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SEC Adopts Securities Offering Reform for Closed-End Investment Companies

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The SEC issued in the second quarter of 2020 amended rules and forms intended to streamline the registration, communications and offering practices for business development companies (BDCs) and registered closed-end investment companies, including interval funds and tender offer funds (collectively, “Affected Funds”). The rule and form amendments will permit Affected Funds to use the securities offering rules that are already available to operating companies.

Highlights of the new rules include:

                 Immediate or Automatic Effectiveness of Certain Filings

The amendments expand the scope of rule 486 of the Securities Act of 1933 to unlisted affected funds that conduct continuous offerings of securities, as defined under SEC rules. The amendments permit these funds to make certain changes to their registration statements on an immediately effective basis or on an automatically effective basis a set period of time after filing. Rule 486 currently applies only to closed-end funds (CEFs) that operate as “interval funds,” and these amendments will provide parity for other non-listed closed-end funds.

                Communication and Prospectus Delivery Reforms

Under the new rules, Affected Funds can satisfy their final prospectus delivery obligations by filing their final prospectuses with the Commission. Affected Funds can also use many of the offering communication rules currently available to operating companies thereby enabling such funds to use a free writing prospectus, certain factual business information, forward looking statements, and certain broker-dealer research reports.

                New Method for Interval Funds to Pay Registration Fees

Rather than registering a specific number of shares and paying registration fees at the time of filing, under the amendments, CEFs that operate as interval funds will register an indefinite number of shares and pay registration fees based on net issuance of shares. This approach is similar to that permitted for mutual funds and exchange-traded funds. Additionally, the amendments will allow certain continuously offered ETPs that are not registered under the Investment Company Act to use a similar approach.

Highlights of the new disclosure requirements include:

·     Structured Data Requirements for All Affected Funds

Affected funds will be required to tag certain registration statement information, similar to current tagging requirements for mutual funds and exchange-traded funds. BDCs also will be required to submit financial statement information, as operating companies currently do. Funds that file Form 24F-2 in connection with paying their registration fees, including mutual funds and exchange-traded funds (as well as interval funds under these amendments), will be required to submit the form in XML format..

Short Form Registration

To streamline registration, certain BDCs and closed-end funds may use a short-form registration statement if they meet certain reporting history requirements and a public float of $75 million or more. The release defines public float as the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant. BDCs and closed-end funds that take advantage of this option must disclose material unresolved SEC staff comments and closed-end funds must provide management’s discussion of fund performance in their annual reports.

                 Financial Highlights

BDCs will be required to include financial highlights disclosure summarizing their financial statements in both their registration statements and annual reports. Presently, BDC prospectuses include full financial statements, but are not required to present such a summary. However, as a matter of industry practice, many BDCs currently presently include such summaries. The amendments make this mandatory.

                Incorporation by Reference Changes for All Affected Funds

Affected Funds are currently required to provide new purchasers with a copy of all previously filed materials that are incorporated by reference into the registration statement. The amendments will eliminate this requirement and instead require affected funds to make incorporated materials readily available on a website.

                Annual Report Disclosure Requirements for Registered CEFs

Registered CEFs, as currently permitted by Rule 8b-16(b), can forgo an annual update provided that they disclose in their annual reports certain key changes that have occurred during the prior year. The amendments include a new requirement that any changes be described in enough detail to allow investors to understand each change and the way it may affect the fund. Additionally, there is a new requirement that any Affected Fund that relies on Rule 8b-16(b) must describe the fund's current investment objectives, investment policies, and principal risks in its annual report, even if there were no changes in the preceding year.

Because of the size-based nature of some of the rules, there are provisions in the rule and form amendments that generally will not be applicable to smaller entities, e.g., enhanced offering and communication benefits and amendments to the registration process for affected funds that create a short-form registration statement on Form N-2.

          Effective Dates

The rule and form amendments will become effective on August 1, 2020, with the exception of the amendments related to registration fee payments by interval funds and certain ETPs, which will become effective on August 1, 2021.

Compliance dates for certain requirements under the amendments provide a transition period after the effective date of the final rule:

  • The requirement for registered CEFs to provide MDFP in their annual reports to shareholders will have a compliance date of August 1, 2021.
  • Inline XBRL structured data reporting requirements for financial statement, registration statement information, and prospectus information will have a compliance date of August 1, 2022 for affected funds that are eligible to file a short-form registration statement. For all other affected funds subject to these structured data reporting requirements, the compliance date is February 1, 2023.
  • The requirement that Form 24F-2 filers (including existing filers) file reports on Form 24F-2 in an XML structured data format will have a compliance date of February 1, 2022.

 

Further details of the amended rules and forms can be found at www.sec.gov/rules/final/2020/33-10771.pdf.

 

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