In March 2019, the SEC, at the direction of Congress, proposed rules (the "Proposed Rules") to modify the registration, communications, and offering processes for business development companies ("BDCs") and registered closed-end funds, including interval funds (together, "Affected Funds"), under the Securities Act of 1933 (the "Securities Act"). Many of these proposals are intended to provide Affected Funds access to certain streamlined offering processes that are currently available only to operating companies. At the same time, the Proposed Rules would also impose on Affected Funds additional reporting obligations under the Securities Exchange Act of 1934. In short, key elements of the proposals are:
- Allow seasoned Affected Funds (i.e., funds that are current and timely in their SEC reporting with at least $75 million in public float) to access a streamlined registration process allowing, among other things, use of a short-form shelf registration statement facilitating the ability to "take down" from the shelf and offer securities more rapidly in response to market conditions;
- Allow Affected Funds to satisfy final prospectus delivery requirements using alternative methods such as simply filing a final prospectus with the SEC (a process currently available only to certain operating companies);
- Allow Affected Funds greater flexibility to make public communications prior to a registration statement's effectiveness without the risk of violating gun-jumping provisions;
- Require all closed-end funds (including interval funds) to be subject to Form 8-K reporting obligations (as BDCs are currently), including adding a requirement (applicable to all closed-end funds and BDCs) to report: (i) any material change in investment objectives or policies; and (ii) any material write-down of a significant investment1;
- Require all closed-end funds (including interval funds) to include a management discussion of fund performance section (MDFP) in its annual report (which currently is only required for open-end funds and BDCs); and
- Relax the share registration process for closed-end funds so that it mirrors that of open-end mutual funds (and thus allows closed-end funds to pay for shares eventually sold instead of having to pay for all securities registered regardless if they are sold, which is currently the case).
The Proposed Rules are the result of two pieces of legislation passed by Congress in March and May 2018, respectively: the Small Business Credit Availability Act and the Economic Growth, Regulatory Relief, and Consumer Protection Act. Although the statutes were intended to provide BDCs and closed-end funds greater flexibility in offerings, many of the Proposed Rules, particularly the new 8-K reporting obligations, could increase burdens on closed-end funds' compliance requirements. Comments on the Proposed Rules are requested within 60 days after publication of the release in the Federal Register. For the full SEC release, please visit: https://www.sec.gov/rules/proposed/2019/33-10619.pdf.
Footnote
1 An investment would be deemed to be a significant investment if the registrant's and its subsidiaries' investments in a portfolio holding exceed 10% of the total assets of the registrant and its consolidated subsidiaries.
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