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Broker-Dealers Busted for Tendering More than their Net Long Positions

Two broker-dealers were fined and censured for tendering more than their net long positions in a partial tender offer.  Both of the firms had sold call options, thereby reducing their net long positions, but the firms tendered the full amount of their long positions, thereby receiving more than their fair shares of the partial tender.  The broker-dealers violated Rule 14e-4 (aka the short tender rule), which prohibits a person from tendering more than its net long position in a partial tender offer.

Closed-end funds with limited liquidity should surveil for these types of trading shenanigans so that brokers don’t game the tender offer system. 

SEC Proposes Overhaul of BDC and Closed-End Fund Rules

The SEC has proposed an overhaul of the registration and offering rules for business development companies and closed-end funds.  The proposal provides for a shelf registration for funds with a public float of at least $75 Million and a more flexible offering and communications scheme for Well-Known Seasoned Issuers with a public float over $700 Million.  The proposal would allow interval funds to pay registration fees based on the issuance of shares rather than paying an estimate at registration.  The proposed new rules would change disclosure rules to follow operating companies, utilizing Form 8-K for significant events and management discussion of fund performance in annual reports.  A 60-day comment period will begin upon publication. 

These changes are long overdue.  The current rules shoehorn BDC and closed-end funds into the mutual fund regulatory regime, resulting in some unintended regulatory consequences.  While we’re sure that industry pros will debate the specifics of the proposal, it’s hard to argue that the SEC shouldn’t revamp the rules. 

General Partner Fined for Violating Tender Offer Rules


The SEC censured and fined the General Partner of a private partnership for failing to file the required notice and response to third party tender offers.  The SEC faults the GP for failing to file a Schedule 14D-9 following the receipt of information of tender offers for more than 5% of the partnership’s interests.  The Schedule 14D-9 is the method by which investors receive information about a tender offer and management’s response.  Because no public market existed for the partnership’s interests, the failure to notify investors could have resulted in fewer investors selling their interests to the third party.

OUR TAKE: Closed-end funds that rely on tender offers for investor liquidity must ensure strict compliance with the arcane and voluminous tender offer rules.  As the market for more esoteric products grows, the SEC will use the tender offer rules to ensure full and fair disclosure.