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
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.
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.
The staff of the SEC’s Division of Investment Management has provided no-action relief that allows open-end investment companies to invest in closed-end investment companies that hold themselves out as part of the same investment group. Without the no-action relief, a narrow reading of Section 12(d)(1)(G) and Rule 12d1-2 of the Investment Company Act would only allow open-end funds to invest in related funds only if such funds were open-end. In general, Section 12(d)(1) limits fund-of-funds structures, absent specific conditions, because fund-of-funds have the potential to create complex products with layered fees and conflicts of interest.
OUR TAKE: This no-action relief provides practical flexibility to create fund-of-funds structures within the same group of companies, which should save costs and avoid artificial product engineering.