On March 20, 2019, in response to direction from Congress, the Securities and Exchange Commission (SEC) proposed rule amendments that would modify and streamline the securities offering and communication processes for business development companies (BDCs) and other registered closed-end investment companies (CEFs) (collectively, “affected funds”). The proposed rule amendments would extend certain offering reforms that are currently available to operating company issuers to certain affected funds. The proposals would also apply payment methods for securities registration fees similar to those mutual funds use to CEFs that operate as interval funds. The scope of affected funds and the proposed rule amendments are discussed below.
Scope of Affected Funds
The proposed rule amendments would treat certain categories of affected funds differently. For example, some of the rules would apply to only BDCs or only interval funds. Additionally, many of the proposed rules would only affect funds that are current and timely in their reporting and that have at least $75 million in public float (Seasoned Funds). Some of the proposed rules would only apply to well-known seasoned issuers (WKSIs), which are Seasoned Funds that generally have at least $700 million in public float.
Importantly, while not required by the congressional mandate, the scope of the proposed amendments would generally treat unlisted BDCs and unlisted registered CEFs consistently, so that funds such as so-called “tender offer funds” would be allowed to rely on certain of the proposals. A detailed explanation of which rules amendments apply to which category of affected funds can be found in Table 1 of the rule proposal.
||Proposed Reforms for Affected Funds|
|Shelf Offering Process and the New Short-Form Registration Statement||
The proposed rule amendments would permit affected funds that are eligible to file on Form S-3 to file a short-form registration statement on Form N-2 that will function like a Form S-3 registration statement. Additionally, the proposed rule amendments would permit affected funds to do the following:
|Ability to Qualify for WKSI Status||
The following rule amendments are proposed:
|Prospectus Delivery Reforms||
The proposed rule amendments would allow affected funds to satisfy their final prospectus delivery obligations by filing their final prospectuses with the SEC, which would be consistent with the alternative delivery method used by operating companies.
|Offering Communications Reforms||
The proposed rule amendments would permit affected funds to do the following:
Affected funds could take advantage of the additional flexibility of the proposed rule amendments or they could continue to rely on SEC Rule 482 and other rules that are currently applicable to investment company communications.
|Broker-Dealer Research Reports||The proposed rule amendments would amend SEC Rule 138 to include parallel references to a registration statement that could be filed on Form N-2 and to the reports that registered CEFs are required to file, which would allow affected funds to publish or distribute research about the issuers’ fixed income securities if they publish or distribute that research in the regular course of business.
|Rule 418 Supplemental Information||The rule amendments propose to change SEC Rule 418(a)(3) to add parallel references to registrants that are eligible to file short-form registration statements on Form N-2. The proposed rule amendment would exempt affected funds from having to be prepared to furnish supplemental information to the SEC promptly upon request.|
|New Method for Interval Funds to Pay Registration Fees||The rule amendments propose a modernized approach that would amend SEC Rules 23c-3 and 24f-2 to permit interval funds to pay securities registration fees using the same method that mutual funds and ETFs use. Thus, an interval funds could pay registration fees based on its net issuance of shares, no later than 90 days after the fund’s fiscal year end rather than in advance.|
|Structured Data Requirements||
The rule amendments propose the following requirements:
|Periodic Reporting Requirements||
The rule amendments propose to require funds filing a short-form registration statement on Form N-2 to include key information in their annual reports that they currently disclose in their prospectuses:
Additionally, the rule amendments propose the following requirements:
|Current Reporting Requirements||
The proposed rule amendments would require registered CEFs to report information on Form 8-K. The rule amendments would also propose the following amendments to Form 8-K:
|Incorporation by Reference Changes||
The proposed rule amendments would allow affected funds to incorporate by reference the information required under Item 13 of Schedule 14A, including financial statements and other information for proxy statements containing specific proposals.
In addition, the proposed rule amendments would remove the requirement that a fund deliver to new investors information that it has incorporated by reference into the prospectus or SAI, and instead require the fund to make its prospectus, SAI, and incorporated materials readily available and accessible on a website.
Finally, the proposed rule amendments would streamline Form N-2’s current provisions regarding disclosure requirements for incorporation by reference to mirror the disclosure requirements of Form S-3.
Comment Period and Compliance Date
The SEC has requested comments on the proposed rule amendments. The comment period for the proposed rule amendments will end 60 days after publication in the Federal Register. The SEC is also proposing a transition period after the publication of a final rule in the Federal Register regarding the following four proposed new requirements.
Affected funds that would be eligible to file a short-form registration statement would be required to comply with the full scope of Form 8-K as proposed, including the new Form 8-K items for affected funds, by the earlier of two dates:
All other affected funds would be required to comply within 18 months after the date of the publication of a final rule in the Federal Register.
|Management’s Discussion of Fund Performance||Any annual report that a registered CEF files one year or more after the publication of a final rule in the Federal Register would be required to include the proposed management’s discussion of fund performance disclosures.|
|Structured Data Requirements||
Affected funds subject to the financial statement or prospectus structured data reporting requirements that would be eligible to file a short-form registration statement would be required to comply with those provisions no later than 18 months after the date of publication of a final rule in the Federal Register.
All other affected funds subject to those requirements would be required to comply within 24 months after publication of a final rule in the Federal Register.
All filers on Form 24F-2 would be required to comply with the proposed structured data format for this form no later than 18 months after the publication of a final rule in the Federal Register.
|Rules 23c-3 and 24f-2||The proposed amendments to Rules 23c-3 and 24f-2 would become effective one year after the publication of a final rule in the Federal Register.|
Practice Points and Tips
The proposed rule amendments generally represent welcome improvements that would help to streamline and modernize offering and communication processes for affected funds. Advisers to and Boards of the affected funds should consider the impact that the rule amendments, if adopted, would have on the affected funds that they manage and oversee. For more information on the application of these proposed rule amendments or investment company regulatory compliance, please feel free to call or e-mail your contact in the Investment Management Group.