On October 7, 2020, the Securities and Exchange Commission (“SEC”) adopted a new rule designed to streamline and enhance the regulatory framework for funds that invest in other funds (“fund of funds arrangements”). The new rule (Rule 12d1-4) will create a consistent framework for fund of funds arrangements to replace the existing regulatory approach that relied on various SEC exemptive orders and varied based on the type of acquiring fund. The scope of permissible acquiring and acquired funds under Rule 12d1-4 is broader than that permitted by the SEC’s exemptive orders. In particular, Rule 12d1-4 will permit a business development company (“BDC”) to acquire the securities of any registered investment company or other BDC in excess of the limits imposed by Section 12(d)(1) of the Investment Company Act of 1940, as amended. BDCs will be able to rely on Rule 12d1-4 as both acquiring and acquired funds. However, Rule 12d1-4 will prohibit a BDC from controlling an acquired fund and will require a BDC that holds more than a certain percentage of an acquired fund’s outstanding voting securities to vote those securities in a prescribed manner in order to minimize the influence that the BDC may exercise over the acquired fund. The effect of the final rule on the number of acquiring BDCs will likely be limited because BDCs are prohibited from making any investment unless, at the time of the investment, at least 70% of the BDC’s total assets are invested in securities of eligible portfolio companies, which do not include funds. A detailed Legal Update will follow. See the SEC’s adoption of the final rule here.
