What is Section 12D-1?
Section 12D-1, under the Investment Companies Act 1940, prohibits investment companies from investing in each other. The rule was created to prevent the arrangement of funds from a fund to benefit its investors at the expense of the shareholders of the acquired fund.This exercise of control may come under the threat of exercising the controlling power of the voting shares or massive redemption from the funds earned.
Congress also created an exemption to this rule in the form of an investment limit, which allows fund arrangements as long as the limit is met. In 2018, Congress updated the rules with new conditions under Section 12D-1, allowing for greater flexibility in investing. Congress also proposed enacting new rules that would repeal Section 12D-1-2 and introduce a new standard set of rules.I
- Section 12D-1 of the SEC Investment Companies Act was created to prohibit investment funds from investing in one another.
- Sections 12D-1A and B lay down rules that allow investments subject to certain limits.
- In 2018, Congress refined the rules under 12D-1 to allow for more flexibility in the fund-of-funds arrangement.
- Congress has proposed to replace Section 12D-1-4 completely and repeal 12D-1-2.
Understanding Section 12D-1
Section 12D-1 was created with by-laws that allow specific exemptions to the restriction of investment funds investing in each other. Section 12D-1A sets the exemption limit in which a registered fund can invest in another fund.Section 12D-1B sets the exemption limit in which an open-ended fund can sell its securities to another fund.
In 2018, Congress decided to change the way in which funds can invest in each other. He created Section 12D-1E-G, allowing various fund-of-fund arrangements under specific circumstances, which effectively repealed Section 12D-1A-B. In doing so, Congress felt that it had created a framework that was inconsistent and inefficient. Congress has proposed eliminating 12D-1-2 and exemption orders and replacing them with a new section 12D-1-4 to streamline the rules.
How does the Section 12D-1 limit apply?
The limitations of section 12D-1A state that a fund cannot:
- Hold no more than 3% voting shares of a registered investment company.
- Invest more than 5% of your assets in a registered company.
- Invest more than 10% of your assets in registered investment companies
Section 12D-1B applies to the sale of securities by a fund and prohibits the sale if the resulting receiving company owns more than 3% of the acquired fund’s voting securities.
Updating Section 12D-1
In 2018, Congress revisited its approach to the Fund of Funds arrangement. In the 1960s, when initial limits were established under the Investment Companies Act, Congress believed that the Fund of Funds arrangement served no real financial purpose.Since that time, he believes that fund of fund structures have incorporated mobility to protect investors as well as provide a financial objective. As such, Congress drafted new rules to allow certain structures that met certain conditions.
Section 12D-1E allows an investment fund to invest all of its assets in one fund. This will make the fund a vessel by which investors can access the acquired funds. Section 12D-1F allows a registered fund to hold a position in any fund up to 3% of the assets of any other fund, without limitation.Section 12D-1G allows a registered open-ended fund to invest in other open-ended funds that are in a “group of investment companies”. In addition, Congress enacted Section 12D-1J, which allows the Securities and Exchange Commission (SEC) to exempt any person, transaction, or asset from Section 12D-1-AB.I
12D-1-2 . to cancel
In conjunction with its updates to Section 12D-1, Congress realized that many of the rules and exemptions exist as a patchwork that is inefficient and covers only specific funds, while not covering others with similar characteristics. . To remedy the situation, Congress has proposed repealing 12D-1-2 and replacing it with 12D-1-4, which would provide a coherent framework, reduce operating costs and open up new investment opportunities.
12D-1-4 . allowed to invest under
Under the proposed new standards, the rules would allow:
- A registered investment fund to receive securities of another registered investment fund above the limits specified in 12D-1
- An acquired fund to sell its securities to an acquired fund
- An acquired fund to redeem its securities in an acquisition fund
At present, the type of fund arrangement that is allowed depends entirely on the type of fund acquired.The new rule will expand the scope of funds allowed in the Fund of Funds arrangement and hence increase investment opportunities for investors. The new arrangements will be allowed only if certain conditions are met in the areas of voter control, redemption limits, fees and avoidance of complex structures.I