On September 20, 2023, the Securities and Exchange Commission (“SEC”) adopted amendments to Rule 35d-1[1] (the “Names Rule”) under the Investment Company Act of 1940, as amended (“1940 Act”), as well as amendments to certain investment company registration forms, Form N-PORT and certain recordkeeping requirements (collectively, the “Adopted Rules”). Under Section 35(d) of the 1940 Act, a registered investment company, such as a mutual fund, exchange-listed closed-end fund or an ETF, may not use a name that the SEC finds as materially deceptive or misleading. Rule 35d-1, initially adopted in 2001, required among other things that certain funds using names suggesting investment in certain types of investments or securities, or in certain countries or geographic regions, to adopt a policy to invest at least 80 percent of its assets in those investments, securities, countries or geographic regions (the “80-Percent Policy”). As noted in the Adopting Release, these rule changes are intended to improve and broaden the scope of funds subject to the 80-Percent Requirement. The Adopted Rules follow amendments and rules proposed by the SEC on May 25, 2022, which we summarized in our Client Alert "SEC Proposes Amendments to Rule 35d-1 under the 1940 Act." Various aspects of the Adopted Rules are discussed below. 80-Percent Policy Requirement Broadening the 80-Percent Policy Requirement to Funds with Names Suggesting an Investment Focus The Adopted Rules expand the scope of Rule 35d-1 to require a registered investment company to adopt an 80-Percent Policy if its name includes terms suggesting that it focuses on investments in a particular industry or group of industries, that have, or whose issuers have, particular characteristics,[2] such as “growth” and “value,” as well as thematic terms or terms that suggest one or more ESG related considerations play a role in the investment decision-making process. These terms are in addition to terms covered by the current Rule 35d-1, that is, names suggesting investments in a particular type of investment or investments or particular countries or geographic regions. The Adopted Rules also maintain current Rule 35d-1’s prohibitions on names suggesting: A guarantee or approval by the U.S. government, including any name that uses the words “guaranteed” or “insured” or similar terms in conjunction with the words “United States” or “U.S. government,” and That the registered investment company’s distributions are exempt from federal income tax or from both federal and state income tax unless the registered investment company invests at least 80 percent of its assets in investments, the income of which is exempt from federal or state taxation, or at least 80 percent of the income its distributes is exempt from federal or state taxation. The Adopting Release notes that the terms “growth” or “value,” or terms indicating that the fund’s investment decisions incorporate one or more Environmental, Social or Governance (“ESG”) factors are examples of the expansion of the scope of Rule 35d-1, and there may be other situations where Rule 35d-1 would also apply. For example, the Adopting Release states that is it expected that Rule 35d-1 would apply to any terms that reference a thematic investment focus.  While in the past, certain funds have stated that Rule 35d-1 does not apply to them because a term in the name suggests an investment strategy rather than a type of investment, the Adopting Release notes that Rule 35d-1, as amended, applies to those funds whether or not such terms connote an investment strategy and not a specific type of investment. If a fund’s name includes multiple terms that would suggest an investment focus, the 80-Percent Policy must address each term, but the Adopting Release notes that a fund may take a reasonable approach to specify how it would incorporate each such element. As an example, the Adopting Release notes that the “XYZ Technology and Growth Fund” could have an investment policy that each investment that is intended to comply with the 80-Percent basket must be in both the technology sector and meet the fund’s growth criteria, or it could have an investment policy that at least 80 percent of its assets be invested in a mix of securities that are either technology investments, growth investments or technology and growth investments. The Adopting Release also provides a fund with flexibility to describe in its prospectus how it defines the terms used in the name and the criteria that the adviser uses to determine if an investment meets the criteria to be included in the 80-percent basket.  With respect to determining if a security is in a specific industry, the Adopting Release notes that there must be “a meaningful nexus between the given investment and the focus suggested by the name.” An example provided in the Adopting Release is that a fund could define a security to be issued by a company in a particular industry if such company derives more than 50 percent of its revenue or income from, or owns significant assets in, the industry. The Adopting Release does note that there could be times when a smaller percentage could be sufficient, such as, for example, if the company is an acknowledged leader in the industry. Conversely, the Adopting Release notes that using text analytics to assign issuers to an industry based on the frequency of certain terms in their disclosure documents would not be a reasonable method to use on its own.[3] The Adopting Release also notes that there are certain fund names that remain outside Rule 35d-1 and thus, their funds will not be required to adopt an 80-Percent Policy. In particular, names that reference a portfolio’s characteristics as a whole, rather than the specific characteristics of investments - such as “balanced”, “real return”, managed risk, or a name indicating that a fund seeks to achieve a certain portfolio duration (e.g., “intermediate term”) - remain outside the scope of Rule 35d-1. In addition, names that reference investment techniques, such as “long/short”, or “hedged,” or  names that reference asset allocation determinations that evolve over time, such as target date funds or sector rotation funds, remain outside the scope of Rule 35d-1. Additionally, fund names that include “global” and “international,” without more, remain outside of Rule 35d-1 and thus, will not require an 80-Percenrt Policy. With respect to fund of funds or acquiring funds, the Adopting Release notes that it would be reasonable for the fund to include the entire value of its investment in an appropriate acquired fund when calculating compliance with the 80-Percent Policy without looking through to the acquired fund’s underlying holdings, provided that the acquired fund has an 80-Percent Policy that covers the names used by the acquiring fund.[4] Departures from the 80% Investment Requirement As is currently the case, for purposes of Rule 35d-1, whether or not an investment fits within the 80-percent basket is determined at the time the investment is made (“time-of-investment test”). Subsequent changes in the market value of the investment or other changes in the issuer or the characteristics of the investment or the fund (such as changes in assets under management) do not cause a position to fall outside of the 80-percent basket. Moreover, if the portfolio would not satisfy its 80-Percent Policy if measured on any particular day, then under normal market circumstances, the fund would need to limit its future investments to positions that comply with the 80-Percent Policy. However, in a change from current practice, a fund subject to the 80-Percent Policy will have to, at least quarterly, review the fund’s portfolio investments to determine whether they continue to be consistent with the fund’s 80-Percent Policy as measured on that date. If it is identified that a fund is no longer in compliance with its 80-Percent Policy, either during the quarterly review or outside of that quarterly review, the fund will be required to take appropriate action to  bring the fund back into compliance “as soon as reasonably practicable” but no longer than 90 consecutive days (the time being measured from when the fund identifies a departure from complying with its 80-Percent Policy). This may require the fund to dispose of securities that no longer fit into its 80-percent basket. The Adopting Release notes that a fund could apply for exemptive relief if it believes it is appropriate and consistent with the protection of investors for the fund to depart from its 80-Percent Policy for a limited amount of additional time past the 90 days. In “other than normal” circumstances, a fund will be allowed to intentionally deviate from its 80-Percent Policy.  In the Adopting Release, the following are noted as events that could fall outside of normal circumstances[5]: Temporary departures as a result of market fluctuations, index rebalancing, cash flows/inflows or temporary defensive positions (for up to 90 consecutive days). Repositioning or liquidation of assets in connection with a reorganization (there is no specific time limit for this type of departure). During a fund launch (fund must be in compliance within 180 consecutive days). When a notice of a change in a fund’s policy in certain circumstances has been provided to fund shareholders (fund must be brought into compliance at the end of the notice period). The Adopting Release notes that whether or not an event is outside of normal circumstances is based on the specific facts and circumstances and therefore a fund has flexibility to determine what would be considered outside of normal circumstances.  Considerations Regarding Derivatives in Assessing Compliance with Amended Rule 35d-1 Amended Rule 35d-1 generally requires that a fund, when calculating its assets for purposes of determining compliance with the 80-Percent Policy, use notional amounts to value derivatives, with certain adjustments. However, a fund must exclude from the calculation certain derivatives that hedge the currency risk associated with a fund’s foreign investments. A fund must exclude currency derivatives if they are: (1) entered into and maintained by the fund for hedging purposes; and (2) the notional amounts of the derivatives do not exceed the value of the hedged investment (or the par value thereof, in the case of fixed income investments) by more than 10%.  Additionally, in calculating notional amounts, a fund will have to convert interest rate derivatives to their 10-year bond equivalents and to delta adjust the notional amount of options contracts. Further, a fund is permitted to exclude any closed-out derivatives positions, whether or not from the same counterparty, when calculating assets for purposes of determining compliance with an 80-Percent Policy, if those positions result in no credit or market exposure to the fund.[6] A fund will be permitted (but is not required), in determining compliance with its 80-Percent Policy, to deduct cash and cash equivalents and U.S. Treasury securities with remaining maturities of one year or less from assets (i.e., the denominator in the 80% calculation), up to the notional amounts of the fund’s derivatives investments.  Additionally, the amendments allow a fund to include in its 80-percent basket derivatives that provide investment exposure to one or more of the market risk factors associated with the investments suggested by the fund’s name, in addition to derivatives that provide investment exposure to the investments suggested by the fund’s name. The Adopting Release notes however, that including derivatives in the 80% bucket which create exposures inconsistent with a fund’s name could be considered materially deceptive and misleading. For example, including a derivative in the 80-percent basket that eliminates the primary risk factor associated with a fund name would be inappropriate.[7] Unlisted Closed-End Funds and BDCs With respect to unlisted closed-end funds and BDCs, the amendments to the Names Rule prohibit a fund with an 80-Percent Policy from changing that policy unless there is approval of the majority of the outstanding voting securities of the fund. However, there is an exception from this requirement for a shareholder vote if: the fund conducts a tender or repurchase offer in advance of the change, the fund provides at least 60 days’ prior notice of any change in the 80-Percent Policy in advance of that offer, that offer is not oversubscribed, and the fund purchases shares at their net asset value.  The Adopting Release notes that the SEC believes this is appropriate because of the inability for shareholders to be able to quickly redeem out of these investments if they do not want to remain invested in a fund that has changed its investment policy.  Effect of Compliance with an 80-Percent Policy – the 20% Bucket The amendments to the Names Rule include a new provision codifying that a fund’s name could be materially deceptive or misleading under section 35(d) even if the fund has adopted and complies with an 80-Percent Policy. In the Adopting Release, the SEC notes that depending on how a fund invests the other 20% of its assets, the fund name could be misleading; for example, if the fund invests in a way such that the source of a substantial portion of the fund’s risk or return is different from what an investor would reasonably expect based on the fund’s name.  As another example, the Adopting Release notes that terms used in fund names that reference well-known organizations, affinity groups, or that reference a specific population of investors may not require an 80-Percent Policy, but such funds will continue to be subject to section 35(d)’s prohibition on materially misleading or deceptive names. Therefore, there should be sufficient disclosure explaining the connection such organization, affinity group or population of investors has to the fund. Prospectus Disclosure Defining Terms Used in Fund Name The Adopting Release also includes amendments to fund registration forms that require each fund that must have an 80-Percent Policy to include disclosure that defines the terms used in its name, including the specific criteria the fund uses to select the investments that the term describes, if any. For this purpose, “term” would mean any word or phrase in a fund’s name, other than any trade name of the fund or adviser, related to the fund’s investment focus or strategies. While funds will have flexibility to use reasonable definitions of the terms in their names, the Adopting Release notes that such definitions cannot be inconsistent with their plain English meaning or established industry use.  For open-end funds that file on Form N-1A, these definitions should be summarized in the summary prospectus and more fully disclosed in the statutory prospectus.  Modernizing the Names Rule’s Notice Requirement The notice requirements under the Names Rule generally remain consistent with the current requirements, with a few modifications. The notice must continue to be provided separately from any other documents. If the notice is delivered in paper form, it may be provided in the same envelope as other written documents. The notice must have the following, or similar clear and understandable statement, in bold-face type: “Important Notice Regarding Changes in Investment Policy [and Name].  If the notice is delivered in paper form, this statement must be on both the notice itself and the envelope in which the notice is delivered.  If the notice is provided electronically, the statement must be in the subject line of the email communication that contains the notice. The notice must describe, as applicable, the fund’s 80-Percent Policy, the nature of the change to the 80-Percent Policy, the fund’s old and new names and the effective date of any investment policy and/or name changes. Funds may not simply post the notice of the changes to their websites without also delivering the notices to shareholders. Form N-PORT Amendments The Adopting Release includes amendments to Form N-PORT that require registered management investment companies and exchange-traded funds organized as unit investment trusts, other than money market funds and small business investment companies (collectively, “N-PORT funds’) to report additional information regarding such fund’s compliance with its 80-Percent Policy. N-PORT funds that have an 80-Percent Policy must report on Form N-PORT, with respect to each portfolio investment, whether or not that investment was part of the 80-percent basket, and must report the definitions of the terms used in the fund’s name, including the specific criteria the fund uses to select the investments the term describes, if any. N-PORT funds must also report the value of the fund’s 80-percent basket, as a percentage of the value of the fund’s assets.  Recordkeeping Requirements Funds that are required to comply with Rule 35d-1 have to maintain certain records documenting their compliance with the rule. Funds will also need to maintain certain records documenting any times that the fund was determined to not be in compliance with its 80-Percent Policy. Transition Period The compliance date for the amendments is 24 months following the effective date[8] for larger entities[9] and 30 months following the effective date for smaller entities[10]. A Note on ESG Integration Funds The Adopting Release notes that, at this time, the SEC is not taking action on the names of funds using ESG integration strategies, which had been part of the proposed rules. The Adopting Release stated that names of funds using ESG integration strategies will be addressed when it comes out with its final rules on ESG disclosures by investment companies and investment advisers. Rule 35d-1, as amended, nevertheless, applies to funds whose names include terms indicating that the funds’ investment decisions include one or more ESG factors. For more information This Client Alert has been prepared by John Hunt, Domenick Pugliese and Rachael Schwartz, each of whom is a Partner in the Investment Management Group of the international law firm of Sullivan & Worcester LLP.  Mr. Hunt is also the co-head of Sullivan’s Private Fund Formation Practice. For more information, Mr. Hunt may be reached in our Boston office by calling +1 (617) 338-2961 or our London office by calling +44 (0)20 7448 1000, or by email atjhunt@sullivanlaw.com; Mr. Pugliese may be reached in our New York office by calling +1 (212) 660-3073 or by email at dpugliese@sullivanlaw.com; Ms. Schwartz may be reached in our New York office by calling +1 (212) 660-3069 or by email atrschwartz@sullivanlaw.com. [1] Release No. IC-3500; Investment Company Names (September 20, 2023) at https://www.sec.gov/files/rules/final/2023/33-11238.pdf (“Adopting Release”). [2] The Adopting Release notes that the SEC staff expects that registrants will understand “particular characteristics” to mean any feature, quality or attribute. [3] The Adopting Release notes that in circumstances where a fund seeks to invest in issuers that are expected to generate significant future revenues from certain businesses, but do not currently generate more than 50 percent of their revenue from these business, funds should consider adding terms such as “emergent” or “future” to their names. [4] The Adopting Release notes that the acquiring fund cannot ignore situations where it knows the acquired fund is not in compliance with its own 80-Percent Policy. [5] In these other than normal circumstances, the clock starts at the time the fund initially departs from the 80-Percent Policy. [6] The Adopting Release notes that in permitting a fund to offset derivative transactions with different counterparties, this treatment differs from that of the derivatives rule, Rule 18f-4, but notes that this different treatment is appropriate given the different concerns addressed by the Names Rule. [7] The Adopting Release provides an example of the ‘XYZ Corporate Bond Fund” that purchases credit default swaps and other derivatives to eliminate credit risk and notes that it would be misleading to include these derivatives in the 80% bucket. [8] The effective date is 60 days after publication in the Federal Register, which has not yet occurred. [9] Larger entities are funds, together with other funds in the same group of related investment companies, that have net assets of $1 billion or more as of the end of the most recent fiscal year. [10] Smaller entities are funds, together with other funds in the same group of related investment companies, that have net assets of less than $1 billion as of the end of the most recent fiscal year.

On October 7, 2020, the Securities and Exchange Commission (“SEC”) adopted a new rule, Rule 12d1-4, designed to provide a consistent and comprehensive framework governing a registered fund’s ability to invest in another registered fund (a “fund of funds” arrangement). Rule 12d1-4 (the “Rule”) under the Investment Company Act of 1940, as amended (the “1940 Act”),[1] will replace the current cornucopia of statutory exemptions, 1940 Act rules, exemptive orders and informal SEC guidance in the form of no-action letters that presently govern many fund of funds arrangements. In adopting the Rule, the SEC noted that the current fund of funds regulatory framework was both unnecessarily complex and provided an unlevel playing field as it sometimes resulted in differing requirements and conditions among funds depending on which type of registered fund was acting as either acquiring or acquired fund and which regulatory regime was being relied upon. The fund of funds rule was initially proposed in late 2018 and generated significant comment and some concern among commentators. The final Rule addressed many of these concerns and therefore differs in certain key respects from the earlier 2018 proposal.  For example, the proposed rule contained a requirement limiting the ability of an acquiring fund from redeeming its shares of an acquired fund and required acquiring fund boards of directors to make certain findings. These requirements were eliminated in the final Rule. The effective date for the Rule is 60 days after publication in the Federal Register, as discussed further below. Overview Fund of funds arrangements are generally limited by the “anti-pyramiding” provisions in Section 12(d)(1) of the 1940 Act. Most significant is Section 12(d)(1)(A), which prohibits 1940 Act registered funds from (a) acquiring more than 3% of another investment company’s outstanding voting securities (the “3% Limit”), (b) investing more than 5% of its assets in a single registered investment company (the “5% Limit”), or (c) investing more than 10% of its assets in registered investment companies (the “10% Limit”).[2] Funds of funds often are able to make investments in excess of these limitations due to several statutory exemptions and SEC rules, such as Section 12(d)(1)(G) of the 1940 Act which permits open-end funds and unit investment trusts (“UITs”) to acquire unlimited shares of other open-end funds or UITs in the same group of investment companies.[3] Funds of funds also may operate pursuant to exemptive orders issued by the SEC which typically include requirements that the board of directors of an acquiring fund must make certain findings in connection with fund of funds arrangements, including that the advisory fees paid by the acquiring funds are based on services provided that are in addition to, rather than duplicative of, services provided under the advisory contract(s) of any acquired fund. Rule 12d1-4 will apply the same uniform standards to all registered investment companies, including open-end funds, exchange traded funds (“ETFs”), UITs and closed end funds (each a “Fund”).  Each Fund may act as an acquiring or an acquired fund. The Rule does not apply to unregistered funds such as private equity funds or foreign funds acting as acquiring funds. The Rule will generally permit a Fund to invest in another Fund in excess of the 12(d)(1) limits subject to certain conditions, as discussed below. Rule 12d1-4 As noted, the Rule now treats all registered funds in a uniform manner. Therefore, it allows open-end funds, UITs and ETFs to now invest in unlisted closed-end funds and unlisted business development companies (“BDCs”). It also expands the ability of closed-end funds to invest in funds other than ETFs, allowing them to invest in open-end funds, UITs, other closed-end funds and in BDCs. BDCs will also benefit in that the Rule will permit them to invest beyond ETFs, allowing investments in open-end funds, UITs, closed-end funds or other BDCs. The Rule also provides certain exemptions from Section 17(a) of the 1940 Act, which would otherwise restrict fund of funds arrangements in the scenario where funds were deemed to be affiliated with one another due to owning greater than 5% of that Fund’s shares. This will allow ETFs to engage in in-kind purchase and sale transactions with affiliated persons on the same basis as if the transactions were cash purchases and sales under the Rule.[4] Conditions: To rely on the Rule, a fund of funds arrangement must satisfy the following conditions: 1. Control and Voting An acquiring fund and its “advisory group” [5] may not “control”[6] an acquired fund. Accordingly, in most cases an acquiring fund and its advisory group may purchase up to 25% of an acquired fund’s outstanding shares. However, the 25% cap creates merely a presumption as to lack of control. In no circumstances may an acquiring fund and its advisory group exercise a controlling influence on the acquired fund’s management or policies, regardless of its level of share ownership. In addition, an acquiring fund and its advisory group must use “mirror voting”[7] if they, in the aggregate, own more than (a) 25% of the outstanding voting securities of an acquired open-end fund or UIT due to a decrease in the outstanding securities of the acquired fund or (b) 10% of the outstanding voting securities of an acquired closed-end fund or BDC.[8] These restrictions on control and voting would not apply if the acquiring fund is in the same group of investment companies[9] as the acquired fund or if the sub-adviser of the acquiring fund, or any person controlling, controlled by, or under common control with the sub-adviser is the acquired fund’s investment adviser or depositor. 2. Fund Findings In order to address concerns that an acquiring fund could exert undue influence over an acquired fund or that an acquiring fund may be charged duplicative fees and expenses, the Rule requires an investment adviser to an open-end fund, ETF or closed-end fund (including a BDC) that relies on the Rule to evaluate and make certain findings regarding the arrangement before the acquiring fund makes an acquisition in excess of the 3% Limit. These requirements replace the redemption limits and proposed prospectus disclosure requirements that were contained in the proposed rule. Unlike the voting requirements discussed above, these requirements apply to all Funds relying on the Rule, even Funds that are part of the same group of investment companies. An acquiring fund’s investment adviser must evaluate the complexity of the fund of funds structure, as well as the relevant fees and expenses and find that the acquiring fund’s fees and expenses do not duplicate the fees and expenses of the acquired fund.[10] An acquired fund’s investment adviser must find that any undue influence concerns associated with the acquiring fund’s investment in the acquired fund are reasonably addressed, after considering certain specific factors. These factors include:the scale of contemplated investments by the acquiring fund and any maximum investment limits; the anticipated timing of redemption requests by the acquiring fund; whether, and under what circumstances, the acquiring fund will provide advance notification of investments and redemptions; and the circumstances under which the acquired fund may elect to satisfy redemption requests in-kind rather than in cash and the terms of any redemptions in-kind. The investment adviser to each of the acquiring and acquired fund must report its evaluations and findings, including the bases for its evaluations and findings, to the applicable fund’s board of directors no later than at the next regularly scheduled board meeting. After the initial report, the Adopting Release indicates that these findings should be reported to the Board annual under the Fund’s compliance program. The underwriter or depositor of a UIT that is an acquiring fund must make similar findings as the investment adviser to an open-end fund. In addition, before a separate account funding variable insurance contracts invests in an acquiring fund, the acquiring fund must obtain a certification from the insurance company issuing the separate account that it has determined that the fees and expenses borne by the separate account, acquiring fund, and acquired fund, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by the insurance company. 3. Fund of Funds Investment Agreement An acquiring fund and acquired fund that do not share an investment adviser must enter into a fund of funds investment agreement prior to the acquiring fund acquiring securities of the acquired fund in excess of the Section 12(d)(1) limits in reliance on the Rule. Such an agreement must include the following: any material terms necessary for the adviser, underwriter, or depositor to have made the findings regarding the acquiring fund’s investment in the acquired fund; a termination provision whereby either party can terminate the agreement with advance written notice within a period of no longer than 60 days; and a provision whereby the acquired fund must provide the acquiring fund with fee and expense information to the extent reasonably requested. Complex Structures The Rule generally limits fund of fund arrangements with more than two tiers. However, the Rule does create a 10% bucket whereby an acquired fund may invest up to 10% of its assets in the securities of another investment company or private fund (the “10% bucket”). The 10% bucket is separate and apart for other investments that may otherwise be permitted by law, such as (a) investments acquired pursuant to Section 12(d)(1)(E) of the 1940 Act, which permits master-feeder arrangements, (b) investments acquired pursuant to Rule 12d1-1 under the 1940 Act, which permits invests in money market funds, (c) a subsidiary wholly-owned and controlled by the acquired fund, (d) investments acquired as a result of a dividend received or as a result of a plan of reorganization of a company, or (e) investments acquired pursuant to exemptive relief from the SEC to engage in interfund borrowing and lending transactions. Rescission of Exemptive Orders and Withdrawal of No-Action Letter In connection with the adoption of the Rule, the SEC is rescinding the exemptive relief previously granted to permit fund of funds arrangements that “fall within the scope of [the Rule].” This encompasses all orders granting relief from Sections 12(d)(1)(A), (B), (C), and (G) of the 1940 Act, except for orders permitting certain interfund lending arrangements. This includes relief provided in ETFs’ exemptive orders that permit acquiring funds to invest in ETFs in excess of the Section 12(d)(1) limits. Going forward, funds will have to invest in ETF shares in reliance on a statutory exemption or the Rule. In addition, the SEC is withdrawing its no-action letters related to Section 12(d)(1) that fall within the scope of the Rule.[11] Rescission of Rule 12d1-2 and Amended Rule 12d1-1 The SEC is also rescinding Rule 12d1-2, which permits an acquiring fund relying on Section 12(d)(1)(G) of the 1940 Act to invest in shares of unaffiliated funds and other securities. As a result, going forward, these types of arrangements must be done in accordance with the requirements of the Rule. Similarly, with the rescission of Rule 12d1-2, acquiring funds that rely on Section 12(d)(1)(G) will lose the ability to invest in unaffiliated money market funds without limit. Accordingly, Rule 12d1-1 is being amended to permit acquiring funds relying on Section 12(d)(1)(G) to invest in unaffiliated money market funds without limit. Amended Form N-CEN The SEC is amending Form N-CEN to require funds to report whether they relied on the Rule or the statutory exemption in Section 12(d)(1)(G) of the 1940 Act during the applicable reporting period. Compliance Dates The Rule and the accompanying SEC rule and form amendments will take effect 60 days after publication in the Federal Register.[12] In order to provide a transition period, the rescission of Rule 12d1-2 and the SEC’s existing exemptive orders will be effective one year after the Rule’s effective date, and the compliance date for the amendments to Form N-CEN will be 425 days after publication in the Federal Register. Observations The Rule provides a comprehensive regime that would impose a substantially uniform set of requirements on all fund of funds arrangements. This will have a particular effect on affiliated fund of funds arrangements, which currently can often rely on the statutory exemption provided by Section 12(d)(1)(G) and Rule 12d1-2 to invest in non-affiliated funds, as well as in stocks, bonds and other securities. Because of the rescission of Rule 12d1-2, acquiring funds that rely on Section 12(d)(1)(G) and Rule 12d1-2 for these purposes will have to modify their operations to rely on the Rule. Many fund complexes also rely on a combination of Section 12(d)(1)(G) and an exemptive order to create three-tier fund of funds arrangements. The rescission of the exemptive orders may cause these arrangements to be restructured because of the limits on the portion of an acquired fund’s assets that can be invested in other registered funds. It remains to be seen whether the SEC would consider new exemptive orders that would permit three-tier fund of funds arrangements. ETFs may also be particularly impacted by certain of the requirements of the Rule. Many acquired funds in affiliated fund of funds arrangements invest in ETFs without limit pursuant to the ETFs’ own exemptive orders. When these exemptive orders are rescinded, the Rule will limit acquired funds’ investments in other funds, including in ETFs, to the 10% bucket. If you have any questions or would like to discuss the new Rule, please feel free to contact any Sullivan lawyer with whom you regularly work or either of the lawyers listed below: Domenick Pugliese 212 660 3073 dpugliese@sullivanlaw.com [1] See Final Rule: Fund of Funds arrangements, SEC Rel. No. IC-34045 (October 7, 2020), available at https://www.sec.gov/rules/final/2020/33-10871.pdf (the “Adopting Release”). [2] Section 12(d)(1)(B) of the 1940 Act prohibits a registered open-end fund, any principal underwriter therefor, or any broker or dealer from selling or otherwise disposing of any security issued by the acquired company to any other investment company or any company or companies controlled by the acquiring company in excess of the 3% Limit or 10% Limit. Section 12(d)(1)(C) of the 1940 Act prohibits an investment company from acquiring any security issued by a registered closed-end fund, if immediately after such purchase or acquisition the acquiring company, other investment companies having the same investment adviser, and companies controlled by such investment companies, own more than 10 per centum of the total outstanding voting stock of such closed-end fund. [3] The term ‘‘group of investment companies’’ means any two or more registered investment companies that hold themselves out to investors as related companies for purposes of investment and investor services. See Section 12(d)(1)(G)(ii) of the 1940 Act. Under Section 12(d)(1)(G), funds may invest in only government securities and short-term paper, in addition to shares of other affiliated open-end funds and UITs. [4] With respect to BDCs, the rule provides exemptions from Sections 57(a)(1)-(2) and 57(d)(1)-(2) of the 1940 Act for arrangements that comply with the Rule. These Sections are the analogous provisions to Section 17(a) that regulate affiliated transactions by BDCs. [5] The Rule defines “advisory group” to mean “either: (a) an acquiring fund’s investment adviser or depositor, and any person controlling, controlled by, or under common control with such investment adviser or depositor; or (b) an acquiring fund’s investment sub-adviser and any person controlling, controlled by, or under common control with such investment sub-adviser.” An acquiring fund would not combine the entities listed in clause (a) with those in clause (b). [6]  Section 2(a)(9) of the 1940 Act defines “control” to mean the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with such company. The 1940 Act creates a rebuttable presumption that any person who, directly or indirectly, beneficially owns more than 25% of the voting securities of a company controls the company and that any person who does not own that amount does not control it. [7] A “mirror" vote” is a vote by an acquiring fund of its shares in an acquired fund in in the same proportion as the vote of all other holders of the acquired fund’s shares. [8] Pass-through voting is to be used when mirror voting is not possible, such as when all shares of an acquired fund are held by acquiring funds that are required to mirror vote. In such cases, the shareholders of the acquiring fund would vote the shares held by the acquiring fund. [9] The Rule defines “group of investment companies” the same way as the term is defined in Section 12(d)(1)(G) of the 1940 Act. [10] In a change from current practice, the Fund’s board is not required to make any findings in order to rely on the Rule. [11] The list of no-action letters to be withdrawn will be available on the SEC’s website. [12] As of the date of this memorandum, the Rule has not been published in the Federal Register.