stated
that, based on certain facts and circumstances, it would not
recommend that the Commission take any enforcement action under
sections 12(d)(1)(A) and (B) (and other sections of the Act) if an
acquiring fund relying on section 12(d)(1)(G) purchases or otherwise
acquires shares of an underlying fund that, in turn, purchases or
otherwise acquires shares of a central fund. See, e.g., Franklin
Templeton Investments, Staff No-Action Letter (pub. avail. April 3,
2015); Thrivent Financial for Lutherans and Thrivent Asset
Management LLC, Staff No-Action Letter (pub. avail. Sep. 27, 2016).
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III. Proposed Rescission of Rule 12d1-2 and Proposed Amendments to Rule
12d1-1

    We also are proposing to rescind rule 12d1-2 in order to create a
more consistent and efficient regulatory framework for the regulation
of fund of funds arrangements. As discussed above, section 12(d)(1)(G)
allows a registered open-end fund or UIT to acquire an unlimited amount
of shares of other open-end funds and UITs that are in the same ``group
of investment companies.'' A fund relying on this exemption is subject
to certain conditions, including a condition limiting the types of
securities an acquiring fund can hold in addition to the shares of
funds in the same group of investment companies, to government
securities and short-term paper.\204\ Congress designed this limit to
restrict the use of this exemption to a ``bona fide'' fund of funds,
while providing the fund with a source of liquidity to redeem
shares.\205\
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    \204\ See 15 U.S.C. 80a-12(d)(1)(G)(i)(II). The acquired fund
also must have a policy against investing in shares of other funds
in reliance on section 12(d)(1)(F) or 12(d)(1)(G) to prevent multi-
tier structures, and overall distribution expenses are limited to
prevent excessive sales loads.
    \205\ See Fund of Funds Proposing Release, supra footnote 16.
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    In 2006, the Commission exercised its exemptive authority to adopt
rule 12d1-2.\206\ Rule 12d1-2 codified, and in some cases expanded,
three types of relief that the Commission provided for fund of funds
arrangements that did not conform to the section 12(d)(1)(G) limits.
Specifically, rule 12d1-2 permits a fund relying on section 12(d)(1)(G)
to: (i) Acquire the securities of other funds that are not part of the
same group of investment companies, subject to the limits in section
12(d)(1)(A) or 12(d)(1)(F); \207\ (ii) invest directly in stocks,
bonds, and other securities; \208\ and (iii) acquire the securities of
money market funds in reliance on rule 12d1-1.\209\ Rule 12d1-2 was
designed to provide a fund relying on section 12(d)(1)(G) with greater
flexibility to meet its investment objective when the risks that lead
to the restrictions in section 12(d)(1) are minimized.\210\ The
Commission stated that the investments permitted under rule 12d1-2 did
not raise additional concerns under section 12(d)(1)(G) because: (i)
They were not investments in funds; or (ii) they represented fund
investments that are limited in scope (i.e., cash sweep arrangements
under rule 12d1-1) or amount (i.e., up to the limits in section
12(d)(1)(A) or 12(d)(1)(F)).\211\
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    \206\ See Fund of Funds Adopting Release, supra footnote 17.
    \207\ See rule 12d1-2(a)(1).
    \208\ See rule 12d1-2(a)(2). Rule 12d1-2 limits investments to
``securities.'' The Commission has issued a series of exemptive
orders that allow a fund relying on section 12(d)(1)(G) to invest in
financial instruments that may not be ``securities.'' This relief
provides that the funds will comply with rule 12d1-2, but for the
ability to invest in a portion of their assets in these other
investments. See, e.g., Van Eck Associates Corp, et al., Investment
Company Act Release Nos. 31547 (Apr. 6, 2015) [80 FR 19380 (Apr. 10,
2015)] (notice) and 31596 (May 6, 2015) (order) and related
application.
    \209\ 17 CFR 270.12d1-2(a)(3).
    \210\ Fund of Funds Adopting Release, supra footnote 17.
    \211\ Id.
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    Our exemptive orders also have permitted funds to invest in funds
within the same group of investment companies.\212\ Funds relying on
these orders could invest in the same group of related investment
companies to the same extent as funds relying on section 12(d)(1)(G).
In addition, funds relying on our exemptive orders could invest to a
greater extent in funds that were not part of the same group of
investment companies. Funds relying on exemptive relief also could
invest in closed-end funds to a greater extent than funds relying on
section 12(d)(1)(G) combined with rule 12d1-2.\213\
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    \212\ See Janus Investment Fund, supra footnote 94.
    \213\ A fund relying on section 12(d)(1)(G) and rule 12d1-2
could acquire no more than 3% of a closed-end fund's outstanding
voting securities. A fund relying on an exemptive order could
acquire an unlimited amount of the voting securities of a closed-end
fund in the same group of investment companies and up to 25% of the
outstanding voting securities of other closed-end funds.
---------------------------------------------------------------------------

    Our exemptive orders include conditions that differ from the
conditions in section 12(d)(1)(G) and the conditions within those
orders also differ depending on whether the investment involves an
acquired fund that is in the same group of investment companies.\214\
The orders generally

subject investments in funds that are not part of the same group of
investment companies to a broader set of conditions designed to protect
investors from the harms Congress sought to address by enacting section
12(d)(1).\215\ Under this existing framework, substantially similar
fund of funds arrangements are subject to different limitations and
conditions.\216\ This has resulted in an inconsistent and inefficient
regulatory framework where the relief on which a fund of funds
arrangement is relying is not always clear to other funds, investors,
or regulators.
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    \214\ See, e.g., Northern Lights Fund Trust, et al., Investment
Company Act Release Nos. 32973 (Jan. 23, 2018) [83 FR 4081 (Jan. 29,
2018)] (notice) and 33008 (Feb. 21, 2018) (order) and related
application (setting forth conditions applicable to affiliated fund
of funds arrangements, including that: (1) Any sales charges or
service fees charged with respect to shares of acquiring funds would
not exceed the limits set forth in FINRA Rule 2341; and (2) no
acquired fund will acquire securities of any other investment
company in excess of the limitations of section 12(d)(1) except to
the extent that such acquired fund (a) acquires such securities in
compliance with section 12(d)(1)(E), (b) receives such securities as
a dividend or as the result of a plan of reorganization, or (c)
acquires such securities pursuant to exemptive relief from the
Commission permitting the acquired fund to acquire the securities of
investment companies for short-term cash management purposes or to
engage in interfund lending).
    \215\ See supra footnote 117 and accompanying text (regarding
conditions applicable to unaffiliated acquired funds).
    \216\ See also supra footnote 28.
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    In order to harmonize the overall regulatory structure, we are
proposing to rescind existing exemptive orders (as discussed below) and
rule 12d1-2. The rescission of rule 12d1-2 would eliminate the
flexibility of funds relying on section 12(d)(1)(G) to: (i) Acquire the
securities of other funds that are not part of the same group of
investment companies, subject to the limits in section 12(d)(1)(A) or
12(d)(1)(F); and (ii) invest directly in stocks, bonds, and other
securities.\217\ Accordingly, funds that wish to invest in funds within
the same group of investment companies beyond the limits in section
12(d)(1)(A), as well as other securities and the securities of the
other funds, could no longer rely on section 12(d)(1)(G) and rule 12d1-
2.\218\ Instead, acquiring funds would have flexibility to invest in
different types of funds and other asset classes under proposed rule
12d1-4 under a single set of conditions that are tailored to address
the concerns that underlie section 12(d)(1) of the Act. We believe that
this approach would enhance investor protection by subjecting more
funds of funds arrangements to the conditions in rule 12d1-4.
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    \217\ Rule 12d1-2(a)(1) and (a)(2). In connection with our
proposed amendment to rule 12d1-1 discussed below, funds relying on
section 12(d)(1)(G) could continue to invest in money market funds
that are not part of the same group of investment companies even
with the proposed rescission of rule 12d1-2(a)(3).
    \218\ Funds also may continue to rely on section 12(d)(1)(F) to
make smaller investments in a number of funds and section
12(d)(1)(E) to invest all of their assets in a master-feeder
arrangement. See supra footnotes 19 and 20 and accompanying text.
---------------------------------------------------------------------------

    As we noted in the adopting release for rule 12d1-2, a significant
consequence of rule 12d1-2 was that a fund investing directly in
equities or bonds could invest a portion of its assets in a fund within
the same group of investment companies if the acquisition was
consistent with the investment policies of the fund.\219\ The proposed
rescission of rule 12d1-2 would require such an equity or bond fund to
comply with the conditions in proposed rule 12d1-4 for any investment
in another fund in excess of the limits of section 12(d)(1)(A)(i).\220\
For example, as proposed, such a fund's adviser would be required to
engage in an evaluation of the complexity of the fund of funds
structure and fees relating to its limited investments in funds--all of
which would be subject to board oversight.\221\ The proposed rule's
redemption limits on acquired funds also would apply to such a
fund.\222\
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    \219\ See Fund of Funds Adopting Release, supra footnote 17, at
n.60 and accompanying text.
    \220\ An equity or bond fund that holds securities could not
rely on section 12(d)(1)(G) if rule 12d1-2 is rescinded because
section 12(d)(1)(G) is available only to funds that invest in other
funds within the same group of investment companies, government
securities and short-term paper. See also supra footnote 217
(discussing proposed amendment to rule 12d1-1).
    \221\ See proposed rule 12d1-4(b)(3)(ii). See also supra section
II.C.3.a.
    \222\ See proposed rule 12d1-4(b)(2). See also supra section
II.C.2.
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    We believe these conditions are necessary to protect investors from
the abuses that can arise when a fund's investment in other funds
exceeds the prescribed limits. We therefore believe that it is
important to require that funds that are investing in other funds in
excess of the limits in section 12(d)(1)(A)(i) comply with the
conditions underlying proposed rule 12d1-4. As a result, however,
proposed rule 12d1-4 could require additional compliance costs for what
would be a smaller investment (albeit larger than the limits under
section 12(d)(1) of the Act).
    The holdings limitations in section 12(d)(1)(G) would apply to
those funds that do not wish to comply with the conditions in proposed
rule 12d1-4 and instead continue to rely on section 12(d)(1)(G).\223\
In order to limit the hardship that the rescission of rule 12d1-2 could
have on existing fund of funds arrangements, we are proposing a one-
year period after the effective date before rule 12d1-2 is rescinded.
We believe that one-year is adequate time for funds relying on current
rule 12d1-2 time to bring their future operations into conformity with
section 12(d)(1)(G) or proposed rule 12d1-4.
---------------------------------------------------------------------------

    \223\ Section 12(d)(1)(G)(i) (limiting investments to open-end
funds and UITs within the same group of investment companies,
government securities, and short-term paper).
---------------------------------------------------------------------------

    In addition, we are proposing an amendment to rule 12d1-1 under the
Act to provide funds relying on section 12(d)(1)(G) with continued
flexibility to invest in money market funds outside of the same group
of investment companies if they rely on section 12(d)(1)(G).\224\ We
continue to believe that ``cash sweep'' arrangements do not raise the
concerns that underlie section 12(d)(1).\225\ We also continue to
believe that retaining this flexibility will help to ensure that funds
in smaller complexes that do not have a money market fund as part of
their fund complex may invest available cash in an unaffiliated money
market fund, subject to the conditions of rule 12d1-1.\226\ This
limited flexibility may come with some reduction in costs associated
with complying with section 12(d)(1)(G)'s limited conditions.\227\
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    \224\ Proposed rule 12d1-1(a) providing an exemption from
section 12(d)(1)(G) for an investment company to acquire the
securities of a money market fund. Rule 12d1-2, which we propose to
rescind, provided the same relief.
    \225\ Funds of Funds Adopting Release, supra footnote 17, at n.
23 and accompanying text.
    \226\ See id., at section II.A.1(a).
    \227\ See, e.g., section 12(d)(1)(G)(i)(III)(bb) (limiting
combined sales charges and service fees to limits under current
FINRA sales rule); section 12(d)(1)(G)(i)(IV) (requiring the
acquired fund to have a policy that prohibits it from acquiring
securities of registered open-end investment companies or registered
UITs in reliance on section 12(d)(1)(G) or (F)).
---------------------------------------------------------------------------

    We request comment on the proposed rescission of rule 12d1-2 and
the proposed amendments to rule 12d1-1.
     Should we rescind rule 12d1-2 as proposed? How would the
proposed rescission affect funds that currently rely on section
12(d)(1)(G)? Would any funds be required to alter their investment
strategies or holdings as a result of the change? Would funds currently
relying on rule 12d1-2 have any challenges with relying on the
conditions in proposed rule 12d1-4? If so, which conditions and why?
For example, what effect would the rescission of rule 12d1-2 have on a
fund that invests the majority of its assets in non-fund securities,
but invests a portion of its assets in affiliated funds?
     Would funds that are currently relying on rule 12d1-2 rely
on proposed rule 12d1-4? Alternatively, would such funds change their
holdings in order to rely on section 12(d)(1)(G)? What factors would
funds consider in determining which exemption to rely on?
     Should we continue to allow funds relying on section
12(d)(1)(G) to acquire the securities of money market funds that are
not in the same group of investment companies in reliance on rule 12d1-
1 as proposed? If not, why not? Should we amend rule 12d1-1 as proposed
or would it be more appropriate to amend rule 12d1-2 to allow only
investment in money market funds?

     Alternatively, should we amend rule 12d1-2 to include
conditions? If so, should we consider expanding the types of
investments that are permissible under rule 12d1-2 to include
investments other than securities, such as real estate, futures
contracts, and other financial instruments that may not qualify as
securities under the Act? \228\
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    \228\ The staff has stated that, based on certain facts and
circumstances, it would not recommend that the Commission take any
enforcement action under section 12(d)(1)(A) (and other sections of
the Act) if a fund relying on section 12(d)(1)(G) invests a portion
of its assets in investments that may not be securities. See
Northern Lights Fund Trust, Staff No-Action Letter (pub. avail. Jun.
29, 2015).
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     We are proposing a one-year period before rescinding rule
12d1-2. Is the one-year period an appropriate amount of time to allow
funds of funds relying on current rule 12d1-2 to come into compliance
with proposed rule 12d1-4 or section 12(d)(1)(G)? If not, how long
should this period last? Why? Alternatively, should we grandfather
funds that are relying on section 12(d)(1)(G) and rule 12d1-2 as of the
date of this proposal?

IV. Amendments to Form N-CEN

    On October 13, 2016, the Commission adopted Form N-CEN, a
structured form that requires registered funds to provide census-type
information to the Commission on an annual basis.\229\ We are proposing
amendments to Form N-CEN to conform to our proposed fund of funds
arrangement rulemaking. Item C.7. of Form N-CEN requires management
companies to report whether they relied on certain rules under the
Investment Company Act during the reporting period. For example, Item
C.7.a. currently requires management companies to disclose if they are
relying on rule 12d1-1. We are proposing to add a requirement to Form
N-CEN that would require management companies to report if they relied
on rule 12d1-4 or the statutory exception in section 12(d)(1)(G) during
the reporting period.\230\ While Form N-CEN already requires a
management company to report if it is a fund of funds,\231\ we are
proposing to collect this information in order to better assess
reliance on rule 12d1-4 or the statutory exception in section
12(d)(1)(G) by management companies and to assist us with our
accounting, auditing and oversight functions, including compliance with
the Paperwork Reduction Act.\232\
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    \229\ See Reporting Modernization Adopting Release, supra
footnote 48.
    \230\ Proposed Items C.7.k. and C.7.l. of Form N-CEN.
    \231\ See Item C.3.e of Form N-CEN.
    \232\ We are also making conforming changes to the title of Item
C.7. of Form N-CEN to reflect that the item includes a statutory
exemption. See proposed amendment to Item C.7. (``Reliance on
certain statutory exemption and rules. Did the Fund rely on the
following statutory exemption or any of the rules under the Act
during the reporting period? (check all that apply)'').
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    UITs also are required to file reports on Form N-CEN. However, the
UIT specific section of Form N-CEN does not require a UIT to identify
if it is a fund of funds. For the same reasons discussed above, we are
proposing to require UITs to report if they relied on proposed 12d1-4
or the statutory exception in section 12(d)(1)(G) during the reporting
period.\233\
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    \233\ Proposed Items F.18 and F.19. of Form N-CEN.
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    We request comment on our proposed amendments to Form N-CEN.
     Should we require any additional information on Form N-CEN
concerning proposed rule 12d1-4 or section 12(d)(1)(G)? Should we
require identification of reliance on any other fund of funds exemptive
rules? For example, should we require UITs to report on Form N-CEN if
they are funds of funds or relied upon rule 12d1-1 during the relevant
period? Should we require funds to identify any statutory exception to
section 12(d)(1)(A) that the fund relied upon during the relevant
period (e.g., section 12(d)(1)(E) or 12(d)(1)(F))? If we do not rescind
rule 12d1-2, should we require funds to report that they relied on rule
12d1-2? Should we require funds to report if they relied on rule 12d1-
3?
     Should we require BDCs to report similar information to
management companies? If so, since BDCs do no file reports on Form N-
CEN, in what form should we require such information be reported?

V. Proposed Rescission of Exemptive Orders; Withdrawal of Staff Letters

    Pursuant to our authority under the Act to amend or rescind our
orders when necessary or appropriate to the exercise of the powers
conferred elsewhere in the Act, we are proposing to rescind the orders
permitting fund of funds arrangements.\234\ The orders covered by this
rescission include all orders granting relief from sections
12(d)(1)(A), (B), (C), and (G) of the Act with one limited exception.
Specifically, we do not propose to rescind the exemptive orders
providing relief from section 12(d)(1)(A) and (B) granted to allow
certain interfund lending arrangements.\235\ Interfund lending
arrangements allow certain funds within the same complex to lend money
to and borrow money from each other for temporary purposes and subject
to certain conditions. While such arrangements require exemptive relief
from sections 12(d)(1)(A) and (B), among other provisions, they do not
result in the pyramiding of funds or the related potential abuses that
the proposed rule is designed to address, and thus are not included
within the scope of the proposed rule.
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    \234\ See section 38(a) of the Investment Company Act (15 U.S.C.
80a-37(a)).
    \235\ See, e.g., Ivy Funds, et al., Investment Company Act
Release Nos. 31068 (June 2, 2014) [79 FR 32779 (June 6, 2014)]
(notice) and 31138 (June 30, 2014) (order) and related application.
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    We do, however, propose to rescind the exemptive orders providing
relief from sections 12(d)(1)(A) and (B) that has been included in our
ETF and ETMF orders.\236\ We believe that rescinding this fund of funds
relief in the ETF and ETMF orders, as well as more generally, would
establish a transparent regulatory framework for these arrangements.
For the reasons discussed above, we expect that the operations of most
existing fund of funds arrangements would not be significantly
negatively affected by the need to comply with the requirements of
proposed rule 12d1-4, as opposed to their orders.\237\
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    \236\ Some of the exemptive orders we have issued to ETFs
include relief permitting ETFs to use certain master-feeder
arrangements. We have proposed to rescind that master-feeder fund
relief, while grandfathering ETF master-feeder arrangements relying
on that relief as of June 28, 2018, as part of an ETF proposal. See
2018 ETF Proposing Release, supra footnote 34. In addition, we
understand that existing ETMFs currently rely on the master-feeder
relief in the orders and do not propose to rescind that relief here.
See Eaton Vance, supra footnote 27.
    \237\ See, e.g., section III.
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    However, the rescission of exemptive orders could have an effect on
certain funds relying on section 12(d)(1)(G). Although 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), it does not require the
acquired fund to have a policy that prohibits it from acquiring the
securities of a fund beyond the limits in section 12(d)(1)(A) in
reliance on an exemptive order issued by the Commission.\238\ We have
observed some funds that invest in acquired funds in reliance on
section 12(d)(1)(G) of the Act that in turn invest in ETFs in reliance
on an exemptive order. If the existing exemptive orders are rescinded,
acquired funds could be required to reallocate or reduce underlying
acquired fund investments

or the acquired funds would be required to reduce their investments in
ETFs. As discussed in more detail below, there could be resulting
costs. We believe, however, that this condition is appropriate in order
to prevent the creation of overly complex structures for affiliated
funds of funds and eliminate those that currently exist. In order to
limit the hardship that revocation of these orders could have on
existing fund of funds arrangements, we are proposing a one-year period
after the effective date before rescission to give acquiring and
acquired funds relying on these exemptive orders time to conform their
operations with the requirements of the proposed rule and rule
amendments.
---------------------------------------------------------------------------

    \238\ Section 12(d)(1)(G)(i)(IV).
---------------------------------------------------------------------------

    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. The proposed rule would be 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.
Recipients of prior orders may make their views known in the context of
the comment process that accompanies this rulemaking, and those views
will be given due consideration. Finally, funds would be able to
request Commission approval to operate as a fund of funds that does not
meet the requirements of the proposed rules.
    We request comment on our proposal to revoke existing orders:
     Should we rescind existing fund of funds orders? If not,
why not? Should we revoke the fund of funds provisions of the ETF
orders and the ETMF orders (with the exceptions described above)?
     As discussed above, we are proposing a one-year period
after the effective date before rescinding exemptive orders. Is the
one-year period an appropriate amount of time to allow funds of funds
relying on the orders to bring their funds into compliance with the
rules? If not, how long should this period last? Why?
     Are we correct in our belief that existing funds of funds
would not face significant challenges in complying with the conditions
of proposed rule 12d1-4 rather than their exemptive orders?
     Are we correct in our understanding that certain funds
rely on both section 12(d)(1)(G) and ETF exemptive orders in order to
create multi-tier fund of funds arrangements? If so, would what
challenges would such funds face if the fund of funds portion of the
ETF exemptive orders is rescinded?
     Should we consider other approaches? For example, should
we consider not rescinding any of the orders? Under this approach, in
which our exemptive orders would be left in place, funds that are
otherwise structured in similar ways may end up operating under
different sets of conditions. Would permitting funds to operate under
different sets of conditions have an adverse effect on competition?
    In addition, staff in the Division of Investment Management is
reviewing staff no-action and interpretative letters relating to
section 12(d)(1) to determine whether any such letters should be
withdrawn in connection with any adoption of this proposal. If the rule
is adopted, some of the letters may be moot, superseded, or otherwise
inconsistent with the rule and, therefore, would be withdrawn. To the
extent that there are concerns with the withdrawal of any of the
letters, commenters should provide comments.

VI. Economic Analysis

A. Introduction

    Proposed rule 12d1-4 would 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. In connection
with the proposed rule, we are also proposing to rescind rule 12d1-2
under the Act and most of our exemptive orders granting relief from
sections 12(d)(1)(A), (B), (C), and (G) of the Act. We are also
proposing a related amendment to rule 12d1-1. For purposes of this
economic analysis, we use the term ``rule proposal'' to refer
collectively to proposed rule 12d1-4, the proposed rescission of rule
12d1-2 and the exemptive orders, and the proposed amendment to rule
12d1-1.
    The rule proposal would affect funds' investment flexibility,
increase regulatory consistency and efficiency, and eliminate the need
for funds to obtain an exemptive order from the Commission and incur
the associated costs and delays. At the same time, the rule proposal
would impose one-time costs to funds that would need to assess whether
their operations are consistent with the rule proposal, particularly to
those funds relying on an order being withdrawn in connection with the
rulemaking. In addition, the conditions in proposed rule 12d1-4 would
impose certain one-time and ongoing costs to funds, such as compliance,
monitoring, and recordkeeping costs.\239\
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    \239\ We expect that the proposed amendments to Form N-CEN would
yield immaterial economic effects. In particular, we expect that the
proposed amendments to Form N-CEN would increase the annual
estimated burden hours associated with preparing and filing Form N-
CEN by approximately 0.1 hours for each fund. In addition, the
proposed amendments to Form N-CEN would facilitate the supervision
and regulation of the fund industry, which would ultimately benefit
fund investors, but any such effects are likely small. Hence, the
economic analysis focuses on the economic effects of proposed rule
12d1-4, the proposed rescission of rule 12d1-2 and the exemptive
orders, and the proposed amendment to rule 12d1-1.
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    We are sensitive to the economic effects that may result from the
rule proposal, including the benefits, costs, and the effects on
efficiency, competition, and capital formation. These potential
effects, as well as possible alternatives to the rule proposal are
discussed in detail below.

B. Economic Baseline

    The baseline against which the costs, benefits, and the effects on
efficiency, competition, and capital formation of the rule proposal are
measured consists of the current state of the market and the current
regulatory framework for funds of funds.
1. Current State of the Fund of Funds Market
    To establish a baseline for the economic analysis of the rule
proposal we provide descriptive statistics on the current state of the
fund of funds market as of June 2018. For purposes of this analysis, we
define a fund of funds as a fund that invests a non-zero percentage of
its assets in other funds.\240\ Funds whose only investments in other
funds are in money market funds and master-feeder funds (i.e., funds of
funds created in reliance on section 12(d)(1)(E)) are excluded from our
definition of a fund of funds for the purpose of the baseline.\241\
Hence, our definition of funds of funds includes: (i) Funds of funds
whose investments are within the limits of sections 12(d)(1)(A) and
(B); (ii) funds of funds that were structured in reliance on sections
12(d)(1)(F) or (G); and (iii) funds of funds that were formed in
reliance on exemptive relief on which proposed rule 12d1-4 is based. We
provide descriptive statistics for these three categories of funds of
funds and also for single-tier funds to provide an understanding of the
funds market as a whole and because the rule proposal would affect both
current and prospective funds of funds.
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    \240\ Our baseline includes acquiring funds that invest a non-
zero percentage of their assets in registered funds, BDCs, and
unregistered funds, and it includes as acquired funds only
registered funds and BDCs.
    \241\ As of June 2018, there were a total of 95 master funds and
195 feeder funds based on Morningstar Direct and 10-K filings data.
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    Table 1 below provides descriptive statistics for acquiring and
acquired

funds as of June 2018.\242\ As Table 1 shows, there are 4,342 acquiring
funds with total gross assets equal to $5,761 billion. 31% of all open-
end funds, 28% of all UITs, 20% of all ETFs, none of the ETMFs, 31% of
all closed-end funds, and none of the BDCs are acquiring funds.\243\
Further, 89.5% of the acquiring funds are open-end funds, 0.1% are
UITs, 9.1% are ETFs, none are ETMFs, 1.4% are closed-end funds, and
none are BDCs. Untabulated analysis shows that 63% of all acquiring
funds are funds that invest in other funds beyond the limits in section
12(d)(1)(A), and 24% of all acquiring funds appear to be relying on the
statutory exemption in section 12(d)(1)(G) to structure a fund of funds
arrangement.\244\
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    \242\ As of December 2017, there were 663 separate accounts with
$1,774 bn total assets. 99.2%, or 658, of these separate accounts
are structured as UITs and the remainder 0.8%, or 5, are structured
as open-end funds. All of the UIT separate accounts are master-
feeder structures. Data for separate accounts is retrieved from Form
N-SAR. Separate accounts are not included in the Tables 1-4 and
Figure 1 of the economic analysis because of limited structured data
for separate accounts.
    \243\ All percentages in this and the next paragraph are based
on funds' total gross assets. Percentages occasionally do not sum up
to 100 due to rounding error.
    \244\ 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 with the same investment adviser. Our methodology may
underestimate the number of 12(d)(1)(G) acquiring funds to the
extent that the acquiring fund and acquired fund have advisers that
are control affiliates. 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).
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    As Table 1 shows, there are 2,521 acquired funds with total gross
assets equal to $6,603 billion. 23% of all open-end funds, none of the
UITs, 93% of all ETFs, none of the ETMFs, all of the closed-end funds,
and 35% of all BDCs are acquired funds. In addition, 59% of the
acquired funds are open-end funds, none are UITs, 37% are ETFs, none
are ETMFs, 4% are closed-end funds, and 1% are BDCs. Untabulated
analysis shows that 41% of all acquired funds are funds listed on a
national securities exchange (i.e., listed closed-end funds, ETFs,
ETMFs, and listed BDCs).
    As Table 1 shows, there are 2,033 acquiring funds in multi-tier
structures and 783 acquired funds in multi-tier structures as of June
2018.\245\ Multi-tier fund structures are funds of funds that comprise
more than two tiers. Untabulated analysis shows that there are 129
multi-tier structures for which the investments in both the second and
third tier are within the statutory limits of section 12(d)(1)(A).
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    \245\ The number of acquiring funds in multi-tier structures
captures the top-tier fund in three-tier structures and the number
of acquired funds in multi-tier structures captures the mid-tier
fund in three-tier structures.

                               Table 1--Descriptive Statistics for Single-Tier Funds, Acquiring Funds, and Acquired Funds
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Gross                     Gross         N of         N of
                                                                  Gross         N of      assets of       N of      assets of    acquiring     acquired
                                                   N of funds   assets of    acquiring    acquiring     acquired     acquired     funds in     funds in
                                                                funds (bn      funds      funds (bn      funds      funds (bn    multi-tier   multi-tier
                                                                    $)                        $)                        $)       structures   structures
--------------------------------------------------------------------------------------------------------------------------------------------------------
Open-end........................................        7,602       16,783        2,841        5,154        1,085        3,880        1,159          447
UITs............................................        4,706           18          969            5            0            0          767            0
ETFs............................................        1,885        2,622          424          522          923        2,433           83          220
ETMFs...........................................            9         0.10            0            0            0            0            0            0
Closed-end......................................          469          258          108           80          469          258           24          116
BDCs............................................           88           94            0            0           44           33            0            0
                                                 -------------------------------------------------------------------------------------------------------
    Total.......................................       14,759       19,775        4,342        5,761        2,521        6,603        2,033          783
--------------------------------------------------------------------------------------------------------------------------------------------------------
This table reports descriptive statistics for single-tier funds, acquiring funds, and acquired funds as of June 2018. A fund of funds is a fund that
  invests a non-zero percentage of its assets in other funds. Funds, whose sole fund investments are in money market funds and master-feeder funds are
  excluded from the definition of fund of funds. Data is retrieved from Morningstar Direct, Morningstar Investment Company Holdings, and funds' 10-K and
  10-Q filings. Total gross assets is the sum of all fund holdings, and we consider both long and short fund positions in the estimation of total gross
  assets.

    Table 2 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 95% and above of their assets in other funds as of
June 2018.\246\ The table shows that the majority of acquiring funds
invest either less than 10% or more than 90% of their assets in other
funds. In particular, 31% of the acquiring open-end funds, 3% of the
acquiring UITs, 37% of the acquiring ETFs, and 63% of the acquiring
closed-end funds invest less than 10% of their assets in other funds.
Moreover, 50% of the acquiring open-end funds, 74% of the acquiring
UITs, 39% of the acquiring ETFs, and 20% of the acquiring closed-end
funds invest more than 90% of their assets in other funds. The reason
for the concentration of acquiring funds below the 10% level is likely