[Federal Register Volume 84, Number 22 (Friday, February 1, 2019)]
[Proposed Rules]
[Pages 1286-1341]
[FR Doc No: 2018-27924]

Vol. 84

Friday,

No. 22

February 1, 2019

Part II

 Securities and Exchange Commission

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17 CFR Parts 270 and 274

 Fund of Funds Arrangements; Proposed Rule

Federal Register / Vol. 84 , No. 22 / Friday, February 1, 2019 /
Proposed Rules

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Securities and Exchange Commission

17 CFR Parts 270 and 274

[Release Nos. 33-10590; IC-33329; File No. S7-27-18]
RIN 3235-AM29

Fund of Funds Arrangements

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (the ``Commission'') is
proposing a new rule under the Investment Company Act of 1940
(``Investment Company Act'' or ``Act'') to streamline and enhance the
regulatory framework applicable to funds that invest in other funds
(``fund of funds'' arrangements). In connection with the proposed rule,
the Commission proposes to rescind rule 12d1-2 under the Act and most
exemptive orders granting relief from sections 12(d)(1)(A), (B), (C),
and (G) of the Act. Finally, the Commission is proposing related
amendments to rule 12d1-1 under the Act and Form N-CEN.

DATES: Comments should be received on or before May 2, 2019.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number S7-27-18 on the subject line.

Paper Comments

     Send paper comments to Brent J. Fields, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.

All submissions should refer to File Number S7-27-18. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
internet website (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for website viewing and printing in the Commission's
Public Reference Room, 100 F Street NE, Washington, DC 20549, on
official business days between the hours of 10:00 a.m. and 3:00 p.m.
Persons submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly.
    Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Joel Cavanaugh, John Foley, Senior
Counsels; Jacob D. Krawitz, Branch Chief; Melissa S. Gainor, Senior
Special Counsel; Brian McLaughlin Johnson, Assistant Director, at (202)
551-6792, Investment Company Regulation Office, Division of Investment
Management, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is proposing for public
comment 17 CFR 270.12d1-4 (new rule 12d1-4) under the Investment
Company Act [15 U.S.C. 80a-1 et seq.]; amendments to 17 CFR 270.12d1-1
(rule 12d1-1) under the Investment Company Act; amendments to Form N-
CEN [referenced in 17 CFR 274.101] under the Investment Company Act;
and rescission of 17 CFR 270.12d1-2 (rule 12d1-2) under the Investment
Company Act.\1\
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    \1\ Unless otherwise noted, all references to statutory sections
are to the Investment Company Act, and all references to rules under
the Investment Company Act are to title 17, part 270 of the Code of
Federal Regulations [17 CFR part 270].
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Table of Contents

I. Background
    A. Funds' Investments in Other Funds
    B. Overview of Section 12(d)(1) Limits
II. Proposed Rule 12d1-4
    A. Scope of Proposed Rule 12d1-4 and Exemptions From Section
12(d)(1) of the Act
    B. Exemptions From the Act's Prohibition on Certain Affiliated
Transactions
    C. Conditions
III. Proposed Rescission of Rule 12d1-2 and Proposed Amendments to
Rule 12d1-1
IV. Amendments to Form N-CEN
V. Proposed Rescission of Exemptive Orders; Withdrawal of Staff
Letters
VI. Economic Analysis
    A. Introduction
    B. Economic Baseline
    C. Benefits and Costs and Effects on Efficiency, Competition,
and Capital Formation of Rule Proposal
    D. Reasonable Alternatives
VII. Paperwork Reduction Act
    A. Introduction
    B. Rule 12d1-4
    C. Rule 0-2
    D. Form N-CEN
    E. Request for Comments
VIII. Initial Regulatory Flexibility Analysis
    A. Reasons for and Objectives of the Proposed Actions
    B. Legal Basis
    C. Small Entities Subject to the Proposed Requirements
    D. Projected Board Reporting, Recordkeeping, and Other
Compliance Requirements
    E. Duplicative, Overlapping, or Conflicting Federal Rules
    F. Significant Alternatives
    G. General Request for Comment
IX. Consideration of Impact on the Economy
X. Statutory Authority

I. Background

    We are proposing new rule 12d1-4 under the Investment Company Act
to streamline and enhance the regulatory framework applicable to fund
of funds arrangements.\2\ The proposed rule would, under specified
circumstances, permit a fund to acquire shares of another fund in
excess of the limits of section 12(d)(1) of the Act without obtaining
an exemptive order from the Commission.\3\ The proposed rule reflects
decades of experience with fund of funds arrangements, and would
subject funds relying on proposed rule 12d1-4 to a tailored set of
conditions that we believe would help protect investors from the harms
Congress sought to address by enacting section 12(d)(1) of the Act. As
the proposed rule would provide a comprehensive exemption for funds of
funds to operate, we also propose to rescind rule 12d1-2 under the Act
and individual exemptive orders for certain fund of funds arrangements
in order to create a consistent and efficient rules-based regime for
the formation and oversight of funds of funds. Finally, in connection
with the proposed rescission of rule 12d1-2, we are proposing
amendments to rule 12d1-1 under the Act to allow funds that rely on
section 12(d)(1)(G) of the Act to invest in money market funds

that are not part of the same group of investment companies.\4\
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    \2\ For purposes of this release, we generally use the term
``funds'' to refer to registered investment companies and business
development companies (``BDCs'') unless the context otherwise
requires. A BDC is a closed-end fund that: (i) is organized under
the laws of, and has its principal place of business in, any state
or states; (ii) is operated for the purpose of investing in
securities described in section 55(a)(1)-(3) of the Act and makes
available ``significant managerial assistance'' to the issuers of
those securities, subject to certain conditions; and (iii) has
elected under section 54(a) of the Act to be subject to the sections
addressing activities of BDCs under the Act. See 15 U.S.C. 80a-
2(a)(48). Section 6(f) of the Act exempts BDCs that have made the
election under section 54 of the Act from registration provisions of
the Act.
    \3\ We also are proposing amendments to Form N-CEN, a structured
form that requires registered funds to provide census-type
information to the Commission on an annual basis. See infra section
IV.
    \4\ See infra section III.
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A. Funds' Investments in Other Funds

    Funds increasingly invest in other funds as a way to achieve asset
allocation, diversification, or other investment objectives. For
example, a fund may invest in another fund to gain exposure to a
particular market or asset class in an efficient manner.\5\ A fund
could, for instance, obtain exposure to a foreign market by investing
in a country-specific fund rather than investing in the securities of
companies listed on an exchange in that country. Funds also may invest
in other funds to equitize cash, engage in hedging transactions, or
manage risk.
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    \5\ Total net assets in mutual funds that invest primarily in
other mutual funds have grown from $469 billion in 2008 to $2.22
trillion in 2017. During this period the number of mutual funds
utilizing this arrangement grew from 839 to 1,400. See Investment
Company Institute, 2018 Investment Company Fact Book (2018) (``2018
ICI Fact Book''), at 256, available at https://www.ici.org/pdf/2018_factbook.pdf.
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    According to staff estimates, almost one half of all registered
funds hold investments in other funds.\6\ Of those funds investing in
other funds, one half invest at least 5% of their assets in other
funds, and one quarter hold almost all of their assets (90%) in other
funds. The acquired funds most often provide exposures to US equity,
international equity, or fixed income asset classes.
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    \6\ This estimate is derived from an analysis of data obtained
from Morningstar Direct for the period ending August 2018. For more
data on fund of funds arrangements, see infra section VI.
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    Main Street investors similarly use fund of funds arrangements as a
convenient way to allocate and diversify their investments through a
single, professionally managed portfolio. For example, a fund of funds
may provide an investor with the same benefits as separate direct
investments in several underlying funds, without the increased
monitoring and recordkeeping that could accompany investments in each
underlying fund.\7\ In addition, a fund of funds may provide an
investor with exposure to an asset class or fund that may not otherwise
be available to that investor.\8\
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    \7\ Target-date funds are a common type of fund of funds
arrangement that are designed to make it easier for investors to
hold a diversified portfolio of assets that is rebalanced over time
without the need for investors to rebalance their own portfolio. See
Investment Company Advertising: Target Date Retirement Fund Names
and Marketing, Investment Company Act Release No. 29301 (June 16,
2010) [75 FR 35920 (June 23, 2010)] (proposing disclosure
requirements for target date retirement funds' marketing materials).
    \8\ A fund of funds may invest, for example, in funds or share
classes with minimum investment amounts that are higher than some
retail investors could afford.
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B. Overview of Section 12(d)(1) Limits

    Section 12(d)(1) of the Investment Company Act limits the ability
of a fund to invest substantially in shares of another fund.\9\ Section
12(d)(1)(A) of the Act prohibits a registered fund (and companies,
including funds, it controls) from:
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    \9\ As originally enacted, section 12(d)(1) prohibited a
registered fund (and any companies it controlled) from purchasing
more than 5% of the outstanding shares of any fund that concentrated
its investments in a particular industry, or more than 3% of the
shares of any other type of fund. See Public Law 76-768, 54 Stat.
789, 809-10 Sec.  12(d)(1) (1940) (codified at 15 U.S.C. 80a-
12(d)(1) (1940)). Congress amended section 12(d)(1) to include the
current limits in section 12(d)(1)(A) and (B) in 1970.
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     Acquiring more than 3% of another fund's outstanding
voting securities;
     investing more than 5% of its total assets in any one
fund; or
     investing more than 10% of its total assets in funds
generally.\10\
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    \10\ See 15 U.S.C. 80a-12(d)(1)(A). Both registered and
unregistered investment companies are subject to these limits with
respect to their investments in a registered investment company.
Registered investment companies are also subject to these same
limits with respect to their investment in an unregistered
investment company. Pursuant to sections 3(c)(1) and 3(c)(7),
private funds are subject to the 3% limitation on investments in
registered funds as well. 15 U.S.C. 80a-3(c)(1) and 3(c)(7)(D). A
``private fund'' is an issuer that would be an investment company,
as defined in section 3 of the Investment Company Act, but for
section 3(c)(1) or 3(c)(7) of that Act. 15 U.S.C. 80b-2(a)(29). In
addition, section 60 of the Act makes section 12(d) applicable to a
BDC to the same extent as it if were a registered closed-end fund.
15 U.S.C. 80a-60.
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    Section 12(d)(1)(B) of the Act addresses the other side of the
transaction by prohibiting a registered open-end fund \11\ (and any
principal underwriter thereof or broker-dealer registered under the
Exchange Act) from knowingly selling securities to any other investment
company if, after the sale, the acquiring fund would:
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    \11\ A registered open-end fund is a management company that is
offering for sale or has outstanding any redeemable security of
which it is the issuer. 15 U.S.C. 80a-5(a)(1) (defining ``open-end
company''). A registered closed-end fund is any management company
other than an open-end fund. 15 U.S.C. 80a-5(a)(2) (defining
``closed-end company''). Section 12(d)(1)(C) of the Act also
includes specific limitations on investments in registered closed-
end funds. See 15 U.S.C. 80a-12(d)(1)(C).
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     Together with companies it controls, own more than 3% of
the acquired fund's outstanding voting securities; or
     together with other funds (and companies they control),
own more than 10% of the acquired fund's outstanding voting
securities.\12\
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    \12\ See 15 U.S.C. 80a-12(d)(1)(B). This prohibition applies to
the sale of securities issued by an open-end fund to registered
funds and unregistered investment companies. Pursuant to sections
3(c)(1) and 3(c)(7), private funds are subject to the 3% limitation
with respect to the sale of any security by any open-end fund to
such private fund. 15 U.S.C. 80a-3(c)(1) and 3(c)(7)(D).
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    Congress enacted these restrictions because it was concerned about
``pyramiding,'' a practice under which investors in the acquiring fund
could control the assets of the acquired fund and use those assets to
enrich themselves at the expense of acquired fund shareholders.\13\
Control could be exercised either directly (such as through the voting
power of a controlling interest) or indirectly (such as coercion
through the threat of large-scale redemptions). Congress also was
concerned about the potential for excessive fees when one fund invested
in another,\14\ and the formation of overly complex structures that
could be confusing to investors.\15\ Congress imposed these limits, in
part, based on our conclusions in 1966 that fund of funds structures
served little or no economic purpose.\16\
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    \13\ See Hearing on H.R. 10065 before the Subcomm. of the House
Comm. on Interstate and Foreign Commerce, 76th Cong., 3d Sess., 112-
14 (1940) (statement of David Schenker); Investment Trusts and
Investment Companies, Report of the Securities and Exchange
Commission, pt. 3, ch. 4, H.R. Doc. No. 136, 77th Cong., 1st Sess.,
1031-1041, nn. 58-59 (1941) (``Investment Trust Study''); id., at
ch. 7, 2742-50. See also Exchange-Traded Funds, Investment Company
Act Release No. 28193 (Mar. 11, 2008) [73 FR 14618 (Mar. 18, 2008)]
(``2008 Proposing Release''), at n.195 (discussing the legislative
history of ``pyramiding schemes''). In some cases, acquired funds
directed underwriting and brokerage business to entities affiliated
with acquiring fund investors on terms that were unfavorable to
acquired fund shareholders.
    \14\ Controlling persons profited when acquiring fund
shareholders paid excessive fees due to duplicative charges at both
the acquiring and acquired fund levels. See Investment Trust Study,
supra footnote 13, at ch. 7, 2725-39, 2760-75, 2778-93.
    \15\ Complicated corporate structures could allow acquiring
funds to circumvent investment restrictions and limitations and make
it difficult for shareholders of the acquiring fund to understand
who controlled the fund or the true value of their investments. See
Investment Trust Study, supra footnote 13, at 2776-77. Acquiring
fund shareholders might believe that they owned shares in a fund
that invested in equity securities of large companies without
understanding that the acquiring fund actually held funds that
provided substantial exposure to smaller issuers, foreign
currencies, or interest rates. See id., at 2721-95.
    \16\ See 2008 Proposing Release, supra footnote 13 (citing
legislative history and Report of the Securities and Exchange
Commission on the Public Policy Implications of Investment Company
Growth, H. Rep. No. 2337, 89th Cong., 2d Sess. (1966) (``PPI
Report'')). See also Fund of Funds Investments, Investment Company
Act Release No. 26198 (Oct. 1, 2003) [68 FR 58226 (Oct. 8, 2003)]
(``Fund of Funds Proposing Release'') at n.8.
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    Our views and those of Congress regarding fund of funds
arrangements have evolved over the years as fund of funds structures
have developed to include investor protections and serve purposes that
benefit investors.\17\ As a

result, Congress created statutory exceptions that permit different
types of fund of funds arrangements subject to certain conditions.\18\
First, section 12(d)(1)(E) of the Act allows an acquiring fund to
invest all of its assets in a single fund so that the acquiring fund
is, in effect, a conduit through which investors may access the
acquired fund.\19\ Second, section 12(d)(1)(F) of the Investment
Company Act permits a registered fund to take small positions (up to 3%
of another fund's securities) in an unlimited number of other
funds.\20\ Finally, section 12(d)(1)(G) allows a registered open-end
fund or unit investment trust (``UIT'') to invest in other open-end
funds and UITs that are in the same ``group of investment companies.''
\21\
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    \17\ See Fund of Funds Investments, Investment Company Act
Release No. 27399 (June 20, 2006) [71 FR 36640 (June 27, 2006)]
(``Fund of Funds Adopting Release'') at n.7 and accompanying text;
2008 Proposing Release, supra footnote 13.
    \18\ See Fund of Funds Proposing Release, supra footnote 16, at
n.8 and accompanying text.
    \19\ See 15 U.S.C. 80a-12(d)(1)(E). This section is relied upon
by master-feeder fund arrangements, in which one or more funds pool
their assets by investing in a single fund with the same investment
objective.
    \20\ See 15 U.S.C. 80a-12(d)(1)(F). A fund relying on section
12(d)(1)(F) is restricted in its ability to redeem shares of the
acquired fund and is unable to use its voting power to influence the
outcome of shareholder votes held by the acquired fund.
    \21\ See 15 U.S.C. 80a-12(d)(1)(G). ``Group of investment
companies'' is defined in section 12(d)(1)(G) as any two or more
registered funds that hold themselves out to investors as related
companies for purposes of investment and investor services. 15
U.S.C. 80a-12(d)(1)(G)(ii).
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    When Congress enacted section 12(d)(1)(G), it also gave the
Commission specific authority to permit additional types of fund of
funds arrangements as structures evolved. Section 12(d)(1)(J) of the
Act allows the Commission to exempt any person, security, or
transaction, or any class or classes of transactions, from section
12(d)(1) if the exemption is consistent with the public interest and
the protection of investors.\22\ A House of Representatives committee
report on the amendments urged the Commission to use this exemptive
authority ``in a progressive way as the fund of funds concept continues
to evolve over time.'' \23\
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    \22\ See National Securities Markets Improvement Act of 1996
(``NSMIA''), Public Law 104-290, 110 Stat. 3416 (1996), at Sec.
202(4) (codified at 15 U.S.C. 80a-12(d)(1)(J); Comm. On Commerce,
Securities Amendments of 1996, H.R. Rep. No. 104-622 (1996), 104th
Cong., 2nd Sess., at 43-44 (``H.R. Rep. No. 622''). Congress added
section 12(d)(1)(J) to resolve questions regarding the scope of our
authority under section 6(c) of the Act. See Vanguard Special Tax-
Advanced Retirement Fund, Inc., Investment Company Act Release No.
14361 (Feb. 7, 1985) (order), dissenting opinion of Commissioners
Treadway and Peters (concluding that applicants failed to establish
an adequate record on which the Commission could find an exemption
from section 12(d)(1)(A) to meet the standards of section 6(c) of
the Act).
    \23\ H.R. Rep. No. 622, supra footnote 22, at 44-45. The report
specifically noted that many fund complexes might not have a
sufficient number or variety of fund types to permit a workable fund
of funds arrangement under section 12(d)(1)(G) and the Commission
should use its exemptive authority so ``the benefits of [funds of]
funds are not limited only to investors in the largest fund
complexes, but, in appropriate circumstances, are available to
investors through a variety of different types and sizes of
investment company complexes.'' The report stated that, in
exercising its authority, the Commission should consider factors
that relate to the protection of investors, including the extent to
which a proposed arrangement is subject to conditions that are
designed to address conflicts of interest and overreaching by a
participant in the arrangement, so as to avoid the abuses that gave
rise to the initial adoption of the Investment Company Act's
restrictions against funds investing in other funds.
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    We exercised this exemptive authority in 2006 when we adopted 17
CFR 270.12d1-1 (rule 12d1-1), 17 CFR 270.12d1-2 (rule 12d1-2), and 17
CFR 270.12d1-3 (rule 12d1-3), which were based on relief we previously
provided in a number of exemptive orders.\24\ We also have used our
authority under section 12(d)(1)(J) to issue exemptive orders
permitting fund of funds arrangements that the Act or our rules
otherwise restrict when we found those arrangements to be consistent
with the public interest and the protection of investors.\25\ These
exemptive orders permit fund investments in other funds, subject to
specified conditions that are designed to prevent the abuses that led
Congress to enact section 12(d)(1).\26\ Relief from sections
12(d)(1)(A) and (B) also is included in our exemptive orders that allow
exchange-traded funds (``ETFs'') and exchange traded managed funds
(``ETMFs'') to operate.\27\
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    \24\ See Fund of Funds Adopting Release, supra footnote 17. Rule
12d1-1 allows funds to invest in shares of money market funds in
excess of the limits of section 12(d)(1). See infra section III
(discussing the proposed amendment of rule 12d1-1). Rule 12d1-2
provides funds relying on section 12(d)(1)(G) with greater
flexibility to invest in other types of securities. See infra
section III (discussing the proposed rescission of rule 12d1-2).
Finally, rule 12d1-3 allows acquiring funds relying on section
12(d)(1)(F) to charge sales loads greater than 1.5%. We did not
rescind the exemptive orders that funds had relied upon in
connection with these arrangements before we adopted rules 12d1-1,
12d1-2 and 12d1-3.
    \25\ As the orders are subject to terms and conditions set forth
in the applications requesting exemptive relief, references in this
release to ``exemptive relief'' or ``exemptive orders'' include the
terms and conditions described in the related applications. See,
e.g., Schwab Capital Trust, et al., Investment Company Act Release
Nos. 24067 (Oct. 1, 1999) [64 FR 54939 (Oct. 8, 1999)] (notice) and
24113 (Oct. 27, 1999) (order) and related application (``Schwab'');
Franklin Fund Allocator Series, et al., Investment Company Act
Release Nos. 32669 (June 5, 2017) [82 FR 26720 (June 8, 2017)]
(notice) and 32722 (July 3, 2017) (order) and related application
(``Franklin Fund''). In addition to our section 12(d)(1)(J)
authority, we have issued these orders pursuant to our exemptive
authority under sections 17(a) and 6(c) of the Act.
    \26\ See, e.g., Schwab, supra footnote 25. The conditions
include: (i) Limits on the control and influence an acquiring fund
can exert on the acquired fund; (ii) limits on certain fees charged
to the acquiring fund and its shareholders; and (iii) limits on the
acquired fund's ability to invest in other funds.
    \27\ ETFs are organized as either open-end funds or UITs and
require exemptive relief from certain provisions of the Act to
operate. ETFs issue shares that can be bought or sold throughout the
day in the secondary market at a market-determined price. See, e.g.,
IndexIQ ETF Trust, et al., Investment Company Act Release Nos. 33163
(July 19, 2018) [83 FR 35289 (July 25, 2018)] (notice) and 33200
(Aug. 14, 2018) (order) and related application. ETMFs are hybrid
structures between mutual funds and ETFs and similarly need relief
from the Act to operate. Unlike ETFs, secondary market transactions
in ETMFs occur at the next-determined net asset value (``NAV'') plus
or minus a market-determined premium or discount that may vary
during the trading day. See, e.g., Eaton Vance Management, et al.,
Investment Company Act Release Nos. 31333 (Nov. 6, 2014) [79 FR
67471 (Nov. 13, 2014)] (notice) and 31361 (Dec. 2, 2014) (order) and
related application (``Eaton Vance'').
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    This combination of statutory exemptions, Commission rules, and
exemptive orders, however, has created a regulatory regime where
substantially similar fund of funds arrangements are subject to
different conditions. For example, an acquiring fund could rely on
section 12(d)(1)(G) and rule 12d1-2 when investing in an acquired fund
within the same group of investment companies.\28\ Alternatively, it
could rely on relief provided by an exemptive order, which would allow
it to invest in substantially the same investments, but would require
the fund to comply with different conditions.
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    \28\ Such a fund would rely on section 12(d)(1)(G) to invest in
acquired funds within the same group of investment companies,
government securities, and short term paper. In addition, the fund
could rely on rule 12d1-2 to invest in: (i) Securities of funds that
are not in the same group of investment companies up to the limits
in section 12(d)(1)(A) or (F); (ii) securities of money market funds
in reliance on rule 12d1-1; and (iii) stocks, bonds, and other
securities.
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    In order to create a more consistent and efficient regulatory
framework for fund of funds arrangements, we are proposing to rescind
rule 12d1-2 and many of the exemptive orders we have granted giving
relief from sections 12(d)(1)(A), (B), (C), and (G) of the Act.\29\ We
propose to replace that relief with a comprehensive fund of funds
framework under new rule 12d1-4. A comprehensive, streamlined framework
would reduce confusion and subject fund of funds arrangements to a
tailored set of conditions that would enhance investor protection,
while also providing funds with investment flexibility to meet their
investment

objectives in an efficient manner. We believe that the proposed rule
would provide investors with the benefits of fund of funds
arrangements, while protecting them from the historical abuses
described above. We also propose to amend rule 12d1-1 under the Act to
allow funds that rely on section 12(d)(1)(G) to invest in money market
funds that are not part of the same group of investment companies in
reliance on that rule.\30\
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    \29\ We do not propose to rescind exemptive orders providing
relief from section 12(d)(1)(A) and (B) of the Act with respect to
certain interfund lending arrangements. See infra footnote 201 and
accompanying text.
    \30\ Under the proposal, a fund relying on section 12(d)(1)(G)
would no longer have the flexibility to: (i) Acquire the securities
of other funds that are not part of the same group of investment
companies; or (ii) invest directly in stocks, bonds, and other
securities. In order to make these investments, the fund would need
to comply with proposed rule 12d1-4 (including its conditions). See
infra section III.
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    In developing this proposal, the Commission considered comments we
received in response to a package of new rules and rule amendments
focused largely on ETFs proposed in 2008.\31\ This proposal also takes
into account Commission staff observations of developments in the
industry since that time.
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    \31\ See 2008 Proposing Release, supra footnote 13. The 2008
Proposing Release, among other things, would have allowed funds to
invest in ETFs beyond the section 12(d)(1) statutory limits.
Proposed rule 12d1-4 also would allow funds to invest in ETFs, and
would allow ETFs to act as acquiring funds, in excess of the limits
in section 12(d)(1). As discussed in section V, we propose to
rescind the exemptive relief relating to investments in ETFs that
has been included in our ETF exemptive orders.
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II. Proposed Rule 12d1-4

A. Scope of Proposed Rule 12d1-4 and Exemptions From Section 12(d)(1)
of the Act

    Registered funds and BDCs. Proposed rule 12d1-4 would permit a
registered investment company or BDC (collectively, ``acquiring
funds'') to acquire the securities of any other registered investment
company or BDC (collectively, ``acquired funds'') in excess of the
limits in section 12(d)(1), subject to conditions that are designed to
address historical abuses associated with fund of funds arrangements.
Accordingly, open-end funds, UITs, closed-end funds (including BDCs),
ETFs, and ETMFs could rely on proposed rule 12d1-4 as both acquiring
and acquired funds.\32\
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    \32\ The proposed rule would not be available to face-amount
certificate companies. Face-amount certificate companies are
registered investment companies which are engaged or propose to
engage in the business of issuing face-amount certificates of the
installment type, or which have been engaged in such businesses and
have any such certificates outstanding. See section 4(1) of the
Investment Company Act. There is only one face-amount certificate
company currently operating as an investment company and making
current filings pursuant to section 13 [15 U.S.C. 80a-13] or section
15(d) of the Exchange Act [15 U.S.C. 80a-15]. Given the very limited
universe of face-amount certificate companies and the nature of
their investments, we do not propose to include face-amount
certificate companies within the scope of proposed rule 12d1-4 as
acquiring funds or acquired funds.
---------------------------------------------------------------------------

    Today, an acquiring fund's ability to invest in an acquired fund in
excess of the limits in section 12(d)(1) varies significantly based on
the type of acquiring fund. The following chart describes the types of
fund of funds arrangements that have been permitted under our exemptive
orders:

------------------------------------------------------------------------
                                          Acquired fund under exemptive
 Acquiring fund under exemptive orders                orders
------------------------------------------------------------------------
Open-end funds.........................  Open-end funds, UITs, ETFs,
                                          ETMFs, Listed closed-end
                                          funds,\33\ Listed BDCs.
UITs...................................  Open-end funds, UITs, ETFs,
                                          ETMFs, Listed closed-end
                                          funds.
Closed-end funds (listed and unlisted).  ETFs, ETMFs.
BDCs (listed and unlisted).............  ETFs.
ETFs \34\..............................  Open-end funds, UITs, ETFs,
                                          Listed closed-end funds,
                                          Listed BDCs.
------------------------------------------------------------------------

    Proposed rule 12d1-4 would create a consistent framework for all
registered funds and BDCs. The proposed rule would subject fund of
funds arrangements to conditions that are tailored to different
acquiring fund structures, rather than assessing the merit of a
particular fund of funds arrangement on an individual basis. As
described in more detail below, we believe that these tailored
conditions would serve to protect fund investors at both tiers of a
fund of funds arrangement.
---------------------------------------------------------------------------

    \33\ We use the terms ``listed closed-end funds'' and ``listed
BDCs'' to refer to closed-end funds and BDCs that are listed and
traded on national securities exchanges. Our exemptive orders have
included a representation that acquiring funds will not invest in
reliance on the order in closed-end funds or BDCs that are not
listed and traded on a national securities exchange. See, e.g.,
Innovator ETFs Trust, et al., Investment Company Act Release Nos.
33214 (Aug. 24, 2018) [83 FR 44374 (Aug. 30, 2018)] (notice) and
33238 (Sept. 19, 2018) (order) and related application (``Innovator
ETFs'').
    \34\ We have provided this relief to ETFs that are structured as
open-end funds and UITs. See Exchange-Traded Funds, Investment
Company Act Release No. 33140 (June 28, 2018) [83 FR 37332 (July 31,
2018)] (``2018 ETF Proposing Release'') at nn. 344-46 and
accompanying text (describing relief from section 12(d)(1) for
investments in ETFs).
---------------------------------------------------------------------------

    The following chart describes the types of fund of funds
arrangements that would be permitted under proposed rule 12d1-4:

------------------------------------------------------------------------
Acquiring fund under proposed rule 12d1-  Acquired funds under proposed
                   4                               rule 12d1-4
------------------------------------------------------------------------
Open-end funds.........................  Open-end funds.
UITs...................................  UITs.
Closed-end funds (listed and unlisted).  Closed-end funds (listed and
                                          unlisted).\35\
BDCs (listed and unlisted).............  BDCs (listed and unlisted).
ETFs...................................  ETFs.
ETMFs..................................  ETMFs.
------------------------------------------------------------------------

    Thus, in addition to the fund of funds arrangements currently
allowed by our exemptive orders, the proposed rule would allow open-end
funds, UITs, and ETFs to invest in unlisted closed-end funds and
unlisted BDCs beyond the limits in section 12(d)(1). Proposed rule
12d1-4 would similarly increase permissible investments for closed-end
funds beyond ETFs and ETMFs to allow them to invest in open-end funds,
UITs, other closed-end funds, and BDCs, in

excess of the section 12(d)(1) limits. Under the proposed rule, BDCs,
which currently may only invest in ETFs in excess of the section
12(d)(1) limits, would additionally be permitted to invest in open-end
funds, UITs, closed-end funds, other BDCs, and ETMFs. Finally, the
proposed rule would allow ETMFs to invest in all registered funds and
BDCs.
---------------------------------------------------------------------------

    \35\ Under proposed rule 12d1-4, an acquiring fund could invest
in unlisted closed-end funds and BDCs. For example, an acquiring
fund could invest in interval funds under the proposed rule, which
are closed-end funds that offer to repurchase their shares at
periodic intervals pursuant to 17 CFR 270.23c-3 (rule 23c-3 under
the Investment Company Act), and are generally unlisted. Based on
staff analysis, there were 39 interval funds, representing
approximately $21 billion in assets, in 2017.
---------------------------------------------------------------------------

    Expanding permissible fund of funds arrangements would provide
funds covered by the rule with flexibility to meet their investment
objectives. In addition, we believe that the proposed rule's scope
would eliminate unnecessary and potentially confusing distinctions
among permissible investments for different types of acquiring funds.
The proposed rule also would level the playing field among these
entities, allowing each to invest in the same universe of acquired
funds in excess of the limits in section 12(d)(1) without obtaining
individualized exemptive relief from the Commission. We believe that
the universe of permissible fund of funds arrangements generally should
not turn on the type of the funds in the arrangement. Instead, we
believe that the proposed rule should address differences in fund
structures with tailored conditions designed to protect against the
abuses historically associated with funds of funds.\36\ When
conditioned appropriately, expanding the scope of permissible acquiring
and acquired funds in the manner described above would create a
consistent and streamlined regulatory framework, while addressing
investor protection concerns.
---------------------------------------------------------------------------

    \36\ In 2008, the proposed relief from section 12(d)(1) was
considered within the context of a broader ETF rule proposal and
thus was limited to sales of shares of ETFs beyond the limits in
section 12(d)(1). That proposal, however, similarly would have
permitted all registered funds and BDCs to act as acquiring funds
under the rule. See 2008 Proposing Release, supra footnote 13.
---------------------------------------------------------------------------

    For example, we do not believe that expanding the scope of
permissible acquiring funds to include BDCs would present investor
protection concerns regarding undue influence, duplicative fees, or
complex structures that the proposed rule's conditions would not
address. A BDC relying on the proposed rule as an acquiring fund also
is subject to other limitations on its ability to invest in acquired
funds.\37\ Similarly, we do not believe that including ETMFs within the
scope of the proposed rule would present investor protection concerns
that we have not already extensively considered with other investment
products. We believe that the proposed rule's conditions appropriately
address investor protection concerns underlying section 12(d)(1)(A)
with respect to these products.\38\
---------------------------------------------------------------------------

    \37\ See 15 U.S.C. 80a-54(a) (prohibiting a BDC from making any
investment unless, at the time of the investment, at least 70% of
the BDC's total assets are invested in securities of certain
specific types of companies, which do not include funds).
    \38\ See supra footnote 27.
---------------------------------------------------------------------------

    Further, we believe that the proposed rule's scope of permissible
arrangements is appropriately calibrated based on our understanding of
these investment products and our experience with conditions similar to
the proposed rule's conditions. As noted above, Congress specifically
urged the Commission to monitor the evolution of legitimate fund of
funds arrangements and permit such arrangements when investors are
adequately protected against the abuses that led Congress to enact
section 12(d)(1). We believe that the proposed rule's conditions
appropriately guard against those abuses, serving to protect investors.
More specifically, the proposed rule would limit an acquiring fund's
ability to exert undue influence over an acquired fund directly through
ownership or indirectly through the threat of large-scale
redemptions,\39\ would require evaluation of the fees associated with a
fund of funds arrangement,\40\ and would guard against unduly complex
fund of funds structures.\41\ Accordingly, we believe that the proposed
exemptions from sections 12(d)(1)(A), (B), and (C) are consistent with
the public interest and the protection of investors under section
12(d)(1)(J) of the Act.
---------------------------------------------------------------------------

    \39\ Proposed rule 12d1-4(b)(1) would prohibit the acquiring
fund and its advisory group from controlling (individually or in the
aggregate) the acquired fund, with certain exceptions. Proposed rule
12d1-4(b)(2) would limit the amount of acquired fund shares that an
acquiring fund may redeem directly from the acquired fund during any
thirty-day period. See infra section II.C.1-2.
    \40\ Proposed rule 12d1-4(b)(3). See infra section II.C.3.
    \41\ Proposed rule 12d1-4(b)(4). See also infra section II.C.4.
---------------------------------------------------------------------------

    Private funds. Similar to the 2008 proposal, private funds would
not be within the proposed rule's scope of acquiring funds.\42\ Several
commenters on the 2008 proposal urged us to include private funds
within that proposed rule's scope.\43\ They argued that the conditions
of the 2008 proposed rule would prevent abuses by acquiring private
funds in the same way that the conditions would prevent abuses by
registered acquiring funds. For example, some commenters stated that
the rule's prohibition of control by an acquiring fund and the
restrictions on direct redemptions would protect an acquired ETF from
being unduly influenced by an acquiring private fund.\44\ Some also
stated that the risks associated with duplicative fees and overly
complex structures are less concerning when the acquiring fund is a
private fund, because private fund investors may be better able to
understand the complex structure and judge the propriety of the private
fund's fees than some investors in other types of acquiring funds.\45\
They also argued that private fund investment in ETFs would benefit
ETFs by increasing the liquidity of ETF shares and furthering economies
of scale, and would benefit private funds by permitting them to invest
in specific sectors in an efficient manner.\46\
---------------------------------------------------------------------------

    \42\ Pursuant to sections 3(c)(1) and 3(c)(7), private funds are
subject to the 3% limitation on investments in registered funds in
section 12(d)(1)(A)(i). Accordingly, private funds require relief
from this section in order to invest in registered funds beyond the
limits in section 12(d)(1). See supra footnote 10. Because the
limitations contained in sections 12(d)(1)(A)(i) and 12(d)(1)(B)(i)
referenced in 3(c)(1) and 3(c)(7) only apply to registered funds,
private funds can invest in other private funds or unregistered
investment companies without limitation.
    \43\ See, e.g., Comment Letter of Barclays Global Fund Advisors
(May 16, 2008) (``BGFA Letter'') (all investment companies subject
to section 12(d)(1) should be included within the rule's scope);
Comment Letter of Managed Fund Association (May 18, 2017) (``MFA
Letter''); Comment Letter of The Bar of the City of New York (May 9,
2008) (``NY Bar Letter''); Comment Letter of State Street Global
Advisors (May 19, 2008) (``SSgA Letter'').
    \44\ See MFA Letter; SSgA Letter.
    \45\ See MFA Letter; SSgA Letter.
    \46\ See, e.g., MFA Letter; NY Bar Letter.
---------------------------------------------------------------------------

    The proposed rule would not include private funds as acquiring
funds because private funds are not registered with the Commission and
would not be subject to the reporting requirements that we propose
below on Form N-CEN regarding reliance on the proposed rule.\47\
Private funds also would not report information regarding their
acquired fund holdings on Form N-PORT.\48\ In addition, private funds
are not subject to recordkeeping requirements under the Investment

Company Act.\49\ Even if an acquired fund kept records relating to this
arrangement, that alone may not provide an adequate basis for
monitoring compliance with the proposed rule's conditions.
---------------------------------------------------------------------------

    \47\ See infra section IV. However, Form PF and 17 CFR
275.204(b)-1 (rule 204(b)-1 under the Investment Advisers Act of
1940 (the ``Advisers Act'')) require certain registered investment
advisers to private funds to file Form PF to report information
about the private funds they manage. See Reporting by Investment
Advisers to Private Funds and Certain Commodity Pool Operators and
Commodity Trading Advisors on Form PF, Investment Advisers Act
Release No. 3308 (Oct. 31, 2011) [76 FR 71128 (Nov. 16, 2011)].
    \48\ Form N-PORT requires certain registered investment
companies to report information about their monthly portfolio
holdings to the Commission in a structured data format. See
Investment Company Reporting Modernization, Investment Company Act
Release No. 32314 (Oct. 13, 2016) [81 FR 81870 (Nov. 18, 2016)]
(``Reporting Modernization Adopting Release'').
    \49\ See, e.g., 17 CFR 270.31a-1 (rule 31a-1) (setting forth
certain recordkeeping requirements for registered investment
companies). While the records of a private fund to which a
registered investment adviser provides investment advice are deemed
to be the records of the investment adviser under the Investment
Advisers Act of 1940 (the ``Advisers Act''), there is no requirement
for the private fund to create these records under the Investment
Company Act. See section 204(b)(2) of the Investment Advisers Act
[15 U.S.C. 80b-4(b)(2)].
---------------------------------------------------------------------------

    Accordingly, we do not propose to include private funds as
acquiring funds under the scope of the rule. Given the policy
considerations discussed above, we believe it is appropriate for
private funds to request relief from sections 12(d)(1)(A) and (B) of
the Act through our exemptive application process, and for the
Commission to weigh these policy considerations in the context of the
facts and circumstances of each particular applicant.\50\
---------------------------------------------------------------------------

    \50\ To date, our exemptive orders have not permitted private
funds to invest in registered funds beyond the limits in section
12(d)(1)(A)(i) of the Act.
---------------------------------------------------------------------------

    Unregistered investment companies. Unregistered investment
companies, such as foreign funds, also are excluded from the scope of
proposed rule 12d1-4.\51\ We have the same concerns regarding fund of
funds arrangements involving unregistered investment companies that we
discussed above for private funds.\52\ By definition, these investment
companies are not registered with the Commission and would not be
subject to the reporting requirements that we propose below on Form N-
CEN regarding reliance on the proposed rule. Furthermore, unregistered
foreign funds' investments in U.S. registered funds, and certain
abusive practices that were associated with such investments, were a
concern underlying Congress's amendments to section 12(d)(1) in
1970.\53\ Those amendments expanded the scope of section 12(d)(1) to
include unregistered investment companies.\54\ We therefore do not
propose to include unregistered investment companies as acquiring funds
under the rule. As with private funds, we believe it is appropriate for
unregistered investment companies to request relief from sections
12(d)(1)(A) and (B) of the Act through our exemptive application
process, and for the Commission to weigh the applicable policy
considerations in the context of the facts and circumstances of each
particular applicant.\55\
---------------------------------------------------------------------------

    \51\ See supra footnote 10 and accompanying text. We use the
term ``foreign fund'' to refer to an ``investment company'' as
defined in section 3(a)(1)(A) of the Investment Company Act that is
organized outside the United States and that does not offer or sell
its securities in the United States in connection with a public
offering. See section 7(d) of the Investment Company Act
(prohibiting a foreign fund from using the U.S. mails or any means
or instrumentality of interstate commerce to offer or sell its
securities in connection with a public offering unless the
Commission issues an order permitting the foreign fund to register
under the Act). An unregistered foreign fund, as discussed in this
release, may be registered in a foreign jurisdiction, such as under
the European Union's directive regarding Undertakings for Collective
Investments in Transferable Securities (``UCITS''). A foreign fund
may conduct a private U.S. offering in the United States without
violating section 7(d) of the Act only if the foreign fund conducts
its activities with respect to U.S. investors in compliance with
either section 3(c)(1) or 3(c)(7) of the Act (or some other
available exemption or exclusion). See Exemptions for Advisers to
Venture Capital Funds, Private Fund Advisers With Less Than $150
Million in Assets Under Management, and Foreign Private Advisers,
Investment Advisers Act Release No. 3222 (June 22, 2011) [76 FR
39646 (July 6, 2011)] (``Exemptions Release'').
    \52\ The Commission has taken the position that a foreign fund
that uses U.S. jurisdictional means in the offering of the
securities it issues and that relies on section 3(c)(1) or 3(c)(7)
of the Investment Company Act would be a private fund. See
Exemptions Release, supra footnote 51 (citing Dechert LLP, Staff No-
Action Letter (Aug. 24, 2009) at n.8 (noting that under certain
circumstances, a foreign fund may make a private U.S. offer in
reliance on the exclusion from the definition of ``investment
company'' in sections 3(c)(1) or 3(c)(7) of the Act, and such a
foreign fund is subject to section 12(d)(1) to the same extent as a
U.S. 3(c)(1) or 3(c)(7) fund)).
    \53\ The legislative history of the 1970 amendments suggests
that Congress primarily intended to address four abusive practices:
pyramiding of voting control; undue influence over an acquired fund
through the threat of large-scale redemptions; investor confusion
caused by complex fund of funds structures; and layering of costs.
See PPI Report, supra footnote 16. With respect to foreign funds as
acquiring funds, the PPI Report noted that ``redemptions could be
unduly escalated by the instability of certain foreign economies,
political upheaval, currency reform, or other factors which are not
really relevant to investment in domestic mutual funds.'' See id at
318.
    \54\ See supra footnote 9.
    \55\ To date, our exemptive orders have not permitted
unregistered funds to invest in registered funds beyond the limits
in section 12(d)(1)(A) of the Act.
---------------------------------------------------------------------------

    We request comment on the scope of proposed rule 12d1-4:
     Should the exemptive relief under the proposed rule
include all registered funds and BDCs within the scope of ``acquired
funds'' and ``acquiring funds'' as proposed? Should we define those
terms more broadly or more narrowly?
     Should we limit the scope of the proposed rule to track
the scope of existing fund of funds exemptive relief? For example,
should we exclude closed-end funds and BDCs that are not listed on a
national securities exchange from the scope of ``acquired funds'' under
the proposed rule, maintaining the status quo for those investments?
     Are there investor protection concerns with including
closed-end funds and BDCs that are not listed on a national securities
exchange in the scope of the ``acquired funds''? If so, what concerns,
and why?
     Would including these unlisted closed-end funds and BDCs
in the scope of ``acquired funds'' affect an acquiring fund's liquidity
risk management, including acquiring funds subject to rule 22e-4 under
the Act? If so, how?
     Should closed-end funds and BDCs be permitted to rely on
the rule as acquiring funds only with respect to investments in ETFs
and ETMFs or with respect to some other limited subset of acquired
funds?
     Should UITs be permitted to invest in BDCs under the
proposed rule? Would such an arrangement present any concerns that are
not addressed by the proposed rule's conditions?
     Should the scope of proposed rule 12d1-4 include ETMFs as
acquiring funds, as proposed? Are there any special concerns we should
consider with respect to ETMFs, given that we have less experience with
fund of fund arrangements involving these funds?
     Should the proposed rule expressly allow sponsors of UITs
to deposit units of existing UITs into portfolios of new UIT series
beyond the limits of section 12(d)(1)? \56\ If so, why, and should the
proposed rule include conditions specifically related to such relief?
For example, should the proposed rule expressly require that no sales
charges are charged in connection with the deposit of units of the
existing UIT in the portfolio of the future UIT? Are there other
conditions we should consider?
---------------------------------------------------------------------------

    \56\ 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
section 12(d)(1)(A) (and other sections of the Act) if the sponsor
of a UIT deposits units of existing series in portfolios of futures
series of the UIT. See, e.g., Municipal Investment Trust Fund, Staff
No-Action Letter (pub. avail. Oct. 25, 1975); The Ohio Company,
Staff No-Action Letter (pub. avail. March 14, 1977); First Trust of
Insured Municipal Bonds, Staff No-Action Letter (pub. avail. Feb.
25, 1979).
---------------------------------------------------------------------------

     Are there additional conditions we should consider for any
subset of acquiring funds or acquired funds? Are there any proposed
conditions that should apply only to a subset of acquiring funds or
acquired funds?
     Should the scope of proposed rule 12d1-4 include private
funds as acquiring funds? If so, should private funds be permitted to
invest in all types of acquired funds under the rule? Or should they be
limited to investments in funds that may be bought and sold on

an exchange, such as closed-end funds and ETFs?
     If we permit private funds to rely on the rule as
acquiring funds, should the rule include additional conditions designed
to address private fund investments? For example, should the rule only
be available to a private fund with an SEC-registered investment
adviser? Should we also permit private funds with exempt reporting
advisers to rely on the rule? How should we treat private funds that
are sub-advised for these purposes? Should the rule be available only
to a private fund for which an investment adviser provides information
on Form ADV? \57\ Should we require additional reporting on Form ADV
regarding whether a private fund relies on rule 12d1-4?
---------------------------------------------------------------------------

    \57\ Investment advisers register with the Commission by
completing Form ADV and filing Parts 1A and 2A of that form with the
Commission. Exempt reporting advisers also file reports with the
Commission on Form ADV. Form ADV generally requires advisers to
private funds to report certain information regarding those funds.
See generally, Rules Implementing Amendments to Investment Advisers
Act of 1940, Investment Advisers Act Release No. 3221 (June 22,
2011) [76 FR 42950 (July 19, 2011)]. See also Item 7.B and Section
7.B. of Schedule D of Form ADV.
---------------------------------------------------------------------------

     Should we allow unregistered investment companies,
including foreign funds, to rely on the rule as acquiring funds? If we
permit unregistered investment companies to rely on the rule, should we
include additional conditions in rule 12d1-4 designed to address an
unregistered investment company's investments? If so, what conditions?
     Should we continue to take the interpretive position that
foreign funds that make private offerings in the U.S. in reliance on
section 3(c)(1) or 3(c)(7) are private funds for purposes of section
12(d)(1)? Alternatively, should we only treat foreign funds that
conduct their activities with respect to U.S. investors in compliance
with section 3(c)(1) or 3(c)(7) and are privately offered outside the
United States as private funds for purposes of section 12(d)(1)? For
example, should we take the position that a fund that conducts a
private U.S. offering in compliance with sections 3(c)(1) or 3(c)(7),
but also conducts a public offering in a foreign jurisdiction (e.g.,
certain UCITS funds),\58\ is an investment company, rather than a
private fund, solely for purposes of section 12(d)(1)? Should the
treatment of foreign funds as private funds differ when the foreign
fund is an acquiring fund versus when the foreign fund is an acquired
fund? Are there different or greater concerns, particularly regarding
duplicative fees and complex structures, if registered funds are
permitted to invest in foreign funds in excess of the limits in section
12(d)(1)(A) than there are with domestic private funds or registered
funds?
---------------------------------------------------------------------------

    \58\ See supra footnote 51.
---------------------------------------------------------------------------

     If we permit private funds or unregistered investment
companies to rely on rule 12d1-4, should we require those acquiring
funds to make certain filings with the Commission disclosing their
reliance on the rule? If so, should we promulgate a new form for those
filings, and what information should be required on this form? For
example, should we consider requiring these funds to report information
to the Commission regarding their amount of holdings in an acquired
fund? How frequently should we require these funds to report such
information? For example, should we require monthly filings? Should
reports be filed more or less frequently? Should those reports be
public or non-public? Would any special concerns arise with respect to
such a condition? To the extent that a foreign fund is registered in a
foreign jurisdiction, should we consider requests for substituted
compliance when the foreign fund complies with comparable non-U.S.
rules?

B. Exemptions From the Act's Prohibition on Certain Affiliated
Transactions

    Proposed rule 12d1-4 would provide exemptive relief from section
17(a) of the Act.\59\ Section 17 of the Act generally prohibits an
affiliated person of a fund, or any affiliated person of such person,
from selling any security or other property to, or purchasing any
security or other property from, the fund.\60\ It is designed to
prevent affiliated persons from managing the fund's assets for their
own benefit, rather than for the benefit of the fund's
shareholders.\61\
---------------------------------------------------------------------------

    \59\ Proposed rule 12d1-4(a).
    \60\ An affiliated person of a fund includes: (i) Any person
directly or indirectly owning, controlling, or holding with power to
vote, 5% or more of the outstanding voting securities of the fund;
and (ii) any person 5% or more of whose outstanding voting
securities are directly or indirectly owned, controlled, or held
with power to vote by the fund. See 15 U.S.C. 80a-2(a)(3)(A), (B).
Section 17 also restricts certain transactions involving funds that
are affiliated because both funds have a common investment adviser
or other person exercising a controlling influence over the
management or policies of the funds. See 15 U.S.C. 80a-2(a)(3)(C).
The determination of whether a fund is under the control of its
advisers, officers, or directors depends on all the relevant facts
and circumstances. See infra section II.C.1.
    \61\ See Investment Trusts and Investment Companies: Hearings on
S. 3580 Before a Subcomm. of the Senate Comm. On Banking and
Currency, 76th Cong., 3rd Sess. 37 (1940) (Statement of Commissioner
Healy).
---------------------------------------------------------------------------

    Absent exemptive relief, section 17(a) would prohibit a fund that
holds 5% or more of the acquired fund's securities from making any
additional investments in the acquired fund.\62\ Fund of funds
arrangements involving funds that are part of the same group of
investment companies or that have the same investment adviser (or
affiliated investment advisers) also implicate the Act's protections
against affiliated transactions, regardless of whether an acquiring
fund exceeds the 5% threshold.\63\ Furthermore, in instances where an
ETF is an acquired fund, section 17(a) would prohibit the delivery or
deposit of basket assets on an in-kind basis by an affiliated fund
(that is, by exchanging certain assets from the ETF's portfolio, rather
than in cash).\64\
---------------------------------------------------------------------------

    \62\ If an acquiring fund holds 5% percent or more of the
outstanding voting shares of an acquired fund, the acquiring fund is
an affiliated person of the acquired fund and the acquired fund is
an affiliated person of the acquiring fund. In general, to the
extent that purchases and sales of acquired fund shares occur on the
secondary market and not through principal transactions directly
between an acquiring fund and an acquired fund, relief from section
17(a) would not be necessary.
    \63\ As discussed below, the proposed rule would allow fund of
funds arrangements when: (i) The acquiring fund is in the same group
of investment companies as the acquired fund; or (ii) 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. See infra section II.C.1.
For purposes of this section, we assume that funds in the same group
of investment companies are under common control because funds that
are not affiliated persons would not require relief from section
17(a). See Fund of Funds Adopting Release, supra footnote 17.
    \64\ An ETF would be prohibited under section 17(a)(2) from
purchasing securities and other property (i.e., securities and other
property in the ETF's basket assets) from the affiliated acquiring
fund in exchange for ETF shares. An acquiring fund would be
prohibited under section 17(a)(1) from selling any securities and
other property (i.e., securities and other property in the ETF's
basket assets) to an affiliated ETF in exchange for the ETF's
shares. The orders we have granted permitting investments in ETFs
provide relief from section 17(a) of the Act to permit these
transactions. See, e.g., Barclays Global Fund Advisors, et al.,
Investment Company Act Release Nos. 24394 (Apr. 17, 2000) [65 FR
21215 (Apr. 20, 2000)] (notice) and 24451 (May 12, 2000) (order) and
related application. In addition, our orders provide separate
affiliated transaction relief for the acquisition or sale of an
ETF's basket assets as part of the creation or redemption of ETF
creation units. Such relief is subject to its own protections. See
2018 ETF Proposing Release, supra footnote 34. The exemptive orders
granted to ETMFs have included similar exemptions from section
17(a). See Eaton Vance, supra footnote 27.
---------------------------------------------------------------------------

    Section 17(b) of the Act authorizes the Commission to exempt a
proposed transaction from the provisions of section 17(a) if the terms
of the transaction, including the consideration to be paid or received,
are fair and reasonable and do not involve

overreaching on the part of any person concerned, and the transaction
is consistent with the policy of the investment company as recited in
the fund's registration statement and the general purposes of the Act.
In addition, section 6(c) of the Act permits the Commission to exempt
any person, security, or transaction or any class or classes of
persons, securities or transactions from any provision of the Act if
such exemption is necessary or appropriate in the public interest and
consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the Act.\65\ We believe that
the exemptions from section 17(a) set forth in the proposed rule meet
the standards set forth in sections 17(b) and 6(c). We believe that the
proposed rule's conditions make unlikely the prospect of overreaching
by an affiliated fund. For example, the proposed rule's redemption
limit would prevent an acquiring fund (including an acquiring fund that
is an affiliate of the acquired fund) from threatening to quickly
redeem or tender a large volume of acquired fund shares as a means to
exert undue influence over an acquired fund.\66\
---------------------------------------------------------------------------

    \65\ The Commission has interpreted its authority under section
17(b) as extending only to a single transaction and not a series of
transactions. See In re Keystone Custodian Funds, Inc., 21 SEC. 295
(1945) (exempting, under section 6(c) of the Act, a series of
transactions that otherwise would be prohibited by section 17(a)).
The Commission's exemptive authority under section 6(c), however, is
not constrained to a single transaction. The Commission looks to the
standards set forth in section 17(b) when issuing exemptions by rule
from section 17(a).
    \66\ See infra sections II.C.1 and 2.
---------------------------------------------------------------------------

    An acquired fund that is an open-end fund or UIT is further
protected from overreaching due to the requirement that all purchasers
receive the same price.\67\ In the case of a closed-end acquired fund,
we similarly believe that the acquired fund's repurchase of its shares
would provide little opportunity for the acquiring fund to overreach
because all holders would receive the same share price.\68\
---------------------------------------------------------------------------

    \67\ The purchase of open-end fund or UIT shares must be at a
price based on the current NAV of the shares which is next-computed
after receipt of a tender of an offer to purchase or redeem the
shares. See section 22(c) of the Act and 17 CFR 270.22c-1 (rule 22c-
1). Primary market transactions with an ETF (or an ETMF) would also
be done at a price based on NAV. See 2018 ETF Proposing Release,
supra footnote 34; Eaton Vance, supra footnote 27.
    \68\ Closed-end fund shares typically are bought and sold on the
secondary market. In cases where closed-end funds engage in
repurchase transactions, such as with interval funds, the pricing of
the closed-end fund's shares in those transactions are subject to
certain rules. See, e.g., rule 23c-3; see also section 23(c)(2) of
the Act (providing for offers to repurchase closed-end funds to be
made only after all holders of securities are given reasonable
opportunity to submit tenders); 17 CFR 270.23c-1(a)(6) (rule 23c-
1(a)(6)) (requiring repurchase of closed-end fund shares be made at
a price not above the market value, if any, or the asset value of
such security, whichever is lower, at the time of such purchase); 17
CFR 270.23c-1(a)(9) (rule 23c-1(a)(9)) (requiring that the purchase
be made in a manner or on a basis that does not unfairly
discriminate against any holders of the class of securities
purchased).
---------------------------------------------------------------------------

    In addition, the utility of the proposed rule would be limited if
we did not exempt fund of funds arrangements from the affiliated
transaction prohibitions in section 17(a). As a practical matter,
without an exemption from section 17(a), an acquiring fund would be
subject to a 5% limit on investments in acquired funds under proposed
rule 12d1-4.\69\ Similarly, a fund of funds arrangement involving funds
that are part of the same group of investment companies or that have
the same investment adviser (or affiliated investment advisers) would
not be able to rely on proposed rule 12d1-4 without such an exemption.
We also believe that the proposed exemption from section 17(a) is
necessary in light of the goals of rule 12d1-4. Existing orders have
provided similar exemptive relief from the affiliated transaction
provisions in section 17(a) for many years.\70\
---------------------------------------------------------------------------

    \69\ Without an exemption from section 17(a), an acquired fund
generally could not sell its shares to, or redeem or repurchase
those shares from, an affiliated acquiring fund.
    \70\ See e.g., Schwab, supra footnote 25; Franklin Fund, supra
footnote 25; Innovator ETFs, supra footnote 33. We believe that
section 12(d)(1)(G) of the Act also implies relief under section
17(a) of the Act with respect to the acquisition or sale of shares
of an acquired fund within the same group of investment companies.
---------------------------------------------------------------------------

    We proposed exemptions from section 17(a) in connection with our
2008 proposal, which would have permitted an ETF that is an affiliated
person of an acquiring fund to purchase and sell ETF shares to the
acquiring fund at NAV.\71\ We noted there that we did not believe
providing these exemptions would implicate the concerns underlying
section 17(a). Commenters that addressed these provisions in the 2008
Proposing Release agreed with the proposed relief under section
17(a).\72\ One commenter, in particular, noted that the exemption was
appropriate in light of the proposed protections in the rule, which
provided little opportunity for the acquiring fund to manage an
acquired fund for its own benefit.\73\
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    \71\ See 2008 Proposing Release, supra footnote 13.
    \72\ See ICI Letter; Comment Letter of Xshares Advisors, LLC
(May 20, 2008) (``Xshares Letter'').
    \73\ See ICI Letter.
---------------------------------------------------------------------------

    We request comment on the affiliated transaction exemptions in
proposed rule 12d1-4.
     Do the acquiring funds that currently invest in acquired
funds on the basis of the relief provided in our orders typically
acquire 5% or more of the acquired fund's outstanding voting
securities?
     Is the scope of the proposed exemptions from section 17(a)
sufficiently broad to allow funds to use the exemptive relief we
propose to grant from sections 12(d)(1)(A)-(C)? Should the scope of the
proposed exemptions include transactions on the secondary market? If
so, why?
C. Conditions
    Consistent with the public interest and the protection of
investors, proposed rule 12d1-4 includes conditions designed to prevent
the abuses that historically were associated with fund of funds
arrangements and that led Congress to enact section 12(d)(1). These
conditions are based on conditions in exemptive orders that the
Commission has issued permitting fund of funds arrangements.\74\
However, we propose to streamline these conditions to enhance
compliance and strengthen investor protections. The proposed rule would
establish a comprehensive framework that would subject fund of funds
arrangements to a tailored set of conditions that address differences
in fund structures.\75\ The following table sets forth a general
overview of the differences between the conditions under our current
exemptive relief and the proposed rule:
---------------------------------------------------------------------------

    \74\ See, e.g., Schwab, supra footnote 25; Franklin Fund, supra
footnote 25; Innovator ETFs, supra footnote 33.
    \75\ For example, the conditions regarding layering of fees vary
based on the structure of acquiring fund. See infra section II.C.3.

----------------------------------------------------------------------------------------------------------------
                                                  Condition under existing        Condition under proposed rule
             Concern addressed                        exemptive orders                       12d1-4
----------------------------------------------------------------------------------------------------------------
Undue Influence............................  Voting conditions (including the   Voting conditions do not differ
                                              point at which the voting          based on the type of acquired
                                              condition is triggered) differ     fund and would require an
                                              based on the type of acquired      acquiring fund and its advisory
                                              fund.                              group to use pass-through or
                                                                                mirror voting when they hold
                                                                                more than 3% of the acquired
                                                                                fund's outstanding voting
                                                                                securities.
                                             Fund boards must make certain      An acquiring fund's ability to
                                              findings and adopt procedures to   quickly redeem or tender a
                                              prevent overreaching and undue     large volume of acquired fund
                                              influence by the acquiring fund    shares is restricted (replacing
                                              and its affiliates.                the requirements for
                                             Requires an agreement between       participation agreements and
                                              acquiring and acquired funds       board findings/procedures).
                                              agreeing to fulfill their
                                              responsibilities under the
                                              exemptive order (a
                                              ``participation agreement'').
Complex Structures.........................  Limits the ability of an acquired  Limits the ability of funds
                                              fund to invest in underlying       relying on certain exemptions
                                              funds (that is, it limits          to invest in an acquiring fund
                                              structures with three or more      and limits the ability of an
                                              tiers of funds).                   acquired fund to invest in
                                                                                other funds.
                                                                                Requires an evaluation of the
                                                                                complexity of the fund of funds
                                                                                structure and aggregate fees.
                                                                                Specific considerations vary by
                                                                                acquiring fund structure.

Layering of Fees...........................  Caps sales charges and service     Requires an evaluation of the
                                              fees at limits under current       complexity of the fund of funds
                                              FINRA sales rule (rule 2830)       structure and aggregate fees.
                                              even in circumstances where the    Specific considerations vary by
                                              rule would not otherwise apply.    acquiring fund structure.
                                             Requires an acquiring fund's
                                              adviser to waive advisory fees
                                              in certain circumstances or
                                              requires the acquiring fund's
                                              board to make certain findings
                                              regarding advisory fees.
----------------------------------------------------------------------------------------------------------------

    Other than the differences described in this table, the conditions
in proposed rule 12d1-4 are substantially similar to the conditions
that have been included in our exemptive orders since 1999.\76\ We
discuss each of the proposed conditions below.
---------------------------------------------------------------------------

    \76\ See, e.g., Schwab, supra footnote 25.
---------------------------------------------------------------------------

1. Control
    In order to address the concern that a fund could exert undue
influence over another fund, proposed rule 12d1-4 prohibits an
acquiring fund and its advisory group from controlling, individually or
in the aggregate, an acquired fund, except in the circumstances
discussed below.\77\ This condition generally comports with the
conditions of the exemptive relief the Commission has previously issued
and our 2008 proposal.\78\
---------------------------------------------------------------------------

    \77\ See proposed rule 12d1-4(b)(1)(i); proposed rule 12d1-4(d)
(defining ``advisory group''). See also infra section II.C.1.b.
(discussing exceptions to the control condition).
    \78\ See, e.g., Wells Fargo Funds Trust, et al., Investment
Company Act Release Nos. 30201 (Sept. 12, 2012) [77 FR 57597 (Sept.
18, 2012)] (notice) and 30231 (Oct. 10, 2012) (order) and related
application (prohibiting an acquiring fund (and its advisory group
and sub-advisory group) from controlling an acquired fund). See also
2008 Proposing Release, supra footnote 13 (prohibiting an acquiring
fund, any of its investment advisers or depositors, or any company
in a control relationship with any of those entities from
controlling an ETF, individually or in the aggregate).
---------------------------------------------------------------------------

    The Act defines control to mean the power to exercise a controlling
influence over the management or policies of a company, unless such
power is solely the result of an official position with such
company.\79\ The Act also creates a rebuttable presumption that any
person who directly or indirectly beneficially owns more than 25% of
the voting securities of a company controls the company and that one
who does not own that amount does not control it.\80\ A determination
of control depends on the facts and circumstances of the particular
situation.\81\
---------------------------------------------------------------------------

    \79\ 15 U.S.C. 80a-2(a)(9).
    \80\ Id. These presumptions continue until the Commission makes
a final determination to the contrary by order either on its own
motion or on application by an interested person.
    \81\ ``[N]o person may rely on the presumption that less than
25% ownership is not control when, in fact, a control relationship
exists under all the facts and circumstances.'' Exemption of
Transactions by Investment Companies with Certain Affiliated
Persons, Investment Company Act Release No. 10698 (May 16, 1979) [44
FR 29908 (May 23, 1979)], at n.2.
---------------------------------------------------------------------------

    Accordingly, an acquiring fund and its advisory group's beneficial
ownership of up to 25% of the voting securities of an acquired fund
would be presumed to not constitute control over the acquired fund. A
fund relying on the proposed rule, therefore, generally could make a
substantial investment in an acquired fund (i.e., up to 25% of the
acquired fund's shares). If, however, facts and circumstances existed
that gave an acquiring fund and its advisory group the power to
exercise a controlling influence over the acquired fund's management or
policies other than as discussed below, that fund would not be able to
rely on the proposed rule even if the fund and its advisory group owned
25% or less of the acquired fund's voting securities.\82\
---------------------------------------------------------------------------

    \82\ We have long held that ``controlling influence'' includes,
in addition to voting power, a dominating persuasiveness of one or
more persons, the act or process that is effective in checking or
directing action or exercising restraint or preventing free action,
and the latent existence of power to exert a controlling influence.
See, e.g., In re Investors Mutual, Inc., et al., Investment Company
Act Release No. 4595 (May 11, 1966) (Commission opinion), at text
accompanying nn.11-14 (citing The Chicago Corporation, Investment
Company Act Release No. 1203 (Aug. 24, 1948); Transit Investment
Corporation, Investment Company Act Release No. 927 (July 31, 1946);
In the Matter of the M.A. Hanna Company, Investment Company Act
Release No. 265 (Nov. 26, 1941)).
---------------------------------------------------------------------------

    In assessing control, an acquiring fund's investment in an acquired
fund would be aggregated with the investment of the acquiring fund's
advisory group. Consistent with past exemptive orders, the proposed
rule would not require an acquiring fund to aggregate the ownership of
an acquiring fund advisory group with an acquiring fund sub-advisory
group.\83\ Instead, each of these groups would consider its ownership
percentage separately and would be subject to the same voting
provisions as discussed below.\84\
---------------------------------------------------------------------------

    \83\ Proposed rule 12d1-4(d) defines ``advisory group,'' to mean
``either: (1) an acquiring fund's investment adviser or depositor,
and any person controlling, controlled by, or under common control
with such investment adviser or depositor; or (2) an acquiring
fund's investment sub-adviser and any person controlling, controlled
by, or under common control with such investment sub-adviser.''
Under the proposed rule, an acquiring fund would not combine the
entities listed in clause (1) with those listed in clause (2).
    \84\ See proposed rule 12d1-4(b)(1)(ii).

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

    We believe requiring an acquiring fund to aggregate its holdings
with its advisory group would prevent a fund or adviser from
circumventing the control condition by investing in an acquired fund
through multiple controlled entities, e.g., other funds in the fund
complex. Several commenters on our 2008 proposal, however, urged us to
narrow the scope of entities that an acquiring fund would be required
to aggregate when determining whether an acquiring fund controls an
ETF.\85\ These commenters noted that the scope of the 2008 Proposing
Release's control prohibition was broader than that of section
12(d)(1)(A), which prohibits only an acquiring fund and companies it
controls from acquiring in the aggregate more than 3% of an ETF's
shares.\86\ They also noted the difficulty of complying with the
proposed aggregation requirement, particularly for those funds whose
advisers are part of large financial organizations where information
barriers may preclude the adviser from knowing positions held, for
example, by advisers under common control.\87\
---------------------------------------------------------------------------

    \85\ See, e.g., BGFA Letter; Comment Letter of Stradley Ronon
Stevens & Young LLP (May 19, 2008) (``Stradley Letter''); ICI
Letter; Xshares Letter.
    \86\ See, e.g., ICI Letter.
    \87\ See, e.g., Xshares Letter. Section 12(d)(1)(B) prohibits an
acquired fund from ``knowingly'' selling or otherwise disposing of a
security issued by the acquired fund to any other investment
company. Section 12(d)(1)(A) does not include a similar ``knowing''
element.
---------------------------------------------------------------------------

    Because the control condition effectively allows an acquiring fund
and its advisory group to obtain a significant ownership stake in an
acquired fund, we do not believe it is appropriate to limit the
affiliates that are subject to this condition as suggested by
commenters in 2008. Our exemptive orders include a similar condition
and funds relying on those orders likely already have established
policies and procedures to monitor compliance with the aggregation
requirement embedded in the proposed definition of the term ``advisory
group.'' Other provisions of the Act and our rules also extend to
affiliated persons of an investment adviser.\88\ Funds (or the
advisers) have experience developing compliance policies and procedures
in those circumstances.\89\ Finally, we also do not believe that the
breadth of the entities that are included within an acquiring fund and
its advisory group would limit the usefulness of proposed rule 12d1-4.
Instead, the risk of undue influence over an acquired fund would be
more effectively addressed by requiring the entities that fall within
these definitions to aggregate their holdings in an acquired fund for
purposes of the control condition.
---------------------------------------------------------------------------

    \88\ See, e.g., section 17(a) of the Act (prohibiting first- and
second-tier affiliates of a fund from borrowing money or other
property, or selling or buying securities or other property to or
from the fund, or any company that the fund controls). See also
supra footnote 60 and accompanying text.
    \89\ See 17 CFR 270.38a-1 (rule 38a-1 under the Act) (requiring
registered investment companies to adopt, implement and periodically
review written policies and procedures reasonably designed to
prevent violations of the federal securities laws). See also
Compliance Programs of Investment Companies and Investment Advisers,
Investment Company Act Release No. 26299 (Dec. 17, 2003) [68 FR
74714 (Dec. 24, 2003)] (``Compliance Rule Adopting Release'')
(noting that funds or their advisers should have policies and
procedures in place to identify affiliated persons and to prevent
unlawful transactions with them).
---------------------------------------------------------------------------

    In some circumstances, such as net redemptions, an acquiring fund's
holdings may trigger the Act's control presumption through no action of
its own. If the acquiring fund and its advisory group become a holder
of more than 25% of the outstanding voting securities of an acquired
fund as a result of a decrease in the outstanding voting securities of
the acquired fund, the proposed rule would not require an acquiring
fund to dispose of acquired fund shares. An acquiring fund, however,
would not be able to rely on the proposed rule to acquire additional
securities of the acquired fund when it (along with its advisory group)
holds more than 25% of the acquired fund's voting securities.
a. Voting Provisions
    The proposed rule would require an acquiring fund and its advisory
group to vote their securities in the manner prescribed by section
12(d)(1)(E)(iii)(aa) of the Act if the acquiring fund and its advisory
group (in the aggregate) hold more than 3% of the outstanding voting
securities of an acquired fund.\90\ In these circumstances, the
acquiring fund would be required to either: (i) Seek voting
instructions from its security holders and vote such proxies in
accordance with their instructions (``pass-through voting''); or (ii)
vote the shares held by it in the same proportion as the vote of all
other holders of the acquired fund (``mirror voting'').\91\ This
proposed condition is designed to limit the acquiring fund and its
advisory group's power to influence the outcome of shareholder votes of
the acquired fund.\92\
---------------------------------------------------------------------------

    \90\ Proposed rule 12d-4(b)(1)(ii). The acquiring fund would be
required to follow the prescribed voting procedures only so long as
such holdings remain above the 3% holdings threshold. This threshold
would be calculated as of the record date for a vote at an annual or
special meeting of the holders of the acquired fund's shares.
    \91\ See proposed rule 12d1-4(b)(1)(ii).
    \92\ See, e.g., Fund of Funds Adopting Release, supra footnote
17 (funds relying on section 12(d)(1)(F) of the Act are required to
follow the section 12(d)(1)(E)(iii) voting procedures so that ``the
[acquiring] fund's adviser would not be able to influence the
outcome of shareholder votes in the acquired fund.'').
---------------------------------------------------------------------------

    Our exemptive orders have historically included conditions designed
to limit an acquiring fund's ability to influence an acquired fund
through voting power. The voting conditions in our exemptive orders,
however, have differed based on the type of acquired fund. For example,
our orders require an acquiring fund (and any other funds within the
advisory group) to vote shares of acquired closed-end funds in the
manner required by section 12(d)(1)(E), while non-fund entities within
the advisory group are required to use mirror voting.\93\ The voting
condition in our orders applies whenever the acquiring fund invests in
a closed-end fund beyond the limits in section 12(d)(1). For acquired
open-end funds or UITs, our exemptive relief has required an acquiring
fund (and its advisory group) to vote their shares using mirror voting
only if the acquiring fund and its advisory group become holders of
more than 25% of the acquired fund's outstanding voting securities due
to a decrease in the outstanding securities of the acquired fund.\94\
Our exemptive orders also include exceptions to the voting conditions
when the fund of funds arrangement involves funds within the same group
of investment companies as discussed below.
---------------------------------------------------------------------------

    \93\ See Innovator ETFs, supra footnote 33.
    \94\ See, e.g., Janus Investment Fund, et al., Investment
Company Act Release Nos. 31753 (Aug. 13, 2015) (notice) and 31808
(Sept. 9, 2015) (order) and related application (``Janus Investment
Fund''). Our 2008 proposal would have included a similar condition
for investments in ETFs. See 2008 Proposing Release, supra footnote
13.
---------------------------------------------------------------------------

    We propose to subject all acquiring funds under proposed rule 12d1-
4 that do not fall within the control exceptions discussed below to the
same voting condition in order to simplify and streamline this
requirement. We believe that this approach would facilitate compliance
monitoring for fund groups that have multiple types of acquiring funds.
We also believe that requiring acquiring funds to utilize mirror voting
or pass-through voting whenever their holdings exceed the statutory
limit in section 12(d)(1)(A)(i) is appropriate to protect the acquired
fund (and ultimately its investors) from undue influence through
shareholder votes. A 3% threshold for the voting condition is
particularly important because our

proposal would allow funds to acquire shares of closed-end funds under
proposed rule 12d1-4. Closed-end funds historically have been the
target of proxy contests.\95\
---------------------------------------------------------------------------

    \95\ Since the mid-1990s, closed-end funds that have traded at a
discount to NAV have been the target of proxy contests initiated by
large investors in those funds, including other funds. See, e.g.,
Tom Lauricella, Proxy Fight at Closed-End Fund Opens Can of Worms
for Industry, The Wall Street Journal (Aug. 9, 2002).
---------------------------------------------------------------------------

    Since 1999, our exemptive orders also have included specific voting
provisions when an insurance product separate account is part of the
acquiring fund advisory group or acquiring fund sub-advisory group.\96\
These provisions are designed to comport with the conditions of
exemptions the Commission has issued specific to certain insurance
product structures.\97\ Most insurance product separate accounts,
however, are organized as UITs and rely on section 12(d)(1)(E) to
invest proceeds from the sale of interests in variable annuity and
variable life insurance contracts in shares of a mutual fund.\98\
Accordingly, we believe most insurance product separate accounts
already comply with the voting provisions set forth in section
12(d)(1)(E)(iii)(aa) of the Act, which we propose to incorporate into
rule 12d1-4. We therefore do not believe separate voting conditions are
necessary for these products.
---------------------------------------------------------------------------

    \96\ See, e.g., The Ohio National Life Insurance Company, et
al., Investment Company Act Release Nos. 30895 (Jan. 28, 2014) [79
FR 6238 (Feb. 3, 2014)] (notice) and 30925 (Feb. 24, 2014) (order)
and related application (``Ohio Life''). The exemptive relief
granted by orders generally is conditioned on registered separate
accounts seeking voting instructions from contract owners and then
voting their shares in accordance with the instruction received (and
voting shares for which no instruction were received in the same
proportion as the shares for which instructions were received).
Relief granted to unregistered separate accounts is conditioned on
those accounts either mirror voting their shares or voting in the
same manner as registered separate accounts. See id.
    \97\ The Commission has granted exemptions from certain rules
under the Act to the extent necessary to permit certain insurance
product structures--referred to as ``mixed and shared funding.''
These exemptions are subject to conditions, including voting
conditions, designed to limit potential material conflicts of
interest among the different contract owners. See, e.g., The RBB
Fund, Inc., et al., Investment Company Act Release Nos. 31648 (May
27, 2015) (notice) [80 FR 31420 (June 2, 2015)] and 31687 (Jun. 23,
2015) (order) and related application; SunAmerica Series Trust, et
al., Investment Company Act Release Nos. 31281 (Oct. 10, 2014)
(notice) [79 FR 62473 (Oct. 17, 2014)] and 31331 (Nov. 15, 2014)
(order) and related application.
    \98\ See Fund of Funds Proposing Release, supra footnote 16.
---------------------------------------------------------------------------

b. Exceptions From the Control and Voting Conditions
    The proposed rule would include exceptions to the control and
voting conditions when: (i) An acquiring fund is within the same group
of investment companies as an acquired fund; or (ii) 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.\99\ The proposed
exceptions are designed to include arrangements that are permissible
under section 12(d)(1)(G) and our exemptive orders within the
regulatory framework of rule 12d1-4. Based on our experience overseeing
fund of funds arrangements, we believe the proposed exceptions are
appropriately tailored to except only those fund of funds arrangements
that do not raise the concerns of undue influence that underlie section
12(d)(1) from the control and voting conditions.
---------------------------------------------------------------------------

    \99\ Proposed rule 12d1-4(b)(1)(iii).
---------------------------------------------------------------------------

    As noted above, open-end funds and UITs may rely on section
12(d)(1)(G) to invest in an open-end fund or UIT within the same group
of investment companies. Our exemptive orders have expanded the relief
in section 12(d)(1)(G) to allow open-end funds to invest in open-end
funds, UITs, ETFs, listed closed-end funds, and listed BDCs within the
same group of investment companies. Proposed rule 12d1-4 would allow
registered funds and BDCs to invest in other registered funds and BDCs
within the same group of investment companies.
    For purposes of rule 12d1-4, we propose to define the term ``group
of investment companies'' as ``any two or more registered investment
companies or business development companies that hold themselves out to
investors as related companies for investment and investor services.''
\100\ This is similar to the definition used in many of our exemptive
orders permitting investments in listed closed-end funds and listed
BDCs. It is intended to clarify that closed-end funds and BDCs are
within the scope of the exception.
---------------------------------------------------------------------------

    \100\ Proposed rule 12d1-4(d).
---------------------------------------------------------------------------

    We believe that it would be false or misleading for a group of
investment companies to hold themselves out as related companies as
that term is used in proposed rule 12d1-4 unless they are, in fact,
related investment companies. We believe, for example, that funds that
are advised by the same investment adviser, or by advisers that are
control affiliates of each other, would be ``related'' companies for
purposes of the proposed rule.\101\ The determination of whether
advisers are control affiliates, however, depends on the relevant facts
and circumstances.\102\
---------------------------------------------------------------------------

    \101\ The definition of ``affiliated person'' includes any
person directly or indirectly controlling, controlled by, or under
common control with, such other person. See section 2(a)(3)(C) of
the Act.
    \102\ See Investment Company Mergers, Investment Company Act
Release No. 25259 (Nov. 8, 2001) [66 FR 57602 (Nov. 15, 2001)]
(proposing rule amendments to permit mergers and other business
combinations between certain affiliated investment companies), at
n.11.
---------------------------------------------------------------------------

    We believe that whether a group of funds sharing a common adviser
or having advisers that are all control affiliates could satisfy the
``holding out'' prong of the definition would depend on the totality of
communications with investors by or on behalf of the funds. For
example, the acquiring fund's prospectus could identify the acquired
funds in which the acquiring fund expects to invest, and disclose the
control relationship among the advisers to the acquiring and acquired
funds. In our view, it would not be necessary for the acquired funds to
include comparable disclosure in their prospectuses or that the
acquired funds and acquiring funds be marketed as related companies for
all purposes and to all potential investors.\103\ Rather, the
requirement in the definition of ``group of investment companies'' that
the funds must hold themselves out to ``investors'' as related
companies for purposes of investment and investor services refers only
to potential investors in the acquiring fund because the relevant
inquiry is how the funds are holding themselves out to potential
investors in the acquiring fund. Disclosure in the acquiring fund's
prospectus of the identity of the acquired funds in which the acquiring
fund expects to invest, and of the control relationship among the
advisers to the acquired and acquiring funds, therefore, is one way to
satisfy the ``holding out'' requirement of the definition.
---------------------------------------------------------------------------

    \103\ If the acquired funds' marketing materials and/or
prospectuses include any statements that are inconsistent with the
representations made in the prospectuses for the acquiring funds
regarding how the acquired fund and acquiring funds are related
companies because of the affiliation of their investment advisers,
such statements could call into question whether the investment
companies are holding themselves out as related companies and
potentially render the control exception unavailable to the fund of
funds arrangement.
---------------------------------------------------------------------------

    Our orders also allow an acquiring fund to invest in an acquired
fund when an acquiring fund's sub-adviser (or a control affiliate of
the sub-adviser) serves as the primary investment adviser or sponsor to
the acquired fund.\104\ Proposed rule 12d1-4 would

similarly except these arrangements from the control and voting
conditions.\105\ This proposed exception would cover arrangements that
may not qualify for the proposed exclusion available to funds within
the same group of investment companies under subparagraph
(b)(1)(iii)(A) because the acquiring fund and acquired fund do not hold
themselves out as related funds for purposes of investment and investor
services.\106\ We believe that these arrangements do not raise the same
concerns regarding undue influence as other types of fund of funds
arrangements because of the sub-adviser's duties as a fiduciary to both
the acquiring fund and acquired fund.
---------------------------------------------------------------------------

    \104\ See Calamos Advisors LLC, et al., Investment Company Act
Release Nos. 30628 (July 24, 2013) [78 FR 46381 (July 31, 2013)]
(notice) and 30653 (Aug. 20, 2013) (order) and related application.
See also BGFA Letter (noting that asset allocation funds often
retain the advisers of acquired ETFs as sub-advisers and that
``[t]he Commission has previously granted exemptive relief relating
to this issue on many occasions'').
    \105\ See proposed rule 12d1-4(b)(1)(iii)(B). Proposed rule
12d1-4(b)(1)(iii)(B) would, however, use the term ``depositor''
instead of ``sponsor'' to be consistent with other rules.
    \106\ Fund of funds arrangements where the acquiring fund's
primary adviser served as adviser to the acquired fund typically
would be able to qualify as funds within the ``same group of
investment companies'' and would not require a separate exception
under our orders.
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    The proposed rule would subject the fund of funds arrangements
within these exclusions to a more limited set of conditions than other
fund of funds arrangements relying on the rule. In circumstances where
the acquiring fund and acquired fund share the same adviser, the
adviser would owe a fiduciary duty to both funds, serving to protect
the best interests of each fund.\107\ In addition, in cases where the
arrangement involves funds that are advised by advisers that are
control affiliates, we do not believe that the acquiring fund adviser
generally would seek to benefit the acquiring fund at the expense of
the acquired fund (nor do we believe that the acquiring fund would seek
to influence the acquired fund through its ownership interest in the
acquired fund).\108\ We believe that the proposed rule's other
conditions, such as the redemption condition described below, would
mitigate against the risks of undue influence when the arrangement
involves funds that have advisers that are control affiliates.
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    \107\ An investment adviser has a fiduciary duty to act in the
best interests of a fund it advises. See section 36(a) under the
Investment Company Act. See also, e.g., SEC v. Capital Gains
Research Bureau, Inc., 375 U.S. 180 (1963); Rosenfeld v. Black, 445
F.2d 1337 (2d Cir. 1971) (describing the fiduciary relationship
between an investment adviser and a mutual fund); Brown v. Bullock,
194 F. Supp. 207, 229, 234 (S.D.N.Y.), aff'd, 294 F.2d 415 (2d Cir.
1961) (noting that investment advisers are under a fiduciary duty to
manage the investment companies entrusted to their care with a
single eye to their best interest, free from any self-dealing);
Compliance Rule Adopting Release, supra footnote 89, at n.68.
    \108\ Accordingly, we also propose to except these arrangements
from the voting condition in proposed rule 12d1-4(b)(1)(ii). See
proposed rule 12d1-4(b)(iii).
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c. Potential Alternatives to Proposed Control Condition
    We considered several alternatives to the proposed control
condition to address concerns regarding undue influence over an
acquired fund, including whether we should set a different limit on
investments by an acquiring fund and its advisory group in an acquired
fund. For example, we considered whether to propose a condition
prohibiting an acquiring fund and its advisory group from acquiring
more than 10% of the outstanding voting stock of an acquired fund. This
alternative would effectively lower an acquiring fund's potential
investment in an acquired fund from 25% to 10% when control is based on
ownership.\109\ A lower limit could reduce the potential for undue
influence and could eliminate the need for additional conditions
designed to address these concerns, such as the redemption limit
described below. A 10% limit also is consistent with sections
12(d)(1)(B) and 12(d)(1)(C) of the Act, which each include a 10% limit
on fund investments in a single acquired fund.
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    \109\ We also considered whether the 10% limit should be
combined with a condition prohibiting an acquiring fund and its
advisory group from controlling an acquired fund. This approach
would capture certain control relationships that are not based on
ownership. As with other questions of control discussed in this
section, whether a person is controlling, controlled by, or under
common control with the acquiring fund's investment adviser or
depositor or the acquiring fund's investment sub-adviser depends on
the particular facts and circumstances.
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    We also considered whether we should narrow the scope of entities
that should be assessed for purposes of a 10% limit. For example, the
10% limit in section 12(d)(1)(C) applies to the acquiring fund and
other funds advised by the same adviser. If we adopted a similar
provision, it would have the benefit of excluding from the calculation
members of an advisory group that are not funds.\110\ As noted above,
non-fund affiliates are not subject to the 12(d)(1) limits, and
acquiring funds are required to consider their non-fund affiliates'
holdings when assessing whether they control an acquired fund by effect
of a condition in our exemptive orders. This approach therefore could
lessen compliance burdens for those funds whose advisers are part of
large financial organizations.
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    \110\ Such a provision also could include funds advised by
control affiliates of the adviser to reflect the current structure
of advisory firms, which may include multiple entities serving as
investment advisers to funds. The proposed exception for funds
within the same group of investment companies in proposed rule 12d1-
4(b)(1)(iii)(A) would incorporate a similar approach. See supra
footnote 101 and accompanying text.
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    However, we believe that our proposed restrictions on control,
which incorporate the 25% presumption, are appropriate when combined
with other conditions set forth in proposed rule 12d1-4. For example,
we believe the proposed condition requiring specified voting procedures
when the acquiring fund and its advisory group exceed a 3% ownership
threshold, and the proposed limit on the acquiring fund's ability to
quickly redeem or tender a large volume of acquired fund shares
effectively mitigate the influence that an acquiring fund and its
advisory group may have on an acquired fund, even if the acquiring fund
and its advisory group owns up to 25% of that fund.\111\ We believe
that a higher ownership limit provides an acquiring fund with the
ability to allocate its assets in an efficient and cost-effective
manner.\112\ Together, we believe that these provisions would limit the
ability of the members of an acquiring fund's advisory group to
exercise undue influence over an acquired fund.
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    \111\ See supra section II.C.2.
    \112\ For example, one way to gain efficient and cost effective
exposure to a particular index in a target-date or life-cycle fund
might be to acquire up to 25% of a fund tracking the index. This
allocation may change over the life cycle of the fund.
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    We request comment on the control and voting conditions in proposed
rule 12d1-4.
     Would the proposed control and voting conditions
sufficiently protect an acquired fund from the type of coercive
behavior on the part of acquiring funds that section 12(d)(1) was
intended to prevent? Are there other conditions that we should consider
to address the potential for undue influence by an acquiring fund and
its controlling persons? Should we consider a lower limit (e.g., 10%)
or a higher limit (e.g., 30%) on investments by an acquiring fund and
its advisory group in an acquired fund? Would a lower limit unduly
restrict fund of funds arrangements?
     Should we require an acquiring fund to aggregate its
holdings with its advisory group when assessing control of an acquired
fund? Are we correct that funds relying on fund of funds exemptive
orders already have established policies and procedures to monitor
compliance with the aggregation requirement embedded in the definition
of an acquiring fund's ``advisory group?''
     Should we define ``advisory group'' as proposed or are
there alternatives that we should consider? For example,

should we exclude control affiliates of an acquiring fund's investment
adviser or depositor from this definition and only include control
affiliates of the acquiring fund?
     Should we permit, as proposed, an exception to the control
and voting conditions when the acquiring fund and acquired fund are
part of the same group of investment companies? Alternatively, should
the proposed rule only except an acquiring fund that is part of the
same group of investment companies from the control condition? Is this
proposed exception to these conditions appropriately tailored? Should
we define ``group of investment companies'' as proposed or are there
alternative definitions we should consider? Should we include a
``holding out'' requirement as part of the exception? Or should we
provide additional guidance regarding how a group of funds sharing a
common investment adviser or having investment advisers that are
control affiliates could satisfy the ``holding out'' prong of the
definition?
     Should we also permit, as proposed, an exception to the
control and voting conditions 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 the proposed
rule only except such an acquiring fund from the control condition? Are
we correct that the potential for abuse is limited in these
circumstances due to generally aligned interests? Are there other
conditions we should consider in this circumstance?
     Are there particular kinds of votes to which the proposed
voting condition should not apply? For example, should there be an
exception to the voting condition for votes on changes in control of an
acquired fund's adviser? If an acquiring fund has a large enough
investment that is subject to the redemption limits (described below)
and is unable to redeem its investment in an acquired fund, would the
timing of such a vote allow sufficient time for the acquiring fund to
seek investor instructions?
     Should the control and voting exceptions cover funds with
advisers that are control affiliates as proposed, or only funds that
share the same investment adviser? Are we correct that an adviser to an
acquiring fund in these circumstances would not seek to benefit the
acquiring fund at the expense of the acquired fund?
     Should we require an acquiring fund to vote in the manner
prescribed by section 12(d)(1)(E)(iii)(aa) if the acquiring fund and
its advisory group hold more than 3% of an acquired fund's outstanding
voting securities? Is there a lower or higher threshold that we should
consider? Should that threshold vary depending on the type of acquired
fund? For example, should there be a lower or higher threshold for
closed-end funds? Should that threshold depend on whether a closed-end
fund is listed or not? Why? Are there alternative voting procedures
that we should consider? Should we eliminate the optionality in the
proposed rule and only allow either pass-through voting or mirror
voting?
     Are the voting options in proposed rule 12d1-4 workable?
Would the proposed threshold cause operational challenges for voting
acquired fund shares? How frequently do acquiring funds use pass-
through voting or mirror voting under our exemptive orders? How
frequently would acquiring funds use pass-through voting versus mirror
voting under the proposed rule?
     Instead of the proposed voting condition, should we codify
the voting provisions set forth in our existing exemptive orders? \113\
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    \113\ See supra footnotes 93-94 and accompanying text
(describing the voting conditions included in our orders).
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     Are we correct that insurance product separate accounts
already have experience complying with the voting provisions in section
12(d)(1)(E)(iii)(aa)? Should we instead include separate voting
provisions for insurance product separate accounts? If so, should we
codify the voting provisions for insurance product separate accounts
set forth in our exemptive orders? \114\
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    \114\ See supra footnote 96.
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     Is our proposal to calculate the holdings of an acquired
fund for the purposes of the 3% voting threshold as of the record date
appropriate? Alternatively, should our proposal be more similar to the
requirements of section 12(d)(1)(F) of the Act, which requires section
12(d)(1)(E) voting procedures for ``any security purchased or acquired
pursuant'' to that section?
     Would the proposed voting provisions have unintended
consequences regarding fund governance? If so, what would those
consequences be, and how should we address them?
     To the extent that an acquiring fund and its advisory
group become a holder of more than 25% of the outstanding voting
securities of an acquired fund as a result of a decrease in the
outstanding voting securities of an acquired fund, should we provide
relief from section 17(a) to allow the acquiring fund and its advisory
group to redeem shares of the acquired fund in-kind and thus reduce
their holdings of the acquired fund?
2. Redemptions
    To address concerns that an acquiring fund could threaten large-
scale redemptions as a means of exercising undue influence over an
acquired fund, the proposed rule includes a condition that would limit
an acquiring fund from quickly redeeming or tendering a large volume of
acquired fund shares. Specifically, proposed rule 12d1-4(b)(2) would
prohibit 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.\115\
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    \115\ Proposed rule 12d1-4(b)(2). Investors in mutual funds can
redeem their shares on each business day and, by law, must receive
approximately their pro rata share of the fund's net assets (or its
cash value) within seven calendar days after receipt of the
redemption request. See section 2(a)(32) of the Act (defining
redeemable security); section 22(e) of the Act (providing, in part,
that no registered investment company shall suspend the right of
redemption, or postpone the date of payment upon redemption of any
redeemable security in accordance with its terms for more than seven
days after tender of the security absent unusual circumstances); and
rule 22c-1 (purchases and redemptions of fund shares must be at a
price based on the current NAV next computed after receipt of an
order to purchase or redeem). Since the proposed condition restricts
an acquiring fund's ability to redeem or submit a redemption
request, rather than an acquired fund's obligation to honor such
redemptions, we do not propose an exemption from section 22(e) of
the Act in connection with this condition.
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    The proposed redemption limitation is designed to provide a check
against the influence that an acquiring fund can have on an acquired
fund when it owns a significant percentage of the acquired fund. As
discussed in the context of the control condition, we believe it is
appropriate to permit funds to purchase up to 25% of an acquired fund
in reliance on the rule, in part, because of the protections afforded
by limiting the acquiring fund's ability to influence the fund through
the threat of large-scale redemptions.\116\
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    \116\ Certain acquiring funds that could rely on proposed rule
12d1-4 could acquire even more than 25% of an acquired fund's
outstanding voting securities. See proposed rule 12d1-4(b)(1)(iii)
(providing exceptions from the control and voting conditions for
fund of funds arrangements when: (i) The acquiring fund is in the
same group of investment companies as the acquired fund; or (ii) the
acquiring fund's investment sub-adviser or any control affiliate of
such sub-adviser acts as the acquired fund's investment adviser or
depositor). See also infra sections III and V (discussing the
proposed rescission of rule 12d1-2 and exemptive orders).

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    We believe the proposed redemption condition, together with the
proposed control and voting conditions, are more protective than
certain conditions currently found in our orders and may be objectively
tested as part of a fund's compliance program. The conditions in our
orders generally require the acquired fund board to make certain
findings and adopt procedures to prevent overreaching and undue
influence by the acquiring fund and its affiliates once the investment
in an unaffiliated acquired fund exceeds the section 12(d)(1)
limits.\117\ For example, our orders require an unaffiliated acquired
fund board to adopt procedures reasonably designed to monitor purchases
by the unaffiliated acquired fund in an underwriting in which an
affiliate of the acquiring fund is the principal underwriter.\118\ Our
orders also require the acquiring fund to take measures to prevent the
acquiring fund from influencing the terms of any services or
transactions between the acquiring fund and an unaffiliated acquired
fund or causing an unaffiliated acquired fund to purchase a security in
any affiliated underwriting. The acquiring fund's board of directors,
including a majority of its independent directors, is required by our
orders to adopt procedures reasonably designed to assure that the
acquiring fund's investment adviser does not take into account
consideration received from an unaffiliated acquired fund (or certain
of the unaffiliated acquired fund's affiliates).\119\ In addition, our
exemptive orders require the acquired fund and each unaffiliated
acquiring fund to execute a participation agreement.\120\
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    \117\ Our orders generally use the term ``unaffiliated funds''
to refer to acquired funds that are not part of the same group of
investment companies as the acquiring fund. For purposes of this
discussion of the conditions in our orders that differentiate based
on whether the acquired fund is part of the same group of investment
companies, we will use the term ``unaffiliated acquired fund''. See,
e.g., USCF Advisers, LLC, et al., Investment Company Act Release
Nos. 32851 (Oct. 4, 2017) [82 FR 47262 (Oct. 11, 2017) (notice) and
32889 (Oct. 31, 2017) (order) and related application (``USCF
Advisers''); Franklin Fund, supra footnote 25.
    \118\ This condition also requires the board to review these
transactions on at least an annual basis and to maintain certain
records associated with the procedures and affiliated underwritings.
    \119\ See, e.g., USCF Advisers, supra footnote 117.
    \120\ See, e.g., Schwab, supra footnote 25.
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    We believe that the proposed redemption, control, and voting
conditions address the same concerns regarding overreaching and undue
influence that these exemptive order conditions sought to address,
without requiring procedures and related board findings covering
particular instances where undue influence and overreaching could
exist. Therefore, replacing these conditions with the proposed
redemption, control, and voting conditions would lower compliance costs
and burdens and enhance investor protection for acquired funds.\121\
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    \121\ We anticipate that fund of funds involving separate
accounts will continue to enter into participation agreements as a
result of the requirements in their ``mixed and shared funding''
orders. See supra footnote 97.
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    We believe the proposed limit is appropriately tailored to reduce
the threat of large-scale redemptions. Along with the other conditions
we are proposing today, it is designed to prevent an acquiring fund
from unduly influencing the acquired fund without the board oversight
and monitoring conditions imposed by our orders. At the same time, the
redemption limit leaves an acquiring fund the ability to redeem a
portion of its investment.\122\ Because the threat of large-scale
redemptions only exists when an acquiring fund holds a significant
amount of an acquired fund, the redemption condition does not apply
unless the acquiring fund holds shares of the acquired fund in excess
of the 3% limit on the acquisition of an acquired fund's outstanding
voting securities under section 12(d)(1)(A)(i) of the Act.\123\ It does
not apply as a result of the fund exceeding the 5% limit on the total
assets of an acquiring fund that may be invested in a single acquired
fund under section 12(d)(1)(A)(ii) of the Act or the 10% limit on the
total assets of an acquiring fund that may be invested in all acquired
funds under section 12(d)(1)(A)(iii) of the Act. In addition, acquiring
funds that rely on the proposed rule to invest in funds that are listed
on an exchange would be permitted to continue to sell shares in the
secondary market without regard to the volume limit.\124\ Based on the
staff's analysis of redemptions of acquired fund shares, we do not
believe that our proposed redemption limit would have a large effect on
funds.\125\ However, we acknowledge that this condition could have a