The SEC adopted rule and form amendments to “modify the registration, communications, and offering processes” for business development companies (a type of closed-end investment company that is not registered, “BDCs”) and registered closed-end investment companies. The benefits of these rule changes were available to operating companies and are now being extended to funds, in accordance with a 2018 Congressional mandate expressed in the Small Business Credit Availability Act (the “BDC Act”) and the Economic Growth, Regulatory Relief and Consumer Protection Act (the “EGRRA Act”).
The new rule amendments include:
– expanding the definition of “well-known seasoned issuer” to capture eligible funds (generally, those having a public float of at least $700 million and meeting certain other regulatory conditions) to permit them to quickly sell securities “off the shelf” using short-form registration statements, provided that such funds include certain disclosures in their annual reports;
– making Securities Act Rule 486 (“Effective Date of Post-Effective Amendments and Registration Statements Filed by Certain Closed-End Management Investment Companies”) available to registered closed-end funds and BDCs that are involved in continuous offerings, so that they may immediately make effective changes to a registration statement;
– allowing certain funds to use communications rules designed to reduce regulatory costs and provide information to investors more quickly (e.g., permitting the use of the “free writing prospectus”);
– permitting closed-end funds that function as interval funds to register an indefinite number of shares and pay SEC fees only when the shares are actually sold;
– eliminating the requirement that funds provide new purchasers with copies of all previously filed materials, which may instead be made available on a website; and
– imposing certain tagging requirements concerning registration statement information.
Affected funds will also be required to tag certain data in their registration statement. BDCs will be required to submit financial information of the same type that operating companies submit.
Broker-Dealer Research Reports
The SEC made the Securities Act Rule 138 research safe harbor available for broker-dealers publishing research about certain categories of a seasoned fund’s securities when the fund is distributing certain other securities.
No Form 8-K Requirements
Closed-end funds will not be required to file periodic reports on Form 8-K. The SEC determined that this additional reporting burden, to which operating companies are subject, was not necessary in light of current funds’ practices.
SEC Chair Jay Clayton said that the extension of the disclosure and regulatory framework to BDCs would improve investor protections.
SEC Commissioner Elad Roisman praised the final rule amendments for making the BDC offering rules consistent with those applicable to operating companies.
SEC Commissioner Hester M. Peirce largely supported the relief provided by this rulemaking, but noted that the agency could have “offered additional relief without compromising investor protection.” Specifically, she stated that the SEC “unnecessarily restrict[s]” the amount of funds that will be able to benefit from the final rule amendments.
SEC Commissioner Allison Herren Lee criticized the final rule amendments for (i) “roll[ing] back investor protections”, (ii) failing to include the proposed Form 8-K reporting requirements, and (ii) allowing certain funds to make material changes in their registration statements that would become automatically effective without staff review. In addition, she objected to adopting a rulemaking during the COVID-19 pandemic.
The rule and form amendments will go into effect on August 1, 2020. The amendment regarding registration fee payments by interval funds and certain exchange-traded products will go into effect on August 1, 2021. Certain of the regulatory reporting requirements will not go into effect until 2022 or 2023.
These rules are consistent with recent efforts to support the economy and small businesses. If the regulators are going to provide a means for retail investors to invest in small companies, supporting BDCs and closed-end investment funds seems one of the more promising paths; particularly as Regulation Best Interest and similar state suitability requirements may discourage broker-dealers from recommending individual investors buy securities issued by small issuers.
Notwithstanding Commissioner Lee’s objection that the rule amendments not be adopted during the pandemic seem, these rule amendments are not being rushed to market; they were proposed a year ago. When bad global events happen, the stock markets drop and investors lose money. SEC rule changes such as these would not provide protection against that.