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by Carlton Fields

On December 19, 2018, the SEC proposed rescinding most so-called fund of funds (FoF) exemptive orders and Rule 12d1-2 under the Investment Company Act of 1940 (Act) and replacing them with new Rule 12d1-4.1

Some of these reforms may have significant consequences for both fund complexes that offer FoFs and issuers of variable insurance products that include FoFs as investment options. The deadline for comments on the proposal is May 2, 2019.

Proposed Rule 12d1-4

Proposed Rule 12d1-4 would replace the traditional FoF order conditions (such as Board oversight to prevent "undue influence" and limitations on certain fees) with new rule conditions designed to address these issues. Generally, Rule 12d1-4 would:

• prohibit FoFs and their advisory groups from controlling (i.e., owning more than 25 percent of) an acquired fund, subject to certain exceptions; require "pass-through" or "echo voting" if the FoF owns more than 3 percent of the acquired fund, subject to certain exceptions; (The above control and voting conditions would not apply if the FoF is in the same group of investment companies as the acquired fund or if the FoF's subadviser or its control affiliate is the adviser or depositor of the acquired fund.)

• generally prohibit a FoF from redeeming more than 3 percent of an acquired fund's total outstanding shares in any 30-day period (the "3 Percent Redemption Restriction");

• require the FoF's investment adviser ......................

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