The Securities and Exchange Commission adopted Wednesday a new rule updating the regulatory framework for fund of funds arrangements, as well as a “finder” exemption for small-business capital formation funding.
The Commission approved a new rule and amendments under the Investment Company Act of 1940 to streamline and enhance the regulatory framework for funds that invest in other funds.
“Main Street investors have increasingly used mutual funds, exchange-traded funds (ETFs) and other types of funds to access our markets and invest for their future,” said SEC Chairman Jay Clayton, during the virtual open meeting. “To achieve asset allocation, diversification and other objectives, many funds have also invested in other funds. Today’s action will enhance and modernize the regulatory framework for these arrangements.”
Clayton explained that the framework “will provide flexibility to fund managers to allocate and structure investments efficiently, without the costs and delays of seeking individualized exemptive orders, as long as the arrangements satisfy a number of conditions designed to enhance investor protection.”
SEC Commissioner Hester Peirce, a Republican, tweeted after the vote that “transitioning from an exemptive order framework for funds-of-funds won’t be easy, but a consistent, workable regulatory approach is important. For less common arrangements, the exemptive process is still available.”
Approximately 40% of all registered funds hold an investment in at least one other fund, according to SEC staff estimates, with total net assets in mutual funds that invest primarily in other mutual funds growing to $2.54 trillion in 2019.
“Retail investors similarly use fund of funds arrangements as a convenient way to allocate and diversify their portfolio through a single, professionally managed investment,” the SEC said.
Rule 12d1-4 will 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 if the funds comply with conditions designed to enhance investor protection, according to the SEC.
The securities regulator also adopted by a 3-2 vote a new limited, conditional exemption from broker registration requirements for “finders” who assist issuers with raising capital in private markets from accredited investors — something Peirce has wanted since 2018.
The plan creates two classes of finders, Tier I and Tier II, that would be subject to conditions tailored to the scope of their respective activities.
The plan establishes “clear lanes for both registered broker activity and limited activity by finders that would be exempt from registration,” the SEC said.