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SEC Seeks Comments on Fund-of-Funds Changes

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SEC building in Washington.

The Securities and Exchange Commission voted to issue for public comment Wednesday a proposed new rule and related amendments to streamline and enhance the regulatory framework for fund of funds arrangements.

“Mutual funds, exchange-traded funds (ETFs) and other types of funds have become increasingly important for Main Street investors to save for retirement and meet their other financial goals,” said SEC Chairman Jay Clayton, in his remarks at the SEC open meeting. “These funds invest in other funds for a variety of reasons, including to achieve asset allocation or diversification in an efficient manner, as well as to hedge and otherwise manage risk.”

However, Clayton continued, “depending on the size of the investments, funds may be required to seek an exemptive order, causing costs and delays, and resulting in a regulative regime where substantially similar fund of funds arrangements may be subject to different conditions. This proposal would create a consistent, rules-based framework for fund of funds arrangements while providing robust protections for investors.”

The commission’s proposal, which will be out for a 90-day comment period, would allow a fund to acquire the shares of another fund in excess of the limits of the Investment Company Act without obtaining an individual exemptive order from the commission.

“In order to rely on the rule, funds must comply with conditions designed to enhance investor protection, including conditions restricting funds’ ability to improperly influence other funds, charge excessive fees, or create overly complex fund of funds structures,” the SEC states.

Dalia Blass, director of the SEC’s Division of Investment Management, stated at the meeting that the proposed new rule and related amendments for fund of funds arrangements “would replace the many, many exemptive orders the agency has issued for funds of funds since the 1990s. I believe strongly that once exemptive relief becomes routine and an area of law is shaped by so many exemptive orders, it is sound regulatory policy to address the relief with a rule.”

Outgoing Commissioner Kara Stein stated that, as it stands now, there are over “4,000 fund-of-fund arrangements, with total gross assets of more than $5.7 billion,” with examples including “target date funds — we call them lifecycle funds in the federal government’s thrift savings plan. Often these allocation funds get exposure to multiple asset classes by investing in other funds.”

Noting some misgivings with the plan, Stein stated that “it’s tremendously important to get the rule right,” and cautioned against “scaling back fee disclosure.”

Also, funds of funds arrangements can create “complexities,” she said, as she questioned whether “investors are fully aware of risks of exposure to other funds.”

— Check out David Grim, Ex-SEC IM Director, Discusses Long-Awaited ETF Rule on ThinkAdvisor.


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