SEC Adopts New Fund of Funds Rules

On June 20, 2006, the U.S. Securities and Exchange Commission (the “SEC”) promulgated three rules that expand the ability of an investment company to acquire securities issued by other funds.¹   In general, new rules 12d1-1, 12d1-2 and 12d1-3 under the Investment Company Act of 1940 (the “1940 Act”) codify and expand prior SEC orders exempting funds from certain prohibitions under Section 12(d)(1) of the 1940 Act, but the SEC also imposed specific disclosure requirements relating to fund of funds expenses.  The new rules are effective as of July 31, 2006 but compliance with the new disclosure requirements is not required until after January 1, 2007.

Background

Sections 12(d)(1)(A) and (B) of the 1940 Act limit the ability of an investment company to invest in other funds.  Congress adopted these provisions in order to prevent abusive “pyramiding” schemes, common prior to the enactment of the 1940 Act, through which a small number of individuals could exercise control over the