SEC Staff Issues FAQs Regarding Fund-of-Funds Arrangements

Who may be interested:  Registered Investment Companies; Registered Investment Advisers; Compliance Officers 

Quick Take:  On March 5, 2026, the staff of the SEC’s Division of Investment Management (Staff) issued new FAQs addressing Rule 12d1-4 under the 1940 Act (FoF Rule). The FoF Rule establishes a regulatory framework governing how registered investment companies and business development companies (BDCs) (together, acquiring funds) may invest in other funds. 

1. Funds-of-Funds Investment Agreements

The FAQs confirm that an acquiring fund must enter into a fund-of-funds investment agreement with an acquired fund whenever it relies on Rule 12d1-4 for an exemption from Section 12(d)(1)(A)(i), (ii), or (iii) (the 3%/5%/10% limits on tiered fund ownership). Although no findings are required under Rule 12d1‑4(b)(2)(i) when an acquiring fund does not exceed the 3% limit of Section 12(d)(1)(A)(i), an agreement must still be executed if the acquiring fund wants to rely on the FoF Rule for purposes of avoiding the 5% and 10% limits of Section 12(d)(1)(A)(ii) and (iii). A FoF Rule agreement for such an acquired fund would not need to include “any material terms” tied to findings otherwise required under the Rule. The Staff explains that the agreement requirement is intended to facilitate negotiation and protect fund interests in fund-of-funds arrangements, and that this purpose is served even where no findings are required.

The FAQs also clarify that unit investment trusts relying on Rule 12d1-4 must enter into a fund-of-funds investment agreement, even if they remain below the 3% threshold.

Finally, the Staff confirms that an agreement is required only when an acquiring fund purchases an acquired fund’s securities in reliance on Rule 12d1‑4. Because Section 12(d)(1) is acquisition‑based, no agreement is required for positions held before reliance on Rule 12d1‑4, unless the acquiring fund later makes additional purchases of the acquired fund in reliance on Rule 12d1‑4.

2. Acquired Fund's Investments in Debt Securities Issued by Collateralized Loan Obligations (CLOs)

The FAQs address Rule 12d1‑4(b)(3)(ii), which generally limits an acquired fund’s investments in other investment companies and “private funds”¹ to 10% of total assets, regardless of whether those vehicles issue equity or debt. The Staff notes, however, that the purpose of this limitation is to prevent fee layering, complex multi‑tier fund structures, and investor confusion. In the Staff’s view, debt securities issued by CLOs do not raise three-tier fund structure concerns because they function as financing instruments backed by collateral cash flows, rather than equity-like fund interests. The Staff recognized, “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.” Accordingly, the Staff states that it would not recommend enforcement action if an acquired fund excludes CLO debt securities when calculating its 10% bucket under Rule 12d1‑4(b)(3)(ii).

The Staff’s responses to the FAQs can be found here. Our previous coverage of the adoption of FoF Rule can be found here.

¹ 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.