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SEC proposes to streamline fund of funds arrangements rules

The U.S. Securities and Exchange Commission proposed rules and amendments in addition to rescinding certain guidelines in order to streamline fund of funds arrangements.

A fund of funds arrangement is made when a mutual fund or other fund type invests in another fund.

The SEC also proposed to amend a rule which will allow funds that primarily invest in funds of the same fund group to continue investing in unaffiliated money market funds.

The SEC said that funds such as mutual funds and exchange-traded funds can acquire another fund's shares in excess of Investment Company Act limits without having to apply for an exemption, if they boost their investor protection framework.

Requirements to enhance investor protection include prohibiting an acquiring fund from controlling an acquired fund, and requiring an acquiring fund with more than a 3% stake of an acquired fund to vote in a manner that limits influence. Required investor protection enhancements also include prohibiting acquiring funds with more than a 3% stake to redeem more than 3% of an acquired fund's total outstanding shares in any 30-day period. The SEC's proposed rule will aim to prevent excessive fees in fund of funds arrangements and will generally prohibit funds from creating three-tier fund of funds structures except under certain circumstances.

It is also proposing to repeal guidelines which will allow funds that wish to create certain fund of funds arrangements to avail the regulatory relief under consideration.

The SEC is accepting comments on these rules and amendments for 90 days after their publication in the Federal Register.