Fund of Funds Arrangements Frequently Asked Questions

Updated March 5, 2026

The staff of the Division of Investment Management has prepared the following responses to questions related to the adoption of Rule 12d1-4 in October 2020 under the Investment Company Act of 1940 (Act). (Adopting Release)

The staff expects to update this document from time to time to include responses to additional questions. These responses represent the views of the staff of the Division of Investment Management. They are not a rule, regulation, or statement of the Commission, and the Commission has neither approved nor disapproved these FAQs or these responses. These FAQs, like all staff guidance, have no legal force or effect: they do not alter or amend applicable law, and they create no new or additional obligations for any person.

If you have questions about the application of Rule 12d1-4, please contact the IM Investment Company Regulation Office at 202-551-6792 or the IM Chief Counsel's Office at 202-551-6825.

Fund of Funds Investment Agreements

Question 1: Must an acquiring fund that is a management company enter into a fund of funds investment agreement with an acquired fund if its acquisition of the acquired fund would exceed the 5% or 10% limits of Section 12(d)(1)(A)(ii) or (iii) of the Act but not the 3% limit of Section 12(d)(1)(A)(i) of the Act (assuming that the two funds do not share the same investment adviser)?

Answer: Yes. The requirement to enter into a fund of funds investment agreement under Rule 12d1-4(b)(2)(iv) applies if a management company that is an acquiring fund is relying upon the rule for an exemption from Section 12(d)(1)(A)(i), (ii), or (iii). No findings under Rule 12d1-4(b)(2)(i) would be required, however, if a management company does not exceed the 3% limit of Section 12(d)(1)(A)(i) with respect to a specific acquired fund.[1] The fund of funds investment agreement with such acquired fund would not need to include "any material terms" related to the findings otherwise required under Rule 12d1-4(b)(2)(iv)(A), as no such terms exist.

As the Commission noted in the Adopting Release, the purpose of the fund of funds investment agreement requirement is, in part, to empower funds relying on the rule to negotiate and tailor appropriate terms to protect their interest in a fund of funds arrangement. The staff believes that requiring the fund of funds investment agreement in these situations facilitates the negotiations contemplated by the Commission, even where no findings are required by the rule.

Question 2: Does the response change if the acquiring fund is a unit investment trust (UIT)?

No. Rule 12d1-4(b)(2)(iv) also requires an acquiring fund that is a UIT to enter into a fund of funds investment agreement with an acquired fund even if the acquiring UIT remains below the 3% threshold of Section 12(d)(1)(A)(i) of the Act with respect to that acquired fund if it is otherwise relying upon the rule in acquiring securities of that acquired fund.

Question 3: If an acquiring fund holds acquired funds below the statutory limits of Section 12(d)(1)(A) but subsequently makes an acquisition in another fund in excess of those limits in reliance on Rule 12d1-4, must an acquiring fund enter into a fund of funds investment agreement for those funds it held prior to relying on the rule or only those it acquires contemporaneously or after relying on the rule?

Answer: An acquiring fund is required to enter into a fund of funds investment agreement with an acquired fund before the acquiring fund acquires securities of such acquired fund in reliance on Rule 12d1-4. Given that Section 12(d)(1) of the Act is an acquisition test, however, an acquiring fund is not required to enter into such agreements with acquired funds in which it had invested prior to relying on Rule 12d1-4, provided that the acquiring fund does not purchase additional shares of such acquired funds in reliance on Rule 12d1-4. If the acquiring fund subsequently does purchase additional shares of such an acquired fund in reliance on Rule 12d1-4, an agreement would be necessary.

Acquired Fund's Investments in Debt Securities Issued by CLOs

Question: Rule 12d1-4(b)(3)(ii) generally prohibits an "acquired fund," as defined in Rule 12d1-4(a)(1), from purchasing or otherwise acquiring the securities of an investment company or "private fund" if immediately after such purchase or acquisition, the securities of investment companies and private funds owned by the acquired fund have an aggregate value in excess of 10% of the value of the total assets of the acquired fund, with certain limited exceptions (the 10% bucket). Rule 12d1-4(d) defines "private fund" as an issuer that would be an investment company under Section 3(a) of the Act but for the exclusions from that definition provided for in Section 3(c)(1) or Section 3(c)(7) of the Act. Many issuers of collateralized loan obligations (CLOs) rely on the exclusion in Section 3(c)(1) or Section 3(c)(7) of the Act and, therefore, fall within the definition of "private fund" for purposes of Rule 12d1-4. Such vehicles can issue both equity securities and debt securities. Does an acquired fund have to count debt securities issued by CLOs towards the 10% bucket?

Answer: Rule 12d1-4(b)(3) was generally designed "to prevent potential increases in duplicative fees and expenses, and to avoid the investor confusion" that can result from complex multi-tier fund structures as "multi-tier structures can obfuscate the fund's investments, fees, and related risks."[2] The Commission stated that "[f]or example, if an acquiring fund invests in an acquired fund that in turn invests in other funds, an acquiring fund shareholder could find it difficult to determine the nature and value of the holdings ultimately underlying his or her investment."[3] The staff recognizes that debt securities issued by CLOs have fundamental structural and operational features that distinguish them from hedge funds, private equity funds, and other entities traditionally considered pooled investment vehicles for purposes of these underlying complex multi-tier fund structure concerns. CLOs' debt securities are backed by the cash flows of an underlying pool of collateral and, unlike equity security holdings, which economically expose investors to the collateral, CLO debt securities earn distributed principal and income on the financing costs of the collateral. These are not the type of "fund-like" investment where the expectations of the acquiring fund's shareholders would be frustrated if these shareholders could not look through the multi-tier structure to determine the nature and value of the CLO holdings. We do not believe, therefore, that investments in CLO debt securities raise the concerns underlying the three-tier prohibition. Accordingly, the staff would not recommend enforcement action to the Commission under sections 12(d)(1)(A), 12(d)(1)(B), 12(d)(1)(C), 17(a), 57(a)(1)-(2), or 57(d)(1)-(2) of the Act if an acquired fund does not count investments in debt securities issued by CLOs towards the 10% bucket in Rule 12d1-4(b)(3)(ii).