The Division of Investment Management (“Division”) of the SEC updated its FAQ for fund of fund arrangements on March 5, 2026. This new FAQ addresses the allowable 10 percent bucket of an acquired fund under Rule 12d1-4(b)(3)(ii) of the Investment Company Act of 1940 (the “Rule”). The Rule contains prohibitions on an acquired fund’s investments with certain exceptions.
The Rule exists to prevent duplication of fees and expenses in multi-tiered complex fund structures. Essentially, if a fund has too many layers of underlying investments, the shareholders may get confused and not have a complete understanding of fund holdings (in addition to paying layered fees). The key question in this new FAQ was about how an acquired fund may invest in CLOs and how those CLOs get counted towards the 10 percent bucket.
FAQ: Does an acquired fund have to count debt securities issued by CLOs towards the 10% bucket?
Answer: No. The Staff understands that debt securities issued by CLOs have different structural and operational characteristics that are unlike other private funds or pooled investment vehicles. Debt CLOs are backed by the cash flows of underlying collateral and earn principal and income on that collateral. Since these CLOs do not behave like funds, the Staff believes they do not pose the same risks of a multi-tiered complex fund investment.
In conclusion, an acquired fund does not need to count debt securities issued by CLOs towards the 10 percent bucket under Rule 12d1-4(b)(3)(ii). This is good news for funds investing in debt CLOs.
View FAQ “Acquired Fund’s Investments in Debt Securities Issued by CLOs”
