The US Securities and Exchange Commission (SEC) has adopted final rules1 to eliminate “redundant, duplicative, overlapping, outdated, or superseded” disclosure requirements in light of other SEC disclosure requirements and US Generally Accepted Accounting Principles (US GAAP). These rules, which generally adopt the changes as proposed,2 amend certain provisions of Regulation S-X and Regulation S-K, certain rules promulgated under the Securities Act of 1933 and the Securities Exchange Act of 1934, and certain related forms. The SEC issued a demonstration version of the final rule, showing a marked version of the impacted provisions.3 Highlighted below are some of the revisions that will have a direct impact on registered investment companies and business development companies (BDCs).
Revisions to Form N-2
By the SEC's own admission, the public reference room is rarely used by the public. As a result, the SEC has revised Form N-2 to remove the requirements to identify the public reference room and to disclose its physical address and phone number. Form N-2 was also revised to remove instructions on how to request copies of documents from the SEC in writing, because all requests must be made via email going forward. Additionally, issuers will now be required to disclose their website addresses, where previously they were encouraged to do so (by virtue of incorporation of changes to item 101(e) of Regulation S-K).
Going forward, registered investment companies and BDCs will need to update these references accordingly.
Revised Items under Regulation S-K
Item 201 of Regulation S-K (Reg. S-K) was revised to remove the requirement to disclose the high-low prices of the issuer’s common stock over the past two years. Instead, the disclosure must state the trading symbol for the issuer’s common stock. Unfortunately, this change was not carried over to Item 8.5 of Form N-2, so the Price Range of Common Stock table will continue to be required in registration statements on Form N-2. The revision to Item 201 will allow BDCs to omit that table from Item 5 of Form 10-K, but will not have an impact on the disclosure required by Form N-2.
Item 503 of Reg. S-K was revised to remove the requirements to disclose the ratio of earnings to fixed charges by deleting paragraph (d). While not specifically incorporated into Form N-2, registered investment companies and BDCs have generally included this table in a prospectus used to offer debt securities or by an issuer with debt securities outstanding. Going forward, registered investment companies and BDCs may opt to exclude this table from their disclosures along with the supporting schedule, which is no longer required under Item 601 of Reg. S-K.
Item 601 of Reg. S-K was revised to delete the statements regarding computations of per share earnings and computation of ratios. This deletion will have an impact because registered investment companies and BDCs have traditionally filed these exhibits or made reference to their inclusion in the notes to financial statements.
Curiously, Item 407(d)(3) of Reg. S-K was not updated to correct the reference to Auditing Standard 61, which remains out of date. Audit Committee Reports included in proxy statements by registered investment companies and BDCs should continue to include the correct reference to AS No. 1301.
Revised Rules Under Regulation S-X
Rule 6-03 was revised to remove paragraph (c)(1)(i), which provided that an investment company could not consolidate financials of a subsidiary that is not an investment company. The provision was removed because US GAAP permits consolidation of a subsidiary that provides services to the investment company. References to this provision typically included in the notes to financial statements for registered investment companies and BDCs will need to be revised.
Rule 6-04 (balance sheet) was revised to consolidate the line items previously required under paragraph 17. Where issuers were previously required to report separately the components of distributable income, the line item now requires only the total of distributable earnings (loss) consistent with US GAAP. Going forward, registered investment companies and BDCs will be able to merge the three previously required line items on their balance sheets.
Rule 6-09 (statement of changes in net assets) was amended to change the requirement under paragraph (3) from requiring that components of distributions be disclosed separately to permitting the issuer to disclose only the total amount of distributions, consistent with US GAAP. However, Rule 6-09 now requires that the tax return of capital distributions must still be disclosed separately.
Given the differences in timing between GAAP and tax determinations, compliance with the revised disclosure requirements may require some additional consideration.
Rule 6-09 was also revised to remove the requirement to disclose parenthetically the balance of undistributed net investment income included in net assets at the end of the period on the statement of changes in net assets. Going forward, issuers can remove the parenthetical disclosure from the line item.
Conclusion
While the timing of the rule’s official publication (and corresponding effective date) is uncertain, these amendments could take effect soon and could impact reporting companies’ third quarter 2018 reports.
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1 See “Disclosure Update and Simplification,” SEC Release No. 33-10532 (Aug. 17, 2018), available at https://www.sec.gov/rules/final/2018/33-10532.pdf (hereinafter referred to as the adopting release).
2 See “Disclosure Update and Simplification,” SEC Release No. 33-10110 (Jul. 13, 2016), available at https://www.sec.gov/rules/proposed/2016/33-10110.pdf.
3 See “Disclosure Update and Simplification – Demonstration Version”, available at https://www.sec.gov/rules/proposed/2018/33-10532-demonstration.pdf.
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