Among other reforms, the Final Rules will:
- Streamline the Securities Act registration process, prospectus delivery requirements and disclosure and regulatory framework for Affected Funds;
- Allow certain Seasoned Funds to qualify as WKSIs;
- Modify the communications rules to permit additional communications by Seasoned Funds during a registered public offering; and
- Permit certain continuously-offered, unlisted Affected Funds to make certain changes to their registration statements on an immediately effective basis or on an automatically effective basis.
Streamlined Shelf Offering Process
Since 1998, the staff of the SEC’s Division of Investment Management has permitted Affected Funds that are deemed to be “seasoned” to maintain a shelf registration statement on Form N-2 that allows them to engage in securities offerings on a delayed or continuous basis.2 The Final Rules codify this in SEC rules and Form N-2, and make the shelf offering process significantly less administratively burdensome by enabling Affected Funds to rely on the streamlined registered offering process that is available to operating companies. Specifically, the Final Rules include the following reforms:
- Short-form registration statement. Seasoned Funds will be permitted to file on Form N-2 a “short-form” registration statement similar to the Form S-3 registration statement used by operating companies. A short-form Form N-2 registration statement will permit Affected Funds to incorporate by reference information from reports previously filed under the Securities Exchange Act of 1934 (rather than repeat that information in the Form N-2) and automatically incorporate by reference information from future Exchange Act filings (rather than amend the Form N-2 by post-effective amendment or prospectus supplement). In order to be eligible to file a short-form Form N-2 registration statement, a Seasoned Fund must meet both the registration and transaction requirements set forth in Form S-3. For Seasoned Funds that are CEFs, the fund also must have been registered under the 1940 Act for at least 12 calendar months preceding the filing of the registration statement and have been current and timely on its reporting under Section 30 of the 1940 Act during that time. An Affected Fund generally will meet the transaction requirements of Form S-3 for a primary offering if the fund’s public float is $75 million or more. Substantially all existing interval funds and all other unlisted CEFs, along with unlisted BDCs, will not qualify to file short-form registration statements on Form N-2, because their common equity securities are not listed on a national securities exchange and therefore such funds do not have a public float.
- Automatically effective registration statements. In response to industry comments, the Final Rules amend Rule 486 under the Securities Act to permit certain categories of Affected Funds beyond only interval funds to file automatically effective registration statements and amendments thereto, and thereby avoid the delay and uncertainty associated with the SEC staff review process. Specifically, the Final Rules permit non-interval CEFs and BDCs that conduct continuous offerings pursuant to Rule 415(a)(1)(ix) (i.e., a non-traded tender offer fund or non-traded BDC) to rely on Rule 486 in order to file post-effective amendments that either become effective immediately upon filing under Rule 486(b) or automatically effective after 60 days under Rule 486(a). In addition, the Final Rules permit registration statements filed by continuously offered CEFs and BDCs (that are not interval funds) to become immediately effective upon filing, if filed for no other purpose than to comply with Rule 415(a)(5) and Rule 415(a)(6).
- Information omitted from base prospectus. Seasoned Funds will be permitted to rely on Rule 430B under the Securities Act to omit certain information from the base prospectus included in their Form N-2 registration statements at the time of effectiveness. Specifically, Seasoned Funds will be allowed to omit information that is unknown or not reasonably available, as well as the identities of selling shareholders and the amount of securities being registered on their behalf. WKSIs also will be permitted to omit information relating to: (i) the distribution plan for the securities; (ii) a description of the securities registered (other than an identification of the name or class of the securities); and (iii) whether the offering is a primary or secondary offering, or a mix.
- Prospectus supplements. Affected Funds will be required to file prospectus supplements exclusively under Securities Act Rule 424, rather than Rule 497. Rule 424 allows registrants to file a prospectus supplement on a delayed basis, and only requires filing for material changes to the prospectus (rather than any variation from the prospectus, as required by Rule 497).
- Prospectus delivery requirements. Affected Funds will be permitted to rely on the Rules 172 and 173 “access equals delivery” regime to satisfy their obligation to deliver a “final prospectus” to investors prior to or at the time of sale or delivery of securities by simply filing such prospectus with the SEC. This reform should significantly reduce printing, mailing and compliance costs associated with the offering process.
WKSI Eligibility
Securities Act Rule 405 generally defines a “well known seasoned issuer” as a seasoned issuer: (i) with $700 million in public float; or (ii) that both (a) has registered and issued at least $1 billion in aggregate principal amount of nonconvertible debt or preferred stock for cash (not exchange) during the past three years and (b) will offer only non-convertible debt or preferred stock in connection with the registration statement for which the WKSI status determination is being made (unless the issuer is otherwise eligible to register a primary offering of its securities on Form S-3 or Form F-3). The definition explicitly excludes registered investment companies and BDCs, notwithstanding the March 24, 2019 self-implementation provision of the BDC Act. Until May 24, 2020, CEFs are prohibited from qualifying as WKSIs. Similarly, BDCs were prohibited from qualifying as WKSIs prior to the March 24, 2019 self-implementation of the BDC Act.
WKSIs are subject to the least burdensome offering and communication requirements. For example, WKSIs are broadly permitted to file automatically effective shelf registration statements and post-effective amendments; make certain oral and written communications (including through the use of a “free-writing” prospectus) before and after filing a registration statement; and defer payment of registration fees until the time of an actual offering (commonly referred to as “pay-as-you-go”).
The Final Rules revise Rule 405 to eliminate the exclusion of CEFs and BDCs from the definition of WKSI, thereby permitting CEFs and BDCs to enjoy the benefits associated with WKSI status.
Despite a large number of industry comments, the SEC declined to modify or eliminate the $700 million public float requirement for WKSI classification, or to create any alternative metric for non-traded funds (which do not have any public float). As noted in the adopting release, the nature of the WKSI eligibility criteria generally would render it impossible for unlisted Affected Funds to satisfy such criteria. The adopting release states that the SEC considered imposing a less restrictive or alternative capitalization threshold for unlisted Affected Funds. However, the SEC ultimately concluded that any other metric would be inconsistent with the policy underlying the adoption of the original WKSI concept in 2005, which was to provide streamlined offering and communication rules to companies that are widely scrutinized by financial analysts, institutional investors and other market participants.
Communications
The Final Rules include amendments that enable Seasoned Funds to rely on exemptions from Securities Act restrictions on offering-related communications (known as “gun-jumping” provisions) currently utilized by operating companies. The Final Rules give Seasoned Funds greater flexibility to publish forward-looking information and factual business information (including through the use of a “tombstone” ad), and would limit the scope of communications subject to prospectus liability under Section 12 of the Securities Act. The Final Rules also allow Seasoned Funds to rely on Securities Act Rules 164 and 433 to use a free-writing prospectus and all Affected Funds that are reporting companies to rely on Rule 168 to publish or disseminate regularly released factual business information at any time, including around the time of a public offering. Further, the Final Rules allow broker-dealers participating in the distribution of an issuer’s equity-related securities to publish or distribute research about the issuer’s debt‑related securities, and vice versa.
Exemption From Rule 418(a)
BDCs and CEFs are currently subject to Securities Act Rule 418(a)(3), which requires the funds to provide certain supplemental information to the SEC or its staff upon request. Operating companies that are eligible to use Form S-3 are exempt from this requirement. The Final Rules exempt Seasoned Funds from the requirement to “furnish, on request, recent engineering, management, or similar reports or memoranda relating to broad aspects of the business, operations, or products of the registrant.”
Amendments to Schedule 14A and Form N-14 – Incorporation by Reference
The Final Rules include amendments to Schedule 14A under the Exchange Act to permit Seasoned Funds to incorporate certain information in their proxy statements by reference to a previously-filed document. The amendment applies to proxy statements that include specific proposals under Item 13 of Schedule 14A, which governs proxy statements such as those seeking shareholder approval to authorize, issue or exchange securities. The Final Rules extend to Seasoned Funds the eligibility to incorporate by reference that is currently afforded to operating companies meeting the requirements of Form S-3.
Effective August 1, 2020, the Final Rules amend Form N-14 to permit BDCs to incorporate by reference certain information into their Forms to the same extent as CEFs. Affected Funds filing on Form N-14 no longer will be required to file documents that are incorporated by reference into the prospectus or SAI. These amendments to Form N-14 are made pursuant to the Paperwork Reduction Act, and are expected to reduce the length of Form N-14 filings for BDCs and Affected Funds.
Amendments to Regulation FD
Rule 103(a) of Regulation FD generally provides that the eligibility of an operating company’s use of short-form registration statements is not affected by the company’s failure to publicly disclose information required to be disclosed solely by Rule 100 of Regulation FD, which addresses the selective disclosure of material non-public information. The Final Rules extend this provision to Seasoned Funds in order to create further parity between Affected Funds and operating companies.
Registration Fees for Interval Funds
Interval funds and tender offer funds currently are required to pay SEC registration fees at the time of registration – regardless of when or if such securities are ultimately sold. Interval funds are thus at risk of either paying fees on unsold shares or inadvertently selling more shares than the amount registered. Under the Final Rules, interval funds are deemed to have registered an indefinite amount of securities, similar to mutual funds and exchange-traded funds (ETFs), and are subject to the same registration fee requirements as open-end funds. Specifically, interval funds will begin paying registration fees annually based on net shares sold, and will be required to file on Form 24F-2 within 90 days of the fund’s fiscal year-end. The SEC noted in the Final Rules that this method was determined to be more appropriate because interval funds are required to routinely offer to repurchase shares at NAV, similar to mutual funds and other open-end funds. Certain ETPs are afforded similar treatment under the Final Rules, allowing such funds to register an unidentified number of shares and paying registration fees on an annual net sales basis. The changes to how interval funds pay registration fees is not applicable to listed CEFs and BDCs; although listed CEFs and BDCs that are WKSIs have the pay-as-you-go option for the payment of SEC filing fees. This aspect of the Final Rules will become effective August 1, 2021, which is one year after most other aspects of the Final Rules.
The Final Rules also revise the SEC’s EDGAR Filer Manual to require that interval funds submit Form 24F-2 filings in Extensible Markup Language (XML), a structured data format similar to XBRL (as discussed below). The XML data format requirement will become effective February 1, 2022.
Disclosure
Discussed in detail below, the SEC also has adopted modifications to various disclosure requirements in order to further the goal of promoting parity between Affected Funds and operating companies, while maintaining appropriate investor protections.
Structured Data
Operating companies and 1940 Act-registered funds (including CEFs) – but not BDCs – currently are required to “tag” portions of certain SEC reports using the Inline eXtensible Business Reporting Language (XBRL) structured data format. This format allows investors and other market participants to view and analyze certain core attributes of the filing and compare like issuers in a more systematic manner. The Final Rules amend Regulation S-K by removing the exclusion of BDCs from the Inline XBRL requirements. BDCs will thus be subject to the same Inline XBRL tagging requirements that are applicable to operating companies, and will be required (among other things) to file XBRL-tagged financial statements. The SEC noted that these changes are meant to address the disparity between accessible financial information provided by BDCs and similar information provided by operating companies.
Further, the Final Rules add several new check boxes to the Form N-2 cover page that are also subject to XBRL tagging requirements. The check boxes will indicate the nature of the filing (e.g., whether it is for an automatic shelf registration statement and whether it is being made pursuant to the new short-form instruction for Form N-2) and the identity of the filer (e.g., type of fund and whether the issuer is seasoned or a WKSI). Additionally, similar to the requirements for mutual funds and ETFs, the Final Rules require that all Affected Funds tag certain key information in their prospectus (including the fee table, senior securities table, investment objectives and policies, risk factors, share price data and capitalization information). Subjecting Affected Funds to XBRL tagging requirements is intended to assist investors in analyzing registration statements and financial information in the same manner as other fund products and operating companies.
Seasoned Funds are required to comply with the structured data requirements by August 1, 2022, and other Affected Funds are required to comply by February 1, 2022.
Periodic Reporting
The Final Rules also implement a number of reforms that elevate the importance of periodic reports relative to other fund documents such as prospectuses and statements of additional information (SAIs). The Final Rules state that the reforms are intended to make annual and other periodic shareholder reports “more salient, convenient, and comprehensive” for investors. The SEC therefore is requiring that registrants include the following additional information in these reports, in order to ensure that prospective investors and existing shareholders are appropriately informed:
- Key fund attributes. Seasoned Funds that file a short-form registration statement are required to include in their annual report certain key disclosures appearing in their prospectus, including: the fee and example table; share price performance (i.e., premium or discount to NAV); and outstanding senior securities table.
- Narrative discussion of fund performance (CEFs). In a manner comparable to mutual funds and ETFs, the Final Rules require CEFs to include in their annual reports management’s discussion of fund performance (MDFP).3 As with the existing requirement under Form N-1A, CEFs are required to include in the new MDFP section narrative disclosure regarding: factors that materially affected the fund’s performance during the reporting period (including relevant market conditions and investment strategies/techniques); graphical representations of historical fund performance; and the impact of fund distribution policies. CEFs are required to comply with the MDFP requirement by August 1, 2021 (i.e., reports filed more than one year after the Final Rule’s effective date must include an MDFP section).
- Enhanced discussion of fund objectives and risks (CEFs). Similar to the MDFP requirement, CEFs that are not required to annually update their registration statements in reliance on Rule 8b-16(b) under the 1940 Act will be required to provide enhanced disclosure and discussions of important fund changes and key fund information in annual reports, in order to provide shareholders with such key fund information in a central location. Applicable CEFs will be required to provide context and substantive discussions of, for example, fund objectives, strategies and principal risks. The discussions should be detailed enough “to allow investors to understand each change and how it may affect the fund.”
- Financial Highlights (BDCs). The Final Rules require BDCs to include a “financial highlights” table (i.e., a tabular summary of the financial statements) in their annual shareholder reports and registration statements.4
- Unresolved SEC staff comments. Similar to operating companies, the Final Rules require Affected Funds to disclose in their annual reports and registration statements SEC staff comments that remain unresolved for 180 days and are deemed to be material by the registrant. The SEC noted a 2005 reform for operating companies that concluded eliminating the requirement to annually file post-effective amendments would diminish the incentive to resolve staff comments in a timely manner. The requirement included in the Final Rules is meant to restore this incentive.
Current Reporting
Operating companies and BDCs are required to disclose on Form 8-K current information regarding the occurrence of certain material events (e.g., new material definitive agreements, earnings announcements, significant financial obligations, director changes). Form 8-K generally must be filed within four business days of the date of the triggering event. The SEC had proposed to extend the requirement to file current reports on Form 8-K to CEFs and to revise Form 8-K to include two new triggering events applicable solely to Affected Funds. First, Affected Funds would have been required to disclose any material change in their investment objectives or policies. Second, Affected Funds would have been required to report a material write down of any portfolio holding comprising more than 10% of the Affected Fund’s total assets and those of its consolidated subsidiaries.
The Final Rules decline to adopt the proposals related to Form 8-K. The SEC noted that it was persuaded by commenters opposing the proposals, and that: requiring CEFs to file on Form 8-K “may not substantially improve the flow of important current information to investors and the market”; and existing BDC disclosures on Form 8-K are generally adequate. The SEC noted in the Final Rules that it will continue to consider the adequacy of current reporting and disclosure.
Online Availability of Information Incorporated by Reference
CEFs and BDCs currently are permitted to incorporate by reference financial information from certain previously-filed reports into their prospectus or SAI. However, Form N-2 requires CEFs and BDCs to provide new investors with a copy of all documents incorporated by reference. The Final Rules remove this requirement and amend the General Instruction to Form N-2 pertaining to Incorporation by Reference to require CEFs and BDCs to instead make the documents available on a website disclosed in the prospectus and SAI. The amendments also require CEFs and BDCs to provide the materials upon request free of charge. The SEC also was persuaded, in part by Dechert LLP’s comment letter, to exempt Affected Funds that conduct continuous or delayed shelf offerings from the undertaking requirements of Item 34.1 on Form N-2. If a fund’s NAV declines more than 10% from the NAV on the effective date of its registration statement, Item 34.1 requires the fund to suspend its offering until the prospectus is amended. Dechert argued that shelf offerings could extend over 3-1/2 years, and the undertaking was not necessary because the fund’s prospectus incorporates by reference updated information contained in its periodic reports.
Withdrawal of Staff Letters
In connection with the adoption of the Final Rules, the SEC’s Division of Investment Management issued an Information Update stating that it was withdrawing certain Rule 486(b) staff letters impacted by the rulemaking, effective August 1, 2021. Specifically, since each amendment to a shelf registration statement of a non-interval CEF will not need to be reviewed and declared effective under the Final Rules, corresponding letters pursuant to Rule 486(b) will no longer be applicable.
Conclusion
The Final Rules largely adopt the SEC’s 2019 proposal, with the exception that CEFs will not be required to file on Form 8-K and several additional, favorable rule changes. Generally, the Final Rules provide welcome flexibility for Affected Funds, and will streamline the offering process and investor communications rules for Affected Funds by placing Affected Funds on an equal footing with operating companies. These reforms should significantly reduce the costs and uncertainty that Affected Funds face in seeking to access the capital markets.
Footnotes
1) Securities Offering Reform for Closed-End Investment Companies (Apr. 8, 2020).
2) See Nuveen Virginia Premium Income Municipal Fund, SEC No-Action Letter (pub. avail. Oct. 6, 2006); Pilgrim America Prime Rate Trust, SEC No-Action Letter (pub. avail. May 1, 1998). An Affected Fund generally is considered “seasoned” if it satisfies the eligibility requirements for Form S‑3 (i.e., it is current and has been timely in its Exchange Act reporting for a period of at least 12 calendar months immediately preceding the filing of the registration statement) and has at least $75 million in public float.
3) BDCs are subject to similar requirements (which also are applicable to operating companies) to disclose “management’s discussion and analysis” in their annual report on Form 10-K.
4) As noted in the Final Rules, it is currently a market practice for BDCs to voluntarily disclose financial highlights in their annual reports.
