The U.S. Securities and Exchange Commission has completed regulations that could help life insurers that run lifecycle funds and other “funds of funds.”

The final rule, Fund Of Funds Investments, codifies guidelines the SEC has been using to cut red tape for fund-of-funds managers who ask it for relief.

The final rule also adds disclosure requirements, to require mutual fund and variable insurance fund managers to tell investors about the expenses of any funds that the fund happens to hold.

Easing restrictions on managers of funds of funds “will expand the circumstances in which funds can invest in other funds without first obtaining an exemptive order from the commission, which can be costly and time-consuming,” SEC officials write in preamble to the proposed final rule. “We anticipate that the rules will promote efficiency and competition.”

Section 12(d)(1) of the Investment Company Act of 1940 limits investment funds’ ability to invest in shares of other funds, in an effort to keep investors in one fund from acquiring a second fund and trampling over the rights of the investors in the second fund, SEC officials write in the preamble.

Section 12(d)(1)(A) prohibits a registered fund from:

- Acquiring more than 3% of another fund’s outstanding voting securities, or charging a sales load greater than 1.5% if it acquires a smaller stake in another fund’s securities.

- Investing more than 5% of its total assets in any one acquired fund.

- Investing more than 10% of total assets in all acquired funds.

Another Investment Company Act provision, Section (d)(1)(F), does allow registered funds to make small investments in many funds, and it lets an ordinary mutual fund or unit investment trust make unlimited investments in other funds and UITs that are part of the same fund complex.

Section 12(d)(1)(G), lets the SEC exempt investment managers from the 12(d)(1)(A) restrictions.

The SEC now is using the flexibility it gets from Section 12(d)(1)(G) to add regulations that will create 3 new permanent exceptions to Section(d)(1)(A):

- Rule 12d-1 will let a fund invest an unlimited amount of its uninvested cash in a money market fund in the same fund complex or in a different fund complex. That will make it easier for funds to find good places to park excess cash, SEC officials write.

- Rule 12d-2 will let an affiliated fund of funds acquire securities of funds that are not part of the same group of investment companies. “There do not appear to be any greater risks to an acquired fund or to shareholders if 3% of its shares are acquired by an affiliated fund of funds as opposed to being acquired by other types of funds specifically permitted to purchase shares,” SEC officials write.

- Rule 12d-3 will let funds that acquire up to 3% of other funds’ shares charge sales loads greater than 1.5%, “provided that the aggregate sales load any investor pays . . . does not exceed the limits on sales loads established by the NASD for funds of funds,” SEC officials write.

Rule 12d-3 should give funds greater flexibility in structuring sales loads, officials write.

The final rule, which is scheduled to take effect July 31, is based on a draft released in October 2003. The SEC notes that it received only 5 comments from the public about the October 2003 draft, and none of the comments came from an insurance company or insurance organization.

A copy of the final rule is posted on the Web at Document Link