# Conformed to Federal Register version > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Asec%3Ad571af36a4760bbe ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text Conformed to Federal Register version SECURITIES AND EXCHANGE COM MISSION 17 CFR Parts 229, 230, 232, 239, 240, 243, 249, 270, and 274 [Release Nos. 33–10771; 34–88606; IC–33836; File No. S7–03–19] RIN 3235–AM31 Securities Offering Reform for Closed-End Investment Companies AGENCY: Securities and Exchange Commission. ACTION: Final rule. SUM M ARY: The Securities and Exchange Commission (the “Commission”) is adopting rules that will modify the registration, communications, and offering processes for business development companies (“BDCs”) and other closed-end investment companies under the Securities Act of 1933. As directed by Congress, we are adopting rules that will allow these investment companies to use the securities offering rules that are already available to operating companies. These rules will extend to closed-end investment companies offering reforms currently available to operating company issuers by expanding the definition of “well-known seasoned issuer” to allow these investment companies to qualify; streamlining the registration process for these investment companies, including the process for shelf registration; permitting these investment companies to satisfy their final prospectus delivery requirements by filing the prospectus with the Commission; and permitting additional communications by and about these investment companies during a registered public offering. In addition, we are amending certain rules and forms to tailor the disclosure and regulatory framework to these investment companies. These amendments also will modernize our approach to securities registration fee payment by requiring closed-end investment companies that operate as “interval funds” to pay securities registration fees using the same method as mutual funds 1 and exchange-traded funds and extend the ability to use this payment method to issuers of certain continuously offered, exchange-traded products (“ETPs”). Additionally, we are expanding the ability of certain registered closed-end funds or BDCs that conduct continuous offerings to make changes to their registration statements on an immediately effective basis or on an automatically effective basis a set period of time after filing. Lastly, we are adopting certain structured data reporting requirements, including for filings on the form providing annual notice of securities sold pursuant to the rule under the Investment Company Act of 1940 that prescribes the method by which certain investment companies (including mutual funds) calculate and pay registration fees. DATES: Effective Dates: This rule is effective August 1, 2020, except for amendatory instructions 21, 22, 30, 31, 33, 34, 41, 42, and 45 which are effective August 1, 2021. Compliance Dates: The applicable compliance dates are discussed below in section II.J. FOR FURTHER INFORMATION CONTACT: Asaf Barouk, Attorney-Adviser; Joel Cavanaugh, Senior Counsel; Terri G. Jordan, Senior Counsel; Amy Miller, Senior Counsel; Angela Mokodean, Senior Counsel; Amanda Hollander Wagner, Branch Chief; David J. Marcinkus, Branch Chief; Jacob D. Krawitz, Branch Chief; or Brian McLaughlin Johnson, Assistant Director, at (202) 551-6792, Investment Company Regulation Office, Division of Investment Management; Charles Kwon, Senior Counsel, Office of Rulemaking, at (202) 551-3430, Division of Corporation Finance; U.S. Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. 2 SUPPLEM ENTARY INFORMATION: The Commission is adopting amendments to: CFR Citation (17 CFR) Commission Reference S EC U RI T I ES AC T OF 1 9 3 3 ( “ SEC URI T IES ACT ”) 1 Rule 134 §230.134 Rule 138 §230.138 Rule 156 §230.156 Rule 163 §230.163 Rule 163A §230.163A Rule 164 §230.164 Rule 168 §230.168 Rule 169 §230.169 Rule 172 §230.172 Rule 173 §230.173 Rule 405 §230.405 Rule 415 §230.415 Rule 418 §230.418 Rule 424 §230.424 Rule 430A §230.430A Rule 430B §230.430B Rule 433 §230.433 Rule 456 §230.456 Rule 457 §230.457 Rule 462 §230.462 Rule 486 §230.486 Rule 497 §230.497 Form S-1 §239.11 Form S-3 §239.13 Form N-14 §239.23 Form F-1 §239.31 Form F-3 §239.33 REGULATION S-T [17 CFR 232.10 THROUGH 232.903] Rule 11 §232.11 Rule 405 §232.405 S EC U RI T I ES EXC HAN GE ACT OF 1 9 34 ( “EXC HAN GE ACT ” ) 2 Schedule 14A 1 15 U.S.C. 77a et seq. 2 15 U.S.C. 78a et seq. §240.14a-101 3 Commission Reference CFR Citation (17 CFR) Rule 103 of Regulation FD §243.103 I N VES T MEN T COMP ANY AC T OF 1 94 0 (“ IN VEST MENT C OMP AN Y AC T ” ) 3 Rule 8b-16 §270.8b-16 Rule 23c-3 §270.23c-3 Rule 24f-2 §270.24f-2 Form 24F-2 §274.24 S EC U RI T I ES AC T AND IN VEST MENT COMP ANY AC T Form N-2 §§239.14 and 274.11a-1 EXC HAN GE AC T AN D I NVES T MEN T C OMP AN Y ACT Form N-CSR 3 §§249.331 and 274.128 15 U.S.C. 80a-1 et seq. 4 TAB LE OF CONTENTS I. Introduction .............................................................................................7 II. Discussion ...............................................................................................17 A. Scope of Closed-End Investment Companies Affected by the Final Rule 17 B. Registration Process ............................................................................. 18 1. Current Shelf Offering Process for Affected Funds............................. 19 2. Amendments to the Registration Process for Affected Funds .............. 21 3. Short-Form Registration on Form N-2 ............................................... 23 C. Well-Known Seasoned Issuer Status ..................................................... 39 1. WKSI Definition............................................................................... 40 2. WKSI Eligibility ............................................................................... 40 3. Ineligible Issuer Definition ................................................................ 50 D. Automatic or Immediate Effectiveness for Filings by Affected Funds Conducting Certain Continuous Offerings ............................................. 53 E. Final Prospectus Delivery Reforms ....................................................... 59 F. Communications Reforms..................................................................... 61 1. Offering Communications ................................................................. 61 2. Broker-Dealer Research Reports........................................................ 67 G. Other Rule Amendments....................................................................... 70 1. Rule 418 Supplemental Information................................................... 70 2. Amendments to Incorporation by Reference into Proxy Statements..... 71 3. Rule 103 of Regulation FD ................................................................ 72 H. New Registration Fee Payment Method for Interval Funds and Issuers of Certain Exchange-Traded Products ....................................................... 73 I. Disclosure and Reporting Parity Proposals ............................................ 76 1. Structured Data Requirements ........................................................... 77 2. Periodic Reporting Requirements ...................................................... 89 3. Current Reporting Requirements for Affected Funds ........................ 100 4. Online Availability of Information Incorporated by Reference.......... 106 5. Amendments to Certain Registered CEFs’ Annual Report Disclosure....................................................................................... 107 J. Effective and Compliance Dates ......................................................... 111 III. Economic Analysis................................................................................114 A. Introduction and Baseline ................................................................... 115 1. Number of Affected Funds .............................................................. 116 2. Current Securities Offering Requirements for Affected Funds .......... 119 3. Current Disclosure Obligations of Affected Funds............................ 120 B. Potential Benefits Resulting from the Proposed Implementation of the Statutory Mandates ............................................................................. 121 1. Improved Access to Capital and Lower Cost of Capital .................... 121 2. Facilitated Communication with Investors ....................................... 132 C. Potential Costs Resulting from the Proposed Implementation of the Statutory Mandates ............................................................................. 134 1. Compliance Costs ........................................................................... 134 2. Other Costs ..................................................................................... 137 D. Alternatives to Adopted Approach to Implementing Statutory Mandates............................................................................................ 140 5 E. Discussion of Discretionary Choices ................................................... 143 1. New Registration Fee Payment Method for Interval Funds and Issuers of Certain Exchange-Traded Products .............................................. 143 2. Structured Data Requirements ......................................................... 146 3. Periodic Reporting Requirements .................................................... 155 4. Discretionary Amendments to Incorporation by Reference Requirements .................................................................................. 160 5. Automatic or Immediate Effectiveness of Filings by Affected Funds Conducting Certain Continuous Offerings........................................ 164 IV. Paperwork Reduction Act Analysis......................................................165 A. Background ........................................................................................ 165 B. Summary of the Amendments and Impact on Information Collections .. 168 1. Amendments to Form N-2 Registration Statement............................ 170 2. Structured Data Reporting Requirements ......................................... 177 3. New Annual Reporting Requirements under Rule 30e-1 and Exchange Act Periodic Reporting Requirements for BDCs............................... 180 4. Securities Offering Communications ............................................... 185 5. Prospectus Delivery Requirements................................................... 188 6. Form 24F-2..................................................................................... 190 7. Amendments Permitting the Registration of Offerings of an Indeterminate Number of Exchange-Traded Vehicle Securities and the Payment of Registration Fees for Such Offerings on an Annual Net Basis .............................................................................................. 192 8. Amendments to Form N-14 ............................................................. 195 V. Final Regulatory Flexibility Analysis ...................................................198 A. Need and Objectives of the Final Rule................................................. 198 B. Significant Issues Raised by Public Comments .................................... 199 C. Small Entities Subject to the Rule ....................................................... 202 D. Projected Reporting, Recordkeeping, and Other Compliance Requirements ..................................................................................... 204 1. Registration Process and Final Prospectus Delivery.......................... 204 2. Communications Rules.................................................................... 207 3. New Registration Fee Payment Method for Interval Funds ............... 211 4. Disclosure and Reporting Requirements........................................... 212 5. Automatic or Immediate Effectiveness for Filings by Affected Funds Conducting Certain Continuous Offerings........................................ 216 E. Agency Action to Minimize Effect on Small Entities ........................... 218 1. Alternatives to the Adopted Approach to Implementing Statutory Mandates ........................................................................................ 219 2. Alternative Approaches to Discretionary Choices............................. 220 VI. Other Matters.......................................................................................222 VII. Statutory Authority ..............................................................................222 6 I. INTRODUCTION We are adopting rules that will modify the registration, communications, and offering processes for business development companies (“BDCs”) and registered closedend investment companies (“registered CEFs”), including interval funds (collectively, “affected funds”) under the Securities Act. 4 In 2005, the Commission adopted securities offering reforms for operating companies to modernize the securities offering and communication processes while maintaining the protection of investors under the Securities Act. 5 At that time, the Commission specifically excluded all investment companies—including affected funds—from the scope of the reforms. 6 Now, as directed by Congress, we are adopting rules that will allow affected funds to use the securities offering rules that are already available to operating companies. 4 BDCs are a category of closed-end investment companies that do not register under the Investment Company Act, but rather elect to be subject to the provisions of sections 55 through 65 of the Investment Company Act. See section 2(a)(48) of the Investment Company Act [15 U.S.C. 80a-2(a)(48)]. Congress established BDCs for the purpose of making capital more readily available to small, developing and financially troubled companies that do not have ready access to the public capital markets or other forms of conventional financing. See H.R. Rep. No. 1341, 96th Cong., 2d Sess. 21 (1980). See infra section II.A for additional discussion of the definition of “affected funds.” “Interval funds” are a type of registered CEF or BDC that make periodic repurchase offers pursuant to rule 23c-3 under the Investment Company Act. See 17 CFR 270.23c-3 (“rule 23c-3”). 5 Securities Offering Reform, Securities Act Release No. 8591 (July 19, 2005) [70 FR 44721 (Aug. 3, 2005)] (“Securities Offering Reform Adopting Release”). In this release we generally use the term “operating company” to refer to issuers that are not investment companies and that are currently eligible to rely on the rules we are amending. 6 See, e.g., id. at 44727 (discussing the exclusion of investment companies registered under the Investment Company Act and BDCs from the definition of “well-known seasoned issuer”); id. at 44735 (discussing the exclusion of such companies from the safe harbors for factual business information and forward-looking information); id. at 44784 (discussing the exclusion of such companies from final prospectus delivery reforms). 7 The Small Business Credit Availability Act (the “BDC Act”) directs us to allow a BDC to use the securities offering rules that are available to other issuers required to file reports under section 13(a) or section 15(d) of the Exchange Act. 7 As discussed in detail below, the BDC Act identifies with specificity the required revisions. 8 The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Registered CEF Act”) (and, together with the BDC Act, the “Acts”) directs us to adopt rules to allow any registered CEF that is listed on a national securities exchange (a “listed registered CEF”) or that makes periodic repurchase offers under rule 23c-3 to use the securities offering rules that are available to other issuers that are required to file reports under section 13(a) or section 15(d) of the Exchange Act, subject to appropriate conditions. 9 Unlike the BDC Act, the Registered CEF Act does not identify with specificity the revisions that are required. In 2019, we proposed rules that would modify the registration, communications, and offering processes for affected funds under the Securities Act. 10 As discussed in 7 Section 803(b) of Small Business Credit Availability Act, Pub. L. 115–141, 132 Stat. 348 (2018) (“BDC Act”). This section also directs us to make specified revisions to allow a BDC to use the proxy rules that are available to such other issuers. Id. Affected funds generally use the proxy rules that are available to operating companies already. One current difference applicable to these entities, however, is a more limited ability to incorporate information into their proxy statements by reference. The BDC Act directs that we eliminate this difference by providing these entities parity with operating companies. Section 803(b)(2)(N) of the BDC Act; see also infra section II.G.2. 8 See section 803(b)(2) of the BDC Act. 9 Section 509(a) of Economic Growth, Regulatory Relief, and Consumer Protection Act, Pub. L. 115–174, 132 Stat. 1296 (2018) (“Registered CEF Act”). The Registered CEF Act also refers to proxy rules, as does the BDC Act. See supra footnote 7. 10 Securities Offering Reform for Closed-End Investment Companies, Investment Company Act Release No. 33427 (Mar. 20, 2019) [84 FR 14448 (Apr. 10, 2019)] (“Proposing Release”). 8 greater detail below, most commenters supported the proposal. 11 Many of the commenters who supported the proposal generally also recommended modifications to some of the proposed rules. 12 For example, some commenters recommended further expanding the scope of issuers that would qualify as “well-known seasoned issuers” to include smaller issuers or those without public float. 13 Commenters also recommended eliminating or modifying the proposed requirement that certain additional affected funds file current reports on Form 8-K. 14 Other commenters recommended that the Commission expand the scope of issuers permitted to file certain immediately effective registration statements. 15 Several commenters that are sponsors to exchange-traded products recommended that the Commission expand the scope of issuers permitted to pay registration fees on an annual net basis. 16 Finally, one commenter expressed concern with the proposal, recommending that large BDCs and registered CEFs be subject to 11 See, e.g., Comment Letter of the Federal Regulation of Securities Committee of the Business Law Section of the American Bar Association (July 3, 2019) (“ABA Comment Letter”); Comment Letter of Alternative Credit Council (June 10, 2019) (“ACC Comment Letter”); Comment Letter of Coalition for Business Development (June 10, 2019) (“CBD Comment Letter”). The comment letters on the Proposing Release (File No. S7-03-19) are available at https://www.sec.gov/comments/s7-03-19.htm. 12 See, e.g., Comment Letter of Calcbench, Inc. (May 13, 2019) (“Calcbench Comment Letter”); Comment Letter of GraniteShares LLC (June 26, 2019) (“GraniteShares Comment Letter”); Comment Letter of Institute for Portfolio Alternatives (June 10, 2019) (“IPA Comment Letter”). 13 See infra section II.C. 14 See infra section II.I.3. 15 See ABA Comment Letter; Comment Letter of Investment Company Institute (June 10, 2019) (“ICI Comment Letter”). 16 See, e.g., Comment Letter of United States Commodity Funds LLC (June 10, 2019) (“USCF Comment Letter”); Comment Letter of World Gold Council (June 10, 2019) (“WGC Comment Letter”). 9 additional scrutiny. 17 As discussed in detail below, we are adopting the proposed rules with certain modifications, after consideration of comments received. Our action will institute a number of reforms: • First, it will streamline the registration process to allow eligible affected funds to use a short-form shelf registration statement to sell securities “off the shelf” more quickly and efficiently in response to market opportunities. • Second, the final rule will allow affected funds to qualify as “well-known seasoned issuers” (“WKSIs”) under rule 405 under the Securities Act. • Third, it will allow affected funds to satisfy final prospectus delivery requirements using the same method as operating companies. • Fourth, it will allow affected funds to use certain rules currently available to operating companies, such as communications safe harbors for certain factual business information and forward-looking information, “free writing prospectuses,” and broker-dealer research reports (referred throughout this release as the “communications rules”). • Fifth, the final rule will allow certain continuously-offered affected funds to make certain changes to their registration statements on an immediately-effective basis or on an automatically effective basis a set period of time after filing. • Finally, it will tailor the disclosure and regulatory framework for affected funds in light of the amendments to the offering rules applicable to them. These amendments include structured data requirements to make it easier for investors and others to analyze fund data; new annual report disclosure requirements to 17 Comment Letter of Dale White (Apr. 3, 2019) (“White Comment Letter”). 10 provide key information in annual reports; a requirement that interval funds pay securities registration fees using the same method that mutual funds and exchange-traded funds (“ETFs”) use today; and a provision that will allow certain ETPs that are not registered under the Investment Company Act to elect to pay securities registration fees in the same manner. As discussed in detail below, the final rule will affect different categories of affected funds differently, just as different categories of operating companies are treated differently under these rules currently. For example, some of the provisions will apply to all affected funds, that is, all BDCs and registered CEFs. Many of the provisions, however, will apply only to “seasoned funds.” These are listed affected funds that are current and timely in their reporting and therefore generally eligible to file a short-form registration statement under the proposal if they have at least $75 million in “public float.” 18 Some of the provisions will apply only to seasoned funds that also qualify as WKSIs, that is, listed affected funds that qualify as seasoned funds and generally have at least $700 million in public float. 19 Additionally, the final rule provides unlisted affected funds with the flexibility to make certain filings that become effective either immediately 18 See General Instruction I.B.1 of Form S-3 (defining “aggregate market value”). In this release, we use “public float” to mean the aggregate market value of the voting and nonvoting common equity held by non-affiliates of the registrant. See General Instruction I.B.1 of Form S-3. Certain issuers with less than $75 million in public float also are eligible to use Form S-3 to register a primary offering but are limited as to the amount of securities they can register. See General Instruction I.B.6 of Form S-3. The Commission has stated that the calculations of an issuer’s public float for the purpose of determining an issuer’s eligibility to use Form S-3 and for determining WKSI status under rule 405 are the same. See Securities Offering Reform Adopting Release, supra footnote 5, at n.50. 19 See rule 405 (defining WKSI). 11 upon filing or automatically after 60 days. 20 The final rule therefore will provide additional flexibilities to both listed and unlisted affected funds. Tables 1 and 2 below summarize these different impacts. 20 See amended rules 486(a) and 486(b) under the Securities Act. See also supra section II.D. 12 TABLE 1 Entity Summary Definition Affected funds Affected funds include all BDCs and registered CEFs, including interval funds. Seasoned funds are affected funds that are current and timely in their reporting and therefore generally eligible to file a short-form registration statement if they have at least $75 million in “public float.” See supra footnote 18. WKSIs are seasoned funds that generally have at least $700 million in “public float.” ETPs are issuers that are not registered investment companies and whose assets consist primarily of commodities, currencies or derivative instruments that reference commodities or currencies; whose securities are listed for trading on a national securities exchange; and that purchase or redeem securities for a ratable share of their assets at NAV. Seasoned funds1 W KSIs ETPs Notes: 1. Some of the rule changes that are shown below as affecting “seasoned funds” will only affect those seasoned funds that elect to file a registration statement on Form N-2 using an instruction permitting funds to use the form to file a short-form registration statement. TABLE 2 Rule Summary Description of Entities Affected Rule by Changes Affected Funds (including BDCs, Registered CEFs, and Interval Funds) Registration Provisions General Instruction F.4.a Requires online posting of Affected Funds of Form N-2 information incorporated by reference. Securities Act Provide the processes for Affected Funds Rules 424 and 497 filing prospectus supplements. Investment Company Act Subjects interval funds to Interval Funds Rule 23c-3 the registration fee payment system based on annual net sales. Securities Act Rule 486 Allows continuously-offered Continuously-offered unlisted affected funds to unlisted affected funds make certain filings that are not relying on rule 23c-3 immediately effective upon filing or automatically effective 60 days after filing. 13 Discussed Below In Section II.I.4 Section II.B.3.d Section II.H Section II.D General Instruction G of Form N-14 Permits certain registrants to incorporate by reference. C ommunication Provisions Securities Act Permits issuers to publish Rule 134 factual information about the issuer or the offering, including “tombstone ads.” Securities Act Permits issuers to Rule 163A communicate without risk of violating the gun-jumping provisions until 30 days prior to filing a registration statement. Securities Act Permit the publication and Rules 168 and 169 dissemination of regularly released factual and forward-looking information. Securities Act Permit use of a “free writing Rules 164 and 433 prospectus.” Prospectus Delivery Provisions Securities Act Permit issuers, brokers, and Rules 172 and 173 dealers to satisfy final prospectus delivery obligations if certain conditions are satisfied. Periodic Reporting Provisions Investment Company Act A requirement that funds Rule 8b-16 that rely on paragraph (b) of the rule describe in the annual report the fund’s current investment objectives, policies and risks, and certain key changes in enough detail to allow investors to understand each change and how it may affect the fund. Instruction 4.g to Item A requirement for narrative 24 of Form N-2 disclosure about the fund’s performance in the fund’s annual report. Item 4 of Form N-2; Requires disclosure of Instruction 10 to Item certain financial 24 of Form N-2 information. Structured Data Reporting Requirements 14 BDCs Section II.B.3.b Affected Funds Section II.F.1 Affected Funds Section II.F.1 Affected Funds Section II.F.1 Affected Funds Section II.F.1 Affected Funds Section II.E Registered CEFs Section II.I.5 Registered CEFs Section II.I.2.b BDCs Section II.I.2.c Structured Financial Statement Data Prospectus Structured Data Requirements Form 24F-2 Structured Format Seasoned Funds Registration Provisions Securities Act Rule 415 General Instructions A.2 and F.3 of Form N-2 Securities Act Rule 430B Securities Act Rule 418 Regulation FD Rule 103 A requirement that BDCs tag their financial statements using Inline eXtensible Business Reporting Language (“Inline XBRL”) format. A requirement that registrants tag certain information required by Form N-2 using Inline XBRL. A requirement that filings on Form 24F-2 be submitted in a structured format. Permits registration of securities to be offered on a delayed or a continuous basis. Provide for backward and forward incorporation by reference. Permits certain issuers to omit certain information from their prospectuses at effectiveness. Exempts some registrants from an obligation to furnish certain engineering, management, or similar reports. Provides that a failure to make a public disclosure required solely by 17 CFR 243.100 (rule 100 of Regulation FD) will not disqualify a “seasoned” issuer from use of certain forms. C ommunication Provisions Securities Act Permits a broker or dealer to Rule 138 publish or distribute certain research reports about securities other than those it is distributing. Proxy Statements 15 BDCs Section II.I.1.a Affected Funds Sections II.I.1.b and II.I.1.c Form 24F-2 Filers, including open-end funds and unit investment trusts Section II.I.1.d Seasoned Funds Section II.B.3 Seasoned Funds Section II.B.3.b Seasoned Funds Section II.B.3.d Seasoned Funds Section II.G.1 Seasoned Funds Section II.G.3 Seasoned Funds Section II.F.2 Item 13 of Schedule 14A Permits certain registrants to use incorporation by reference to provide information that otherwise must be furnished with certain types of proxy statements. Periodic Reporting Provisions Instruction 4.h.(2) to A requirement for Item 24 of Form N-2 information about the investor’s costs and expenses in the registrant’s annual report. Instruction 4.h.(3) to A requirement for Item 24 of Form N-2 information about the share price of the registrant’s stock and any premium or discount in the registrant’s annual report. Instruction 4.h.(1) to A requirement for Item 24 of Form N-2 information about each of a fund’s classes of senior securities in the registrant’s annual report. Instruction 4.h.(4) to A requirement to disclose Item 24 of Form N-2 outstanding material unresolved staff comments that remain unresolved for a substantial period of time. W KSIs Registration Provisions Securities Act Rule 462 Provides for effectiveness of registration statements immediately upon filing with the Commission. C ommunication Provisions Securities Act Permits oral and written Rule 163 communications by or on behalf of WKSIs at any time. ETPs Registration Provisions Securities Act Permits ETPs to register an Rules 415, 424, 456 indeterminate amount of and 457; Forms S-1, S-3, certain securities and pay F-1 and F-3 registration fees based on annual net sales. 16 Seasoned Funds Section II.G.2 Seasoned Funds Section II.I.2.a Seasoned Funds Section II.I.2.a Seasoned Funds Section II.I.2.a Seasoned Funds Section II.I.2.d WKSIs Section II.B.3.c WKSIs Section II.F.1 ETPs Section II.H II. DISCUSSION A. Rule Scope of Closed-End Investment Companies Affected by the Final As we proposed, the final rule will apply to all BDCs and registered CEFs, with certain conditions and exceptions discussed below and generally illustrated in Tables 1 and 2 above. The BDC Act applies to all BDCs, including BDCs that are listed on a securities exchange and those that are unlisted. 21 In contrast, the Registered CEF Act extends to all registered CEFs listed on a securities exchange, as well as interval funds, but excludes other unlisted registered CEFs. 22 Although the Registered CEF Act only requires us to allow interval funds and listed registered CEFs to use the securities offering rules available to operating companies, that Act does not preclude us from exercising our discretion to extend these rules to all registered CEFs. The Commission therefore proposed to apply the rules to all BDCs and all registered CEFs, including unlisted registered CEFs, with certain conditions and exceptions. 23 We believed that this approach would benefit unlisted registered CEFs and their investors by avoiding the adverse consequences that could result from treating unlisted registered CEFs differently from all other registered CEFs and unlisted BDCs. 21 Listed BDCs are publicly traded BDCs that are listed on a stock exchange. Unlisted BDCs include non-traded BDCs, which are offered via a continuous offering up to a preset maximum amount, and private BDCs, which are offered via a private placement offering. 22 See section 509(a) of the Registered CEF Act. Similar to BDCs, registered CEFs include listed and unlisted funds, including publicly traded CEFs that are listed on a stock exchange, non-traded CEFs, and interval funds. 23 Proposing Release, supra footnote 10, at section II. 17 We believed that applying such a distinction is unnecessary because, for purposes of these rules, unlisted registered CEFs are not distinguishable from unlisted BDCs, which the rule amendments must cover. Unlisted registered CEFs, like unlisted BDCs, also would benefit from parity of treatment. 24 We did not receive comment on this aspect of the proposal. Because we continue to believe that this approach will benefit unlisted registered CEFs and their investors by providing new investor protections and avoiding adverse consequences from differential treatment, the final rule will apply to all BDCs and registered CEFs as proposed. The Commission proposed to generally apply the specific requirements of the BDC Act to both BDCs and registered CEFs because it believed that, except where dictated by meaningful differences between BDCs and registered CEFs, consistent application of the proposed rules across affected funds would result in more efficient offering processes and more consistent investor protections. 25 We continue to believe that both Acts share the overall purpose of providing offering and communication rule parity to the investment companies covered by each Act. 26 We did not receive public comment on this aspect of the proposal, and, for the reasons stated above, we are adopting it as proposed. B. Registration Process We are adopting, substantially as proposed, amendments to our rules and forms to streamline the registration process for affected funds by permitting them to use the more 24 Id. 25 Id. 26 Id. (explaining the similarity of the BDC Act’s and the Registered CEF Act’s broad mandates). 18 flexible registration process available to operating companies. These amendments collectively will allow affected funds to offer and sell securities “off the shelf” more quickly and efficiently in response to market opportunities. 1. Current Shelf Offering Process for Affected Funds Issuers, including affected funds, whose offerings are registered or qualified to be registered on Form S-3 may conduct primary offerings “off the shelf” under Securities Act rule 415(a)(1)(x), the provision for offerings made on a delayed or continuous basis. 27 In a rule 415(a)(1)(x) shelf offering, a seasoned issuer can register an unallocated dollar amount of securities for sale at a later time. 28 The issuer can then take down securities “off the shelf” for sale in a public offering as market conditions warrant. This allows seasoned issuers to quickly access the public securities markets from time to time to take advantage of favorable market conditions. 29 Affected funds currently can make shelf offerings under rule 415(a)(1)(x) if they meet the eligibility criteria for Form S-3, even though affected funds register their securities offerings on Form N-2. 30 Our rules for operating companies, however, are more flexible and efficient than for affected funds. In particular, seasoned operating 27 See Proposing Release, supra footnote 10, at n.17 (discussing rule 415(a)(1)). 28 In this release we use the term “seasoned” to refer generally to an issuer that meets the registrant requirements in General Instruction I.A of Form S-3 and, when referring to seasoned funds, a fund that meets these Form S-3 registrant requirements as well as certain modifications for registered CEFs. See Proposing Release, supra footnote 10, at n.18 (explaining the requirements under General Instruction I.A. of Form S-3). 29 Issuers that rely on rule 415(a)(1)(x) must file a new registration statement every three years, with unsold securities and fees paid thereon carried forward to the new registration statement. See Securities Act rule 415(a)(5) and (6). If the new registration statement is an automatic shelf registration statement filed by a WKSI, it will be effective immediately upon filing. 30 See Proposing Release, supra footnote 10, at n.20. 19 companies can use a short-form registration statement on Form S-3. Certain seasoned operating companies also can rely on Securities Act rule 430B to omit certain information from the “base” prospectus when the registration statement becomes effective and later provide that information in a subsequent Exchange Act report incorporated by reference, a prospectus supplement, or a post-effective amendment. 31 The ability to “forward incorporate” information in Exchange Act reports filed after the registration statement becomes effective allows operating companies to efficiently update their prospectuses and access capital markets without the expense and delay of filing post-effective amendments in most cases. Affected funds, on the other hand, currently have limited ability to incorporate information by reference into their registration statements and cannot forward incorporate information from subsequently-filed Exchange Act reports. 32 When an affected fund sells securities, including as part of a takedown “off the shelf,” its registration statement must include all required information. 33 In particular, the affected fund’s registration statement must include current financial information, including any annual update required by section 10(a)(3) of the Securities Act. 34 Affected funds provide any section 10(a)(3) update to the registration statement by filing a post-effective amendment, which involves the expense and potential delay associated with the fund’s preparation of the amendment 31 The base prospectus of a shelf registration statement will generally describe in broad terms the types of securities and offerings that the issuer may conduct at some later time. 32 See Proposing Release, supra footnote 10, at n.22 (discussing “backward incorporation”). 33 The fund’s registration statement must include all required information to avoid liability from selling securities from an out-of-date prospectus and to satisfy section 10(a) of the Securities Act. See infra footnotes 83–84 and accompanying text. 34 See Proposing Release, supra footnote 10, at n.24. 20 and also provides our staff with time to review the amendment for compliance with the applicable disclosure and accounting requirements and to provide comments where appropriate. 35 Affected funds also cannot currently rely on rule 430B, which allows certain issuers to omit information from a prospectus, or the process that operating companies follow to file prospectus supplements. 36 In addition, affected funds cannot currently file automatic shelf registration statements because only WKSIs can file these registration statements. These differences can result in additional expense or delay for affected funds relative to operating companies and can affect the timing of an affected fund’s capital raising. 37 2. Amendments to the Registration Process for Affected Funds The amendments we are adopting are designed to streamline the registration process for affected funds in parity with operating companies. Specifically, and as discussed in more detail below, the amendments will permit affected funds to: 35 These post-effective amendments become effective pursuant to section 8(c) of the Securities Act on such date as the Commission may determine and are typically declared effective by the staff acting pursuant to delegated authority. In contrast, Form S-3 is updated through the filing of an annual report on Form 10-K, which contains the issuer’s audited financial statements for its most recently completed fiscal year. See Securities Offering Reform Adopting Release, supra footnote 5, at n.61; see also Proposing Release, supra footnote 10, at n.25. 36 See id. at n.26. 37 The final rule will give certain affected funds greater flexibility to control the timing of their capital raising. As discussed in the Proposing Release, section 23(b) of the Investment Company Act generally prohibits a registered CEF from issuing its shares at a price below the fund’s current net asset value (“NAV”) without shareholder approval (this provision applies to BDCs as well with certain modifications). See id. at n.27. Because the shares of affected funds often trade at a discount to NAV, by allowing certain affected funds to sell securities “off the shelf,” the final rule will avoid potential delays associated with updating the funds’ registration statements if they seek to access the markets when their shares are trading at a premium. 21 • File a short-form registration statement on Form N-2 that will function like a Form S-3 registration statement. An affected fund that files this short-form registration statement can use it to register shelf offerings, including shelf registration statements that are filed by affected funds that qualify as WKSIs and become effective automatically, and can satisfy Form N-2’s disclosure requirements by incorporating by reference information from the fund’s Exchange Act reports; • Rely on rule 430B to omit information from their base prospectuses, and to use the process operating companies follow to file prospectus supplements; and • Include additional information in periodic reports to update their registration statements. Commenters generally supported our general approach to streamlining the registration process for affected funds. Commenters stated that the proposed amendments would allow affected funds to raise capital more efficiently and cost-effectively and would provide affected funds with greater flexibility to manage the timing of their offerings in response to market opportunities. 38 One commenter stated that affected funds will benefit from the proposed amendments because they no longer will have to file posteffective amendments to shelf registration statements to update their financial statements. Instead, that information will be in annual reports and incorporated by reference into their registration statements. 39 38 See, e.g., ACC Comment Letter; ICI Comment Letter; Comment Letter of Securities Industry and Financial Markets Association (June 5, 2019) (“SIFMA Comment Letter”). 39 See ICI Comment Letter. 22 3. Short-Form Registration on Form N-2 We are adopting, as proposed, new General Instruction A.2 in Form N-2, which will allow affected funds to file a short-form registration statement on Form N-2 that will function like a registration statement filed on Form S-3. 40 If a fund files a registration statement under this new instruction, the fund’s registration statement will incorporate certain past and future Exchange Act reports by reference, allowing the fund to use a short-form registration statement and avoid the need to make post-effective amendments in most cases. An affected fund may use the new instruction to register a shelf offering under rule 415(a)(1)(x), and we are adopting conforming amendments to that rule to make this clear. 41 The new instruction, however, is not limited to offerings under rule 415(a)(1)(x). Rather, an affected fund may use the new instruction to register any of the securities offerings that operating companies are permitted to register on Form S-3. 42 40 Throughout this release, we refer to General Instruction A.2 as the “short-form registration instruction” and refer to funds relying on this instruction as filing a “shortform registration statement” on amended Form N-2. Some of the required amendments and the conditions in our current rules are available only to issuers that meet the eligibility and transaction requirements of Form S-3 and therefore are eligible to file a short-form registration statement on that form. The short-form registration instruction in Form N-2 is designed to facilitate these amendments, as directed in the BDC Act and the Registered CEF Act. 41 See amended rule 415(a)(1)(x) (conforming amendments for affected funds); see also supra section II.B.3.c. 42 See General Instruction I.B of Form S-3 (identifying transactions that can be registered on the form); see also General Instruction A.2.c of amended Form N-2. Form S-3, and therefore the short-form registration instruction, also is available to a majority-owned subsidiary that is a closed-end management investment company eligible to register a securities offering on Form N-2 if it meets certain conditions. See Proposing Release, supra footnote 10, at n.29 (describing the conditions necessary for majority-owned subsidiaries of closed-end management companies to register a securities offering on Form N-2). 23 a. Eligibility to File a Short-Form Registration Statement As proposed, we are adopting amendments to permit an affected fund to file a short-form registration statement under the short-form registration instruction on Form N2 if: • for either a BDC or a registered CEF, the fund meets both the registrant requirements and the transaction requirements of Form S-3 (i.e., the fund could register the offering on Form S-3 if it were an operating company); 43 and • for registered CEFs only, the fund also has been registered under the Investment Company Act for at least 12 calendar months immediately preceding the filing of the registration statement and has timely filed all reports required to be filed under section 30 of the Investment Company Act during that time. 44 An affected fund generally will meet the registrant requirements of Form S-3 if it has timely filed all reports and other materials required under the Exchange Act during the prior year. 45 An affected fund will generally meet the transaction requirements of Form S-3 for a primary offering if the fund’s public float is $75 million or more. 46 Requiring affected funds to satisfy the requirements of Form S-3 in order to file a shortform registration statement provides parity between affected funds and operating 43 See General Instructions A.2.a and A.2.c of amended Form N-2; General Instructions I.A (registrant requirements) and I.B (transaction requirements) of Form S-3. 44 Under this amendment to Form N-2, the fund also must have timely filed all reports required to be filed under section 30 of the Investment Company Act during any portion of a month immediately preceding the filing of the registration statement. See new General Instruction A.2.b of amended Form N-2. 45 See General Instruction I.A.3 of Form S-3. 46 See General Instruction I.B of Form S-3. 24 companies, consistent with Congress’s mandates in the BDC Act and Registered CEF Act. Commenters generally supported the proposal to permit affected funds to file short-form registration statements. 47 Several commenters, however, urged that we provide additional bases other than public float for an affected fund to be eligible to file a short-form registration statement (or to qualify as a WKSI). 48 While the arguments advanced by commenters apply to our proposed short-form registration requirement, commenters focused primarily on our proposed public float threshold for WKSI status. 49 Accordingly, we discuss these comments below in section II.C.2. For the reasons discussed in that section, we are not changing the public float requirement or adopting new requirements for affected funds to file a short-form registration statement. We are adopting the proposed $75 million public float requirement for an affected fund to file a short-form registration statement on Form N-2 to provide affected funds parity with operating companies. Certain affected funds, including most interval funds,50 do not list their securities on an exchange and thus do not have public float. As a result, these affected funds generally would not be able to satisfy the transaction requirement necessary to file a 47 See, e.g., SIFMA Comment Letter; Comment Letter of Mutual Fund Directors Forum (June 12, 2019) (“MFDF Comment Letter”). 48 See, e.g., ICI Comment Letter; ABA Comment Letter. 49 See infra section II.C.2 (discussing comments on public float requirement for WKSI eligibility). 50 Only one interval fund is currently exchange-listed. 25 short-form registration statement. 51 In addition, as we noted in the Proposing Release, because interval funds make continuous offerings, they (as well as other continuously offered, non-listed affected funds) would not be able to file a short-form registration statement that omits information required to be in an issuer’s prospectus when it is offering its securities. 52 Interval funds also have their own offering provision, Securities Act rule 415(a)(1)(xi),53 and post-effective amendments to their registration statements are immediately effective upon filing or automatically effective 60 days after filing under rule 486 under the Securities Act, depending on the substance of the amendments. 54 As a result, interval funds currently have a tailored registration process that, although different in certain respects from that of operating companies, may provide many of the same efficiencies, including the ability to raise capital as the opportunity arises. As discussed below in section II.D, we are adopting amendments to rule 486 to allow any affected fund that conducts continuous offerings under rule 415(a)(1)(ix), such as continuously-offered tender offer funds, to rely on rule 486. We believe these amendments will benefit such 51 We intend for the short-form registration instruction to provide affected funds parity with operating companies so that affected funds can register the same transactions as operating companies register on Form S-3. To register a primary offering of equity securities on Form S-3, an issuer must meet the applicable eligibility and registrant requirements. For example, an issuer with the requisite public float may register a primary offering of securities to be offered for cash. See General Instruction I.B.1 of Form S-3. Alternatively, an issuer may register a primary offering if it has common equity securities listed on an exchange, limits the amount sold over a twelve-month period to no more than one-third of the aggregate value of voting and non-voting common equity held by non-affiliates, and meets certain other requirements. See General Instruction I.B.6 of Form S-3. Interval funds that are not exchange-listed and without public float would not be qualified to register a primary offering of their shares on Form S-3. 52 See Proposing Release, supra footnote 10, at text following n.37. 53 17 CFR 230.415(a)(1)(xi). 54 See 17 CFR 230.486. 26 continuously-offered affected funds by allowing them to maintain effective registration statements in a more efficient, cost-effective manner, similar to the benefits that the rules we are adopting will provide to affected funds that file short-form registration statements. As proposed, in addition to satisfying the registrant requirements of Form S-3, a registered CEF also must have timely filed all reports required under section 30 of the Investment Company Act for the preceding 12 months in order to register an offering under the short-form registration instruction. A registered CEF therefore must have timely filed during the prior year all required Exchange Act reports, such as annual and semi-annual reports to shareholders filed with the Commission on Form N-CSR, as well as reports required only under section 30 of the Act, such as reports on Forms N-CEN and N-PORT. As we stated in the Proposing Release, an issuer’s Exchange Act filings provide the basic source of information to the market and to potential purchasers, and investors in the secondary market use that information in making their investment decisions. 55 Although all affected funds file reports under the Exchange Act, registered CEFs also file reports under the Investment Company Act. These Investment Company Act reports also provide important information to the market and investors, including information about an affected fund’s portfolio holdings that will be publicly reported on a quarterly basis on Form N-PORT. We believe that the market will analyze this portfolio holdings information in a similar manner to how it analyzes financial statements for operating companies to determine changes in prospects for growth and performance. Portfolio holdings disclosure on Form N-PORT, for example, provides important information that 55 See Proposing Release, supra footnote 10, at text accompanying nn.42–46. 27 is comparable to information BDCs include in Exchange Act reports for purposes of providing a quarterly flow of key information to the market. Moreover, requiring registered CEFs to have timely filed their Investment Company Act reports also will provide parity among BDCs, registered CEFs, and operating companies. This is because once Form N-PORT fully replaces Form N-Q, registered CEFs will only file Exchange Act reports semi-annually on Form N-CSR, whereas BDCs and operating companies file Exchange Act reports on Forms 10-K, 10-Q and 8-K. 56 As such, all issuers will be required to have filed their quarterly and other required reports in order to file a shortform registration statement. We received one comment on this particular aspect of the proposal. This commenter expressed support for this aspect of the proposal, stating that it provides parity between registered CEFs and operating companies. 57 b. Information Incorporated by Reference As proposed, the same rules on incorporation by reference that apply to Form S-3 registration statements also will apply to a short-form registration statement filed on Form N-2. 58 We did not receive comments on these amendments and are adopting them 56 Because Form N-PORT will render reports on Form N-Q unnecessarily duplicative, once a registered fund begins filing reports on Form N-PORT, it will no longer be required to file reports on Form N-Q. See Investment Company Reporting Modernization, Investment Company Act Release No. 32936 (Dec. 8, 2017) [82 FR 58731 (Dec. 14, 2017)] (delaying the requirement for registered funds to submit reports on Form N-PORT through the EDGAR system until April 2019 for larger fund groups, and April 2020 for smaller fund groups). Form N-Q will be rescinded on May 1, 2020. See id. 57 See Comment Letter of Teachers Insurance and Annuity Association of America (June 13, 2019) (“TIAA Comment Letter”). 58 See section 803(c)(1) of the BDC Act (directing us to include an item or instruction that is similar to item 12 on Form S-3 to provide that a BDC that would otherwise meet the requirements of Form S-3 shall incorporate by reference the reports and documents filed by the BDC under the Exchange Act into the registration statement of the BDC filed on 28 as proposed. Specifically, an affected fund relying on the short-form registration instruction will be required to: • Specifically incorporate by reference into the prospectus and statement of additional information (“SAI”): (1) its latest annual report filed pursuant to section 13(a) or section 15(d) of the Exchange Act that contains financial statements for the registrant’s latest fiscal year for which a Form N-CSR or Form 10-K was required to be filed; and (2) all other reports filed pursuant to section 13(a) or 15(d) of the Exchange Act since the end of the fiscal year covered by the annual report (backward incorporation by reference); 59 and • State that all documents subsequently filed pursuant to section 13(a), 13(c), 14, or 15(d) of the Exchange Act prior to the termination of the offering shall be deemed to be incorporated by reference into the prospectus and SAI (forward incorporation by reference). 60 We also are adopting, as proposed, an instruction to Form N-2 that will permit an affected fund filing a short-form registration statement on Form N-2 to satisfy the disclosure requirements for its prospectus or SAI by incorporating the information by Form N-2). We are amending General Instruction F.3 of current Form N-2 in its entirety and replacing it with a new General Instruction F.3. In these provisions and others that are substantively identical to parallel provisions in Form S-3, we have included conforming references to a fund’s SAI. 59 See new General Instruction F.3.a.(1)–(2) of amended Form N-2; cf. Item 12(a)(1)–(2) of Form S-3. In addition, if sales of a class of capital stock are to be registered on Form N-2 and the same class is registered under section 12 of the Exchange Act, the affected fund must incorporate by reference the description of the class contained in the Exchange Act registration statement with respect to that class (including any amendment or reports filed for the purpose of updating such description). See new General Instruction F.3.a.(3) of amended Form N-2; cf. Item 12(a)(3) of Form S-3. 60 See new General Instruction F.3.b of amended Form N-2; cf. Item 12(b) of Form S-3. 29 reference from Exchange Act reports. 61 This provision, which is substantively identical to a parallel item in Form S-3, will give affected funds filing a short-form registration statement on Form N-2 the option to either provide required disclosure directly in the prospectus or SAI or to satisfy Form N-2’s disclosure requirements with information incorporated by reference. 62 We did not receive any comments on these particular amendments to Form N-2. We also are adopting, as proposed, conforming changes to Form N-2’s undertakings. 63 Form N-2 currently requires an undertaking that would prevent seasoned funds that file a short-form shelf registration statement from incorporating information by reference as proposed, because it requires funds to file post-effective amendments in 61 See new General Instruction F.3 of amended Form N-2. The amendments will permit a fund to use this incorporated information to provide the disclosure required by Items 3– 12 and Items 16–24 of Form N-2. See new General Instruction F.3.c of amended Form N2; cf. Item 12(d) of Form S-3. 62 The BDC Act directed us to extend this parallel item in Form S-3 (Item 12) to BDCs that meet Form S-3’s requirements. See supra footnote 58; Item 12(d) of Form S-3; see also section 509(a) of the Registered CEF Act. 63 See section 803(b)(2)(P) of the BDC Act (directing us to revise Item 34 of Form N-2 to require a BDC to provide undertakings “that are no more restrictive than the undertakings that are required of a registrant under [Item 512 of Regulation S-K],” which sets forth the undertakings an operating company must include in its registration statement for certain offerings). Commenters suggested that the Item 34.1 undertaking to suspend an offering if a fund’s NAV declines more than 10% from its NAV on its registration statement effective date until the fund amends the prospectus should not apply to continuous or delayed shelf offerings conducted by affected funds pursuant to proposed General Instruction A.2 of Form N-2. See Comment Letter of Dechert LLP (June 10, 2019) (“Dechert Comment Letter”); IPA Comment Letter; see also Item 34.1 of current Form N-2. Commenters urged that the undertaking should not apply in these circumstances because the shelf offering could extend over 3-1/2 years, and the undertaking did not seem necessary because the fund would amend its prospectus by incorporating by reference the information from its Exchange Act reports. See Dechert Comment Letter; IPA comment Letter. We agree, and are amending Item 34.1 to clarify that this undertaking is not applicable in the circumstance described by commenters. See Item 34.1 of amended Form N-2. 30 certain circumstances without providing an exception that would allow the required information to be supplied via incorporation by reference. 64 In contrast, operating companies registering an offering on Form S-3 are not required under the applicable undertaking to file post-effective amendments if the required information is included in an Exchange Act report incorporated by reference or a prospectus supplement that is part of the registration statement. 65 To implement the statutory mandates and provide parity for affected funds, we are adopting amendments to Form N-2’s undertakings to provide the same approach for affected funds filing a short-form registration statement on that form that applies to operating companies that file on Form S-3. 66 64 Form N-2 currently requires an affected fund registering an offering under rule 415 to undertake to file, during any period in which offers or sales are being made, a posteffective amendment to the registration statement under certain circumstances, including to provide any prospectus required by section 10(a)(3) of the Securities Act. See Item 34.4.a of current Form N-2. 65 See 17 CFR 229.512(a)(1)(iii)(B) (Item 512(a)(1)(iii)(B) of Regulation S-K). 66 Specifically, our amendments add a new provision to the relevant undertaking stating that the requirement to undertake to file a post-effective amendment does not apply if the registration statement is filed under the short-form registration instruction and the information required to be included in a post-effective amendment is contained in Exchange Act reports that are incorporated by reference into the fund’s registration statement or is contained in a form of prospectus that is part of the registration statement. See Item 34.3.a of amended Form N-2; cf. Item 512(a) of Regulation S-K. We also are amending Item 34 to make conforming changes to mirror parallel undertakings in Item 512 of Regulation S-K. See, e.g., Item 34.3.a(2) of amended Form N-2; cf. Item 512(a)(1)(ii) of Regulation S-K; Item 34.3.d(1) of amended Form N-2; cf. Item 512(a)(5)(i) of Regulation S-K; Item 34.3.e(2)-(3) of amended Form N-2; cf. Item 512(a)(6)(ii)–(iii) of Regulation S-K; Item 34.5 of amended Form N-2; cf. Item 512(b) of Regulation S-K; and Item 34.6 of amended Form N-2; cf. Item 512(h) of Regulation S-K. Additionally, in response to comments, we are eliminating the undertaking in Item 34.3 of current Form N-2, which requires affected funds to undertake to supplement the prospectus or file a post-effective amendment to disclose certain information if the securities being registered are to be offered to existing shareholders, and if not taken, to be reoffered to the public. See Dechert Comment Letter; IPA Comment. The Commission recently eliminated a parallel undertaking from Regulation S-K because other requirements make the undertaking duplicative and unnecessary. See FAST Act Modernization and Simplification of Regulation S-K, Investment Company Act Release 31 The Proposing Release requested comment on whether we should modify incorporation by reference provisions in other registration forms filed by affected funds to provide parity or consistency across registration statements. In particular, we asked if we should amend Form N-14 to provide that BDCs may incorporate by reference to the same extent as registered CEFs. 67 Commenters supported this approach,68 which would provide for more consistent treatment between registered CEFs and BDCs. We are modifying Form N-14 to allow BDCs to incorporate by reference to the same extent as registered CEFs. As commenters observed, this change will provide consistent treatment for BDCs and registered CEFs. This change also will reduce the length of a BDC’s Form N-14 prospectus, which in some cases can exceed 1,000 pages, because BDCs cannot currently incorporate information by reference. To effectuate this change, we are amending the instruction in Form N-14 that governs incorporation by reference to specifically include BDCs and clarify that current reports include those filed pursuant to section 13(a) or 15(d) of the Exchange Act. 69 Additionally, in response to No. 33426 (Mar. 20, 2019) [84 FR 12674 (Apr. 2, 2019)] (“FAST Act Modernization Adopting Release”), at n.171. We are eliminating this undertaking from Form N-2 for the same reasons, and renumbering Item 34’s sub-items accordingly. 67 Form N-14 currently permits a registered CEF—but not a BDC—to incorporate by reference certain information about the registrant and the company being acquired that is required by Items 5, 6 and 11–14 of Form N-14 from its prospectus, SAI, or Investment Company Act reports into the Form N-14 prospectus. See General Instruction G of current Form N-14. 68 See Dechert Comment Letter; IPA Comment Letter. 69 See General Instruction G of amended Form N-14. We also are eliminating the instruction’s reference to sub-paragraph (d) of Section 30, and will instead reference Section 30 (no sub-part specified). This change will have the effect of requiring a Form N-14 registrant that seeks to incorporate by reference to be current in filing all Section 30 reports, including reports filed on Forms N-PORT and N-CEN. Commenters also suggested that we further amend Form N-14 to provide that a seasoned affected fund that incorporates by reference information about the registrant into the prospectus need not 32 comments,70 we are eliminating the requirement that registrants file with the Form N-14 registration statement the documents that contain information that is incorporated by reference into the prospectus or SAI. 71 Such documents are filed on EDGAR and readily available to Commission staff. c. Affected Funds’ Use of Rule 415(a)(1)(x) and Automatic Shelf Registration Statements72 We are adopting, as proposed, two additional amendments to allow affected funds to use the shelf registration system in parity with operating companies. First, we are amending rule 415(a)(1)(x) to clarify that affected funds may use that rule by adding references to a registration statement filed under the short-form registration instruction. 73 deliver copies of the documents containing such information with the prospectus. See, e.g., Dechert Comment Letter. Because the delivery requirement applies to funds generally and not just affected funds, we believe that any changes to the requirement should be considered on a broader basis that is beyond the scope of this rulemaking. 70 See Dechert Comment Letter; IPA Comment Letter. 71 See General Instruction G of amended Form N-14. The requirement to file with the registration statement the documents that contain the information that is incorporated by reference is no longer necessary given the availability of such documents on EDGAR. We are similarly eliminating the requirement to file with the registration statement each document from which information is incorporated by reference into the SAI. 72 As proposed, amended Form N-2 will become effective on August 1, 2020. The Commission also will need time to modify its systems to automatically reflect that automatic shelf registration statements are effective upon filing and process “pay-as-yougo” payments for affected funds that are WKSIs. See infra section II.J. Until such modifications are complete, which is anticipated to be September 2020, affected funds should contact the staff of the Division of Investment Management’s Disclosure Review and Accounting Office if they are filing an automatic shelf registration statement. 73 See rule 415(a)(1)(x) (amended to include securities registered pursuant to General Instruction A.2 of Form N-2). See also section 803(b)(2)(J) of the BDC Act (directing us to revise rule 415(a)(1)(x) to provide that a BDC that would otherwise meet the eligibility requirements of Form S-3 can register its securities under that provision). Our amendments also add a reference to a Form N-2 registration statement filed pursuant to General Instruction A.2 to rule 415(a)(2) to make clear that affected funds registering offerings pursuant to rule 415(a)(1)(ix), like other issuers relying on that provision, will not be subject to the limitation that they register an amount of securities that the issuer reasonably expected would be offered or sold within two years from the date that the 33 Second, we are adopting a new general instruction to permit affected funds that qualify as WKSIs to file an automatic shelf registration statement. 74 A WKSI can register unspecified amounts of different types or classes of securities on an automatic shelf registration statement. 75 An automatic shelf registration statement and any amendments to the registration statement will be effective immediately upon filing. 76 Automatic shelf registration provides WKSIs with significant flexibility to take advantage of market windows, structure terms of securities on a real-time basis to accommodate investor demand, and determine or change the plan of distribution in response to changing market conditions. WKSIs using an automatic shelf registration statement further benefit by being able to pay filing fees at any time in advance of a shelf takedown or on a “pay-asyou-go” basis at the time of each takedown off the shelf registration statement in an amount calculated for that takedown. 77 Our amendments will extend these same benefits registration statement became effective. Cf. Securities Offering Reform Adopting Release, supra footnote 5, at 44774–44775. 74 See General Instruction B of amended Form N-2; section 803(c)(2) of the BDC Act (directing that we amend Form N-2 to include an instruction that is similar to the instruction regarding automatic shelf registration offerings by WKSIs on Form S-3 to provide that a BDC that is a WKSI may file automatic shelf offerings on Form N-2). This instruction will provide that an affected fund that is a WKSI may use the form as an automatic shelf registration statement only for the transactions that are described in, and consistent with the requirements of, General Instruction I.D of Form S-3. This provides parity with operating companies because General Instruction I.D of Form S-3 specifies the transactions and requirements for an automatic shelf registration statement filed on Form S-3. Consistent with General Instruction I.D of Form S-3, General Instruction B specifies that the form could not be used as an automatic shelf registration statement for securities offerings under rule 415(a)(1)(vii) or (viii). 75 See 17 CFR 230.430B(a) (Securities Act rule 430B(a)). 76 See 17 CFR 230.462(e) and (f) (Securities Act rule 462(e) and (f)). 77 See 17 CFR 230.457(r) and 17 CFR 230.456(b) (Securities Act rule 457(r) and rule 456(b)). 34 to affected funds that qualify as WKSIs, as directed by the BDC Act and the Registered CEF Act. 78 We did not receive any comments on these particular amendments. 79 d. Omitting Information from a Base Prospectus and Prospectus Supplements The BDC Act directed us to include a process for a BDC to file a prospectus in the same manner as under rule 424(b). 80 Consistent with this directive and with the Registered CEF Act, we are amending, as proposed, rule 424(f) to allow affected funds to file a prospectus under rule 424. 81 As discussed in the Proposing Release, affected funds registering shelf offerings under Securities Act rule 415 generally can omit required information from the base prospectus that is unknown or not reasonably available to the fund when the registration statement becomes effective. 82 WKSIs and certain issuers eligible to use Form S-3 for primary offerings are permitted under rule 430B to omit certain additional information. A base prospectus that omits statutorily-required information is not a final prospectus under section 10(a) of the Securities Act. 83 Filing a 78 As proposed, we are making conforming amendments to Securities Act rule 462(f) and to the registration fee table in Form N-2 to enhance consistency with Form S-3 and to allow affected funds that file as WKSIs to use the pay-as-you-go registration fee process. See section II.J for a discussion of applicable effective dates for pay-as-you-go registration fees. 79 While we did not receive any comments specifically on the proposed general instruction to permit affected funds that qualify as WKSIs to file an automatic shelf registration statement, we did receive comments on the proposed WKSI standard for affected funds. Those comments are addressed in section II.C below. 80 See section 803(b)(2)(K) of the BDC Act. 81 These amendments will not apply to open-end funds or other registered investment companies. Accordingly, those investment companies would continue to file prospectuses pursuant to rule 497. See amended rule 424(f). We also are amending rule 424(f) to state that references to the term “form of prospectus” in the rule include the SAI. 82 See 17 CFR 230.409 (Securities Act rule 409). 83 15 U.S.C.77j(a). 35 prospectus supplement pursuant to rule 424 is one way to provide information required for a prospectus to satisfy the requirements of section 10(a). 84 Our rules, however, provide different processes for operating companies and investment companies to file prospectuses. Operating companies currently follow rule 424 to file prospectus supplements, whereas investment companies follow rule 497. Although these rules provide similar processes, they have certain key differences. For example, rule 424(b) is designed to work together with rule 415(a)(1)(x), and provides additional time for an issuer to file a prospectus. Rule 497 does not contain provisions specifically related to offerings under rule 415(a)(1)(x) and requires the fund to file a prospectus with the Commission before using it. Rule 424 also requires an issuer to file a prospectus when the issuer makes changes from or additions to a previously-filed prospectus that are substantive, whereas rule 497 requires funds to file every prospectus that varies from any previously-filed prospectus. Under the amendment to rule 424(f), an affected fund will be able to file any type of prospectus enumerated in rule 424(b) to update, or to include information omitted from, a prospectus or in connection with a shelf takedown. 85 We also are amending rule 497 to provide that rule 424 would be the exclusive rule for affected funds to file a 84 Omitted information also may be provided in a post-effective amendment or, where permitted, through Exchange Act filings that are incorporated by reference. 85 An affected fund that seeks to file a rule 424(b)(1) or 424(b)(4) prospectus supplement to provide pricing information omitted pursuant to rule 430A must be able to satisfy the conditions of rule 430A, which include the requirement to furnish the “undertakings required by Item 512(i) of Regulation S-K.” See rule 430A(a)(2) under the Securities Act. To facilitate an affected fund’s ability to rely on the rule, we are amending rule 430A to require affected funds to provide the parallel undertaking required by Item 34.4 of amended Form N-2. 36 prospectus supplement other than an advertisement that is deemed to be a prospectus under 17 CFR 230.482 (rule 482). 86 This will avoid any confusion that might result if affected funds were permitted to file prospectuses under both rule 424 and rule 497, while also continuing to require affected funds to file rule 482 advertisements as they and other investment companies do today. We also are adopting, as proposed, an amendment to permit affected funds to use rule 430B in parity with operating companies. 87 We received no comments on this aspect of the proposal. Thus an affected fund may omit certain information from its prospectus in two circumstances: • A WKSI filing an automatic shelf registration statement may omit the plan of distribution and information as to whether the offering is a primary one or an offering on behalf of selling security holders. • If an issuer is eligible to file a registration statement on Form S-3 to register a primary offering pursuant to General Instruction I.B.1 of Form S-3, and is registering the resale of securities on behalf of selling security holders, it may omit the identities of selling security holders and the amount of securities to be registered on their behalf, subject to certain conditions. 88 86 See amended Securities Act rule 497(l). 87 See Proposing Release, supra footnote 10, at text preceding n.72. 88 See amended rule 430B (allowing affected funds eligible to register a primary offering under the short-form registration instruction to rely on rule 430B). We also are amending the undertakings in Form N-2 to require affected funds relying on rule 430B to make the same undertakings required of operating companies that rely on the rule. See Item 34.3.d(1) of amended Form N-2; cf. Item 512(a)(5)(i) of Regulation S-K. See also supra footnotes 63–66 and accompanying text. Rules 430B and 424 and 17 CFR 230.158 (rule 37 e. Additional Information in Periodic Reports As discussed above, the amendments we are adopting will permit certain affected funds to forward incorporate information from their Exchange Act reports. These funds may wish to include information in their periodic reports that is not required to be included in these reports in order to update their registration statements. We therefore proposed to include a new instruction to Form N-2 that would allow a fund to include additional information so as long as the fund included a statement in the report identifying information that it included for this purpose to provide context for investors. 89 After considering comments we received, we are not adopting this proposed instruction. The commenters that addressed this proposed new instruction to Form N-2 recommended against requiring this identifying statement in periodic reports on the grounds that it unnecessarily emphasized information included to update the fund’s registration statement and could potentially distract investors from other information that may be more material to their investment decisions. 90 These commenters also stated that requiring funds to identify this information would not be consistent with an integrated disclosure regime in which the information is incorporated by reference. We have determined not to adopt the identification requirement. After considering comments, we 158) specify when information contained in a prospectus supplement will be deemed part of and included in the registration statement and circumstances that will trigger a new effective date of the registration statement for purposes of section 11(a) of the Securities Act. These rules apply to affected funds just as they apply to operating companies. 89 See Proposing Release, supra footnote 10, at n.73 and accompanying text (discussing proposed Instruction 6.i to Item 24 of Form N-2). 90 See Dechert Comment Letter; IPA Comment Letter. 38 are persuaded that requiring an affected fund to highlight information just because it updates the fund’s registration statement could unnecessarily emphasize it. C. Well-Known Seasoned Issuer Status We are adopting, as proposed, amendments that will allow certain affected funds to qualify as WKSIs. Issuers that qualify as WKSIs are permitted to receive the greatest degree of benefits from the modifications to the communications and registration rules that the Commission adopted in 2005. 91 A WKSI, for example, can file a registration statement or amendment that becomes effective automatically in a broader variety of contexts than a non-WKSI. In addition, subject to certain conditions, a WKSI may communicate at any time, including through a free writing prospectus, without violating the “gun-jumping” provisions of the Securities Act. 92 To qualify as a WKSI, the issuer must meet the registrant requirements of Form S-3, i.e., it must be “seasoned” 93 and generally must have at least $700 million in public float. 94 An issuer is not eligible for WKSI status if, among other bases: (1) it is not current and timely in its Exchange Act reports, or (2) it is the subject of a judicial or administrative decree or order arising out of a governmental action involving violations 91 Securities Offering Reform Adopting Release, supra footnote 5, at 44727. 92 See infra section II.F. 93 See supra footnote 28. 94 See paragraph (1)(i)(A) of the WKSI definition in rule 405. See also supra footnote 19. See also Proposing Release, supra footnote 10, at n.77 (identifying alternative bases for an issuer to qualify as a WKSI, including that an issuer may qualify if it has issued, for cash, within the last three years, at least $1 billion in aggregate principal amount of nonconvertible securities, other than common equity, in primary offerings registered under the Securities Act). 39 of the anti-fraud provisions of the Federal securities laws (the “anti-fraud prong” of the ineligible issuer definition). 95 1. WKSI Definition As proposed, we are amending rule 405 to delete the exclusion of affected funds from the definition of WKSI. 96 In addition, we are adopting, as proposed, an amendment to the WKSI definition to include a reference to the registrant requirements of the proposed short-form registration instruction on Form N-2. 97 We received no comments on our proposal to make these particular amendments to rule 405. Commenters generally supported permitting affected funds to qualify as WKSIs. 98 2. WKSI Eligibility The BDC Act directed us to amend Securities Act rule 405 to allow a BDC to qualify as a WKSI, and the Registered CEF Act directed us to allow a registered CEF covered by the Act to use the securities offering rules that are available to operating 95 See paragraphs (1)(i) and (vi) of the definition of ineligible issuer in Securities Act rule 405. 96 See amended paragraph (1)(v) of rule 405. 97 See amended paragraph (1)(i) of the WKSI definition in rule 405. In addition, we are adopting, as proposed, amendments to the definition of WKSI to make conforming references to a registration statement filed under new General Instruction A.2 of amended Form N-2. See paragraphs (1)(i) introductory text and (1)(i)(B)(2) of the definition of WKSI in amended rule 405; new General Instruction A.2 of amended Form N-2. We also are making a conforming amendment, as proposed, to paragraph (2) of the definition of WKSI to add a reference to Form N-CSR, the form on which registered CEFs file their shareholder reports with the Commission. See amendment to paragraph (2) of the definition of WKSI in amended rule 405. We did not receive any comments on our proposal to make these conforming amendments to the WKSI definition in rule 405. 98 See, e.g., ICI Comment Letter; ACC Comment Letter; SIFMA Comment Letter; MFDF Comment Letter. 40 companies. 99 Consistent with these directives, and to provide parity in the offering rules for affected funds and operating companies, we are adopting, as proposed, amendments to allow affected funds to qualify as WKSIs if they satisfy the same $700 million public float requirement that applies to operating companies. Our securities offering rules provide WKSIs with certain registration and communication flexibilities because, among other reasons, they have a demonstrated market following (i.e., they are “well-known”). 100 The Commission has used public float as an approximate measure of an issuer’s market following and the extent to which the market absorbs information about the issuer that is ultimately reflected in the price of the issuer’s securities. 101 The $700 million public float requirement is meant to encompass issuers that are presumptively the most widely followed in the marketplace and whose 99 See section 803(b)(2)(A)(i) of the BDC Act and section 509(a) of the Registered CEF Act. 100 See Securities Offering Reform Adopting Release, supra footnote 5, at n.49 and accompanying text. In establishing the WKSI category of issuers for operating companies, the Commission stated that issuers that meet the $700 million public float threshold or the alternative $1 billion registered offering of non-convertible securities threshold have a wide following by market participants, the media, and institutional investors. See id. at section II.A. 101 See, e.g., id. at n.50 (stating that the determination of public float is based on a public trading market, such as an exchange or certain over-the-counter markets). See also Shelf Registration, Securities Act Release No. 6499, at 5 (Nov. 17, 1983) [48 FR 52889] (“Forms S-3 and F-3 recognize the applicability of the efficient market theory to those companies which provide a steady stream of high quality corporate information to the marketplace and whose corporate information is broadly disseminated. Information about these companies is constantly digested and synthesized by financial analysts, who act as essential conduits in the continuous flow of information to investors, and is broadly disseminated on a timely basis by the financial press and other participants in the marketplace.”); see also Covered Investment Fund Research Reports, Investment Company Act Release No. 33311 (Nov. 30, 2018) [83 FR 64180 (Dec. 13, 2018)] (“Covered Investment Fund Research Reports Adopting Release”). 41 disclosures and other communications therefore are subject to market scrutiny by investors, the financial press, analysts, and others. 102 Although the comments we received generally supported permitting affected funds to qualify as WKSIs, commenters also suggested specific modifications to the proposed amendments to permit certain additional affected funds to qualify. Several commenters recommended that we eliminate the public float requirement for affected funds. 103 Other commenters recommended that we adopt a substantially lower public float threshold for affected funds, among other reasons, to make WKSI status available to a greater percentage of affected funds that have listed securities. 104 One such commenter offered a specific suggestion: that we reduce the public float threshold for affected funds from $700 million to $480 million. 105 This commenter stated that the $700 million public float requirement adopted in 2005 for operating companies permitted approximately 30% of operating companies to qualify as WKSIs, and stated that we should seek to achieve a 102 See Securities Offering Reform Adopting Release, supra footnote 5, at text accompanying n.40. 103 See ICI Comment Letter (suggesting that we permit affected funds to qualify as WKSIs solely based on the other proposed requirements for WKSI status, such as meeting other registrant and transaction requirements of Form S-3); see also Comment Letter of Invesco Ltd. (June 10, 2019) (“Invesco Comment Letter”) (same). See also TIAA Comment Letter (recommending that we eliminate the public float requirement and adopt a standard for WKSI qualification for registered CEFs based on whether certain information about the fund is available to the public, such as information about the fund’s holdings, total return performance, and daily NAV). 104 See ABA Comment Letter. See also TIAA Comment Letter (recommending that we adopt a $480 million public float requirement for registered CEFs in order to permit approximately 30% of registered CEFs to qualify as WKSIs, which would be consistent with the percentage of operating companies that were permitted to qualify as WKSIs under the Commission’s 2005 securities offering reforms). 105 See TIAA Comment Letter (recommending that we reduce the public float threshold to $480 million as an alternative to its recommendation that we eliminate the public float requirement for affected funds). See supra footnote 103. 42 similar 30% “target” by adopting a $480 million public float requirement for affected funds. As the basis for the recommended elimination of or modification to the $700 million public float requirement for affected funds, these commenters stated that while affected funds may not have the same level of market following as operating companies with the requisite public float, market following is a less relevant standard for affected funds than it is for operating companies. These commenters suggested that certain distinguishing characteristics of affected funds compensate for their relative lack of market following and corresponding market scrutiny. For example, commenters stated that affected funds, as pass-through investment vehicles, have a less complex business than traditional operating companies, and thus require less market scrutiny. 106 Commenters also stated that market scrutiny is less relevant for affected funds because, unlike operating companies, affected funds must satisfy the investor protection requirements of the Investment Company Act and related Commission rules, including requirements relating to financial transparency, valuation of portfolio securities, transactions with affiliates, and board oversight, among others. 107 106 See, e.g., ICI Comment Letter; see also ABA Comment Letter (stating that, unlike operating companies, affected funds “generally describe their operations in terms of a stated investment objective and investment strategies that tend to remain constant over time”). The ABA Comment Letter further asserted that the proposed $700 million public float requirement would be burdensome for affected funds relative to operating companies because, unlike operating companies, affected funds have a relatively fixed asset base (and therefore a relatively fixed public float) that would be unlikely to increase over time to a level that would satisfy the public float requirement. 107 See, e.g., ABA Comment Letter (stating that the “operating limitations, oversight requirements and investor protection provisions” that apply to affected funds under the Investment Company Act “more than compensate for Affected Funds’ lower level of research analyst coverage relative to large operating companies”); ICI Comment Letter (stating that affected funds “are subject to important requirements under the Investment 43 Similarly, on the basis that public float is not a suitable criterion for determining WKSI status for affected funds, commenters also urged that we permit unlisted affected funds (which do not have public float) to qualify for WKSI status on the basis of their aggregate NAVs. 108 In addition to the reasons provided by commenters, discussed above, for eliminating or modifying the public float requirement,109 these commenters stated that the intermediaries and distribution platforms through which unlisted affected funds are sold perform extensive due diligence on unlisted affected funds, resulting in these funds being subject to scrutiny “equal” to the market scrutiny indicated by a large public float. 110 Commenters also stated that technological advancements have made unlisted affected funds’ financial disclosures directly accessible to investors, and that, particularly in light of the extensive disclosure funds provide, investors are less dependent on market analysts for financial information. 111 After considering these comments, we are adopting, as proposed, WKSI requirements for affected funds that are in parity with the requirements for operating companies. We are not eliminating or modifying the $700 million public float Company Act, including valuing their investments under board-approved valuation procedures and ongoing board oversight”); TIAA Comment Letter (stating that market following is less relevant to affected funds because, among other reasons, they are subject to “the valuation framework of the 1940 Act”). 108 See, e.g., ABA Comment Letter; Dechert Comment Letter; ICI Comment Letter. 109 Similar to the comments discussed above recommending that we eliminate or reduce the $700 million public float requirement, these commenters stated, among other things, that unlisted affected funds are subject to the Investment Company Act’s investor protection, board oversight, and disclosure requirements, and that unlisted affected funds are structurally and operationally less complex than operating companies. See supra footnotes 106–107 and accompanying text. 110 See Dechert Comment Letter; ABA Comment Letter. 111 See, e.g., Dechert Comment Letter. See section 509(a) of the Registered CEF Act. 44 requirement for affected funds, or permitting affected funds to qualify as WKSIs based on their aggregate NAVs. Our amendments will implement the BDC Act and Registered CEF Act, and are designed to provide parity in the offering rules for affected funds and operating companies. As discussed above, commenters stated that there are certain distinctions between affected funds and operating companies that suggest that the $700 million public float requirement is not an appropriate criterion for determining WKSI status for affected funds. For example, commenters noted that affected funds generally have less complex businesses than operating companies, are subject to the requirements of the Investment Company Act, and provide extensive financial information to the market. We agree with commenters that the WKSI framework, which the Commission designed specifically for operating companies, is not well-tailored to the specific characteristics of affected funds. However, these rules are designed to provide WKSI status to issuers with a demonstrated market following, and the Commission has for many years used public float, based on a public trading market, as an approximate measure of a stock’s market following and, consequently, the degree of efficiency with which the market absorbs information and reflects it in the price of a security. 112 Moreover, the offering rules for operating companies, which Congress specifically directed the Commission to extend to certain affected funds, are not premised on the characteristics of specific types of issuers, such as 112 See Revisions to the Eligibility Requirements for Primary Securities Offerings on Forms S-3 and F-3, Securities Act Release No. 8878 (Dec. 19, 2007) [72 FR 73534 (Dec. 27, 2007)], at text accompanying n.25; See also Securities Offering Reform Adopting Release, supra footnote 5, at text accompanying n.52 (“High levels of analyst coverage, institutional ownership, and trading volume are useful indicators of the scrutiny that an issuer receives from the market, although no one statistic can fully capture the extent to which an issuer is followed by the market.”). 45 whether an issuer’s business is less complex than other issuers’ businesses or whether an issuer is subject to different regulatory requirements. Further, the market following for closed-end funds is significantly less robust than is the case for operating companies. As a result, in our view, it would not be appropriate to select a public float figure that is below the figure used to determine WKSI status for operating companies. We also are not persuaded by commenters that allowing an affected fund, including an unlisted affected fund, to qualify on the basis of its aggregate NAV would be consistent with the requirements for an issuer to qualify as a WKSI, which Congress directed us to extend to affected funds. 113 In addition, permitting unlisted affected funds to qualify as WKSIs based on their aggregate NAVs would result in disparate treatment between unlisted affected funds and similarly situated operating companies under these rules. For example, unlisted real estate investment trusts (“unlisted REITs”) do not have a public float and therefore generally cannot qualify as WKSIs under the rules for 113 As discussed above, the Registered CEF Act, as enacted, requires us to allow only interval funds and listed registered CEFs to use the securities offering rules available to operating companies See supra section II.A. To provide parity of treatment for similarly situated affected funds, we are exercising our discretion to extend certain of these rules to unlisted registered CEFs that are not interval funds. We do not believe, however, that it would be consistent with the Registered CEF Act to provide these unlisted registered CEFs with new criteria for qualifying as WKSIs. Indeed, legislative language that preceded the passage of the Registered CEF Act would have applied to all registered closed-end investment companies, but the legislation enacted as the Registered CEF Act was subsequently narrowed in scope to apply only to listed closed-end funds and interval funds. Compare the Financial CHOICE Act of 2017, H.R. 10, 115th Cong. section 499A(a) (June 8, 2017) (directing us to revise rules to the extent necessary to allow a closed-end company, as defined in section 5(a)(2) of the Investment Company Act, that is registered as an investment company under the Act to use the securities offering and proxy rules that are available to other issuers that are required to file reports under section 13(a) or section 15(d) of the Exchange Act) with section 509(a) of Registered CEF Act. See also 163 Cong. Rec. H4791, H4792 (2017) (daily ed. June 8, 2017) (statement of Rep. Ellison) (stating that the prior bill would “allow even illiquid, nontraded funds to claim multiple exemptions,” making it “harder for the … Commission … to police these products for investors”). 46 operating companies. Unlisted REITs, however, have many of the characteristics that commenters cited in support of permitting unlisted affected funds to use their aggregate NAVs to qualify as WKSIs. 114 Nonetheless, unlisted REITs and other unlisted operating companies may not qualify as WKSIs unless they have the requisite public float or satisfy one of the alternative bases (which we also are adopting for affected funds). Moreover, many of the distinctions between affected funds and operating companies that commenters raised are based on the characteristics of registered funds and BDCs generally, and are not unique to affected funds. We believe that the particular characteristics of registered funds, including affected funds, may be appropriate for the Commission to examine as part of a more comprehensive consideration of whether the securities offering rules for funds should be modified rather than in this rulemaking related to affected funds specifically. 115 We do not agree with the commenters who stated that changing or eliminating the WKSI requirements for affected funds would be consistent with the intent of the Acts. We do not believe, as commenters suggested, that the BDC Act and Registered CEF Act were designed to result in a higher percentage of affected funds qualifying for WKSI 114 For example, both unlisted REITS and unlisted affected funds sell their shares through intermediaries and both types of entities’ financial disclosures have been made directly accessible to investors through advances in technology. 115 As discussed at infra section III.A.1, affected funds represent approximately 5.1% of all registered investment companies by number of funds and approximately 2% by assets. In addition, as discussed at infra section III.D, we believe that providing affected funds with specific WKSI-eligibility criteria would not provide affected funds parity with similarlysituated operating companies that do not have public float or do not meet the $700 million public float requirement and thus cannot qualify as WKSIs under the rules for operating companies. 47 status. 116 Rather, as discussed above, the Acts directed us to extend to affected funds the benefits of our securities offering rules that are available to operating companies. We believe that designing specific WKSI requirements for affected funds to permit a particular percentage of those funds to qualify as WKSIs would not provide parity of treatment. Moreover, the $700 million public float requirement for operating companies was not designed to result in a certain percentage of operating companies qualifying as WKSIs, as suggested by the commenter who recommended that the public float requirement for affected funds be lowered to $480 million. 117 In describing the $700 million public float threshold for operating companies, the Commission observed that the threshold would make the WKSI provisions available to approximately 30% of listed issuers, but this was describing the effect of the provision and not its intent. 118 We also do not agree with commenters that the Registered CEF Act, by referring to interval funds, requires us to permit affected funds to qualify as WKSIs based on criteria other than the criteria that apply to operating companies. 119 The Registered CEF 116 See, e.g., Invesco Comment Letter (stating that the percentage of listed BDCs and registered CEFs that would meet the $700 million public float requirement, as set forth in the proposing release, were lower percentages than the Acts were designed to permit (citing Proposing Release, supra footnote 10, at section IV.A.1.); ABA Comment Letter (same); Dechert Comment Letter (stating that a goal of the BDC Act was to improve the flow of funds to middle-market companies, which would be furthered by permitting unlisted funds to qualify as WKSIs based on their aggregate NAVs). 117 See TIAA Comment Letter. 118 See Securities Offering Reform Adopting Release, supra footnote 5, at text following n.48. 119 See, e.g., ICI Comment Letter (stating that the Registered CEF Act effectively requires the Commission to proceed without a public float standard to enable interval funds to qualify as seasoned funds and WKSI funds); Dechert Comment Letter (stating that adoption of a public float requirement for affected funds effectively would frustrate the intent of the Registered CEF Act). 48 Act directed us to allow interval funds (in addition to listed CEFs) to use the securities offering rules that are available to other issuers required to file reports under section 13 or 15(d) of the Exchange Act. 120 As discussed throughout this release and summarized in Tables 1 and 2 above, the rules that we are amending in this release are available to all affected funds, including interval funds, that satisfy the relevant conditions of those rules. In addition, many of the rules we are amending are not conditioned on an issuer’s public float, such as the amendments to permit affected funds to use the “access equals delivery” prospectus delivery framework available to operating companies. We are adopting certain targeted amendments to permit certain non-interval affected funds to rely on rule 486 under the Securities Act. Unlike the WKSI requirements, rule 486 is specifically designed to apply to funds. These amendments to rule 486 will permit certain registered CEFs and BDCs that conduct continuous offerings—regardless of whether they qualify as WKSIs—to file post-effective amendments and certain registration statements that become either effective immediately upon filing under rule 486(b) or automatically effective after 60 days under rule 486(a). 121 Similar to the benefits the final rule will provide to affected funds that qualify as WKSIs or that are eligible to file short-form registration statements, these amendments will facilitate certain unlisted affected funds’ ability to raise capital without delay by allowing the funds to more efficiently maintain effective registration statements while they engage in continuous offerings. The final rule, therefore, will provide certain listed 120 See section 509(a) of the Registered CEF Act. 121 See infra section II.D (discussing the Commission’s request for comment on broadening rule 486(b) in the Proposing Release and comments received in response to this request, as well as the amendments we are adopting to rule 486). 49 affected funds with the flexibility to use a short-form registration statement and to file registration statements and amendments that become effective automatically. Additionally, unlisted affected funds generally will have the flexibility to make filings that become effective either immediately upon filing or automatically after 60 days. Thus the final rule will provide additional flexibilities to both listed and unlisted affected funds. 3. Ineligible Issuer Definition We are adopting, as proposed, amendments to the definition of ineligible issuer in rule 405. Although all of the provisions in the ineligible issuer definition would apply to affected funds, our amendments are designed to tailor certain of these provisions for affected funds specifically. First, we are amending the definition of “ineligible issuer” to provide that a registered CEF would be ineligible if it has failed to file all reports and materials required to be filed under section 30 of the Investment Company Act during the preceding 12 months. This provision is consistent with the proposed short-form registration instruction and would mirror the current Exchange Act reporting provision in the ineligible issuer definition. 122 We did not receive any comments on this particular proposed amendment. Second, we are adopting, as proposed, an amendment to the definition of ineligible issuer to give effect to the definition’s anti-fraud prong in the context of affected funds. Specifically, we are adopting a parallel anti-fraud prong for affected funds, which provides that an affected fund is an ineligible issuer if within the past three years its investment adviser, including any sub-adviser, was the subject of any judicial or 122 See amended paragraph (1)(i) of the ineligible issuer definition in rule 405. 50 administrative decree or order arising out of a governmental action that determines the investment adviser aided or abetted or caused the affected fund to have violated the antifraud provisions of the Federal securities laws. 123 We believe this amendment is appropriate because investment companies typically are externally managed by an investment adviser, which is primarily responsible for the day-to-day management of the fund and the preparation of the fund’s disclosures. 124 We received several comments requesting that we clarify or modify certain aspects of the proposed amendments. Commenters suggested that we clarify that a violation of section 206(4) of the Advisers Act, or the rules adopted under section 206(4) (except for 17 CFR 275.206(4)-8 (rule 206(4)-8)), by an affected fund's investment adviser or sub-adviser would not give rise to WKSI ineligibility for the affected fund. 125 These commenters also recommended that we modify the proposed anti-fraud provision so that an affected fund would not be an ineligible issuer if the investment adviser (or sub-adviser) that was the subject of a judicial or administrative decree or order as described in the proposed rule no longer advises the affected fund at the time the affected fund seeks WKSI status. 126 Under the anti-fraud prong for affected funds, an affected fund is ineligible for WKSI status if the affected fund’s adviser or sub-adviser is determined to have aided or abetted or caused a violation by the fund of the anti-fraud provisions of the Federal securities laws. As such, only the anti-fraud provisions of the securities laws that apply to 123 See amended paragraph (1)(ix) of the ineligible issuer definition in rule 405. 124 See Proposing Release, supra footnote 10, at text following n.84. 125 See ACC Comment Letter; CBD Comment Letter. 126 Id. 51 the affected fund itself can give rise to WKSI ineligibility. There could not be a violation of section 206(4) or the rules adopted thereunder by an affected fund, because the fund is not itself an adviser. We also do not believe it would be appropriate, as commenters suggested, to modify the proposed amendments to permit an affected fund whose adviser or subadviser was determined to have aided or abetted or caused a violation by the fund of the anti-fraud provisions of the securities laws to preserve its WKSI eligibility by terminating the adviser or sub-adviser. 127 An operating company currently will be an ineligible issuer under the anti-fraud prong even if the operating company terminates all of the employees who aided or abetted the underlying violation of the Federal securities laws, and our amendments will provide comparable treatment if an affected fund were to terminate its adviser. The affected fund also may have the same board of directors that was in place when the affected fund violated the anti-fraud provisions. The specific facts and circumstances relating to a particular issuer’s WKSI status under the ineligible issuer definition may, however, be considered through the Commission’s process under rule 405 for granting waivers of ineligible issuer status. 128 For these reasons, we are adopting the amendments to the ineligible issuer definition as proposed. 127 See ACC Comment Letter; CBD Comment Letter; 128 See paragraph (2) of the ineligible issuer definition in rule 405 (providing that the Commission may grant waivers of ineligible issuer status upon a good-cause showing that it is not necessary under the circumstances for the issuer to be considered an ineligible issuer). 52 D. Automatic or Immediate Effectiveness for Filings by Affected Funds Conducting Certain Continuous Offerings Based on comments that we received, we are expanding the scope of rule 486 to permit any registered CEF or BDC that conducts continuous offerings under rule 415(a)(1)(ix) (e.g., a continuously-offered tender offer fund) to rely on the rule. Rule 486 under the Securities Act currently permits interval funds to file post-effective amendments and certain registration statements that are either immediately effective upon filing under rule 486(b) or automatically effective 60 days after filing under rule 486(a). 129 As discussed in the Proposing Release, our staff has previously stated that it would not recommend that the Commission take enforcement action under certain provisions of the Securities Act if, on a case-by-case basis, specific listed registered CEFs that conduct offerings under rule 415(a)(1)(x) use rule 486(b) to file certain post-effective amendments that are immediately effective upon filing. 130 The Proposing Release noted that staff in the Division of Investment Management were reviewing these no-action letters to determine if they should be withdrawn in connection with any final rules. The Commission also requested comment on whether it should make rule 486(b) available to 129 Filings under rule 486(a) are generally effective on the sixtieth day after filing, but a registrant may designate a later date for effectiveness (which must not be later than eighty days after filing). In addition, the Commission, having due regard to the public interest and the protection of investors, may declare an amendment or registration statement effective under rule 486(a) on an earlier date. See rule 486(a). 130 See, e.g., Nuveen California Select Tax-Free Income Portfolio, SEC Staff No-Action Letter (Nov. 21, 2017); PIMCO Dynamic Income Fund, SEC Staff No-Action Letter (Dec. 12, 2017); Eagle Point Credit Company, Inc., SEC Staff No-Action Letter (Feb. 14, 2018); PIMCO Corporate & Income Opportunity Fund and PIMCO Income Opportunity Fund, SEC Staff No-Action Letter (Sep. 13, 2018); and DNP Select Income Fund, Inc., SEC Staff No-Action Letter (Oct. 4, 2018). 53 all or a broader group of registered CEFs and BDCs. 131 In response to this request, several commenters asked that we allow certain non-interval funds that conduct delayed or continuous offerings under rule 415 to rely on rule 486, in whole or in part. 132 For example, one commenter suggested that the existing no-action letters be retained or codified. This commenter stated that withdrawing the no-action letters would be disruptive to relevant non-WKSI funds and their ability to update their registration statements and receive automatic effectiveness. 133 Additionally, two commenters recommended that we permit affected funds that are continuously-offered unlisted funds to rely on rule 486 in its entirety, including rule 486(a) and rule 486(b). The commenters suggested that, like interval funds, these unlisted funds are continuously offered and would benefit if their filings could become immediately effective or automatically effective 60 days after filing. 134 One of these commenters stated that, for example, allowing continuously-offered unlisted affected funds to rely on rule 486 would benefit investors in these funds by allowing the funds to avoid the time and expense of an annual staff review of registration statements where no changes are made beyond immaterial updates and updates to audited financial information. 135 In response to these comments, we are amending rule 486 to allow any registered CEF or BDC that conducts a continuous offering under rule 415(a)(1)(ix) to rely on rule 131 See Proposing Release, supra footnote 10, at section II.I. 132 See ABA Comment Letter and ICI Comment Letter. 133 See ICI Comment Letter. 134 See ABA Comment Letter and ICI Comment Letter. 135 See ABA Comment Letter. 54 486. 136 We believe this rule amendment will allow these continuously-offered affected funds to maintain effective registration statements in a more efficient, cost-effective manner. For example, under rule 486(a), these funds will be able to make material changes to their registration statements on an automatically effective basis 60 days after filing. In addition, under rule 486(b), continuously-offered unlisted affected funds will be able, for example, to update their financial statements under section 10(a)(3) or make non-material changes to their registration statements on an immediately effective basis. The rule amendment will allow these funds to more efficiently maintain effective registration statements while they engage in continuous offerings. This is similar to the benefits the final rule will provide to affected funds that file short-form registration statements or qualify as WKSIs, as those funds also will be able to make certain updates to their registration statements more efficiently (i.e., through forward incorporation by reference or automatically effective registration statements and post-effective amendments). 137 We believe it is appropriate for any affected fund that conducts delayed or continuous offerings under rule 415(a)(1)(ix), (x), or (xi) to have a mechanism for 136 We also are making a technical amendment to rule 486(b)(1)(iv) to provide a more accurate cross reference to Item 9.1.c of Form N-2. Moreover, we are amending Form N2 to recognize the broader scope of affected funds that may rely on rule 486. See General Instruction E.4 of amended Form N-2 and cover page of amended Form N-2. 137 See supra sections II.B.3.b and II.B.3.c. Although affected funds that file short-form registration statements or qualify as WKSIs will be able to use forward incorporation by reference and automatically effective filings to make a broader range of updates to their registration statements on an immediate basis than those specified in rule 486(b), the majority of post-effective amendments that affected funds currently file are solely for one or more purposes described in rule 486(b). Moreover, interval funds, and affected funds that make continuous offerings under rule 415(a)(1)(ix), will be able to make other, material amendments that are automatically effective 60 days after filing. 55 bringing its financial statements up to date under section 10(a)(3) without delay. 138 Together, the amendments we are adopting in this release and current rule 486 will achieve this objective. Continuously-offered unlisted affected funds relying on rule 486 will continue to be subject to applicable provisions in rule 415. 139 Moreover, these funds will need to comply with relevant conditions in rule 486. 140 If it appears to the Commission that a post-effective amendment or registration statement filed under rule 486(a) may be incomplete or inaccurate in any material respect, the Commission may suspend the effective date of that filing. Further, if it appears to the Commission that the fund has not complied with the conditions in rule 486(b), the Commission may suspend the fund’s ability to rely on rule 486(b). 141 In addition to allowing an affected fund to rely on rule 486 if the fund makes continuous offerings under rule 415(a)(1)(ix), we are also amending the scope of registration statements that rule 486 covers. Currently, rule 486 is available for post- 138 Rule 415(a)(1)(ix), (x), and (xi) are the provisions affected funds primarily use to conduct delayed or continuous offerings of their securities. Rule 415(a)(1)(ix) allows nontraded affected funds to engage in continuous offerings but does not allow delayed (or “shelf”) offerings. Rule 415(a)(1)(x) allows affected funds that are eligible to file short-form registration statements on Form N-2 to engage in delayed or continuous offerings. Rule 415(a)(1)(xi) allows interval funds to engage in delayed or continuous offerings. 139 For example, rule 415 limits the amount of securities that can be registered in a continuous offering under rule 415(a)(1)(ix) and generally requires an issuer relying on rule 415(a)(1)(ix) to file a new registration statement every three years. See rule 415(a)(2), (5), and (6). 140 See rule 486(b)(2) (requiring certain written representations that a post-effective amendment filed under rule 486(b) is filed solely for one or more of the permissible purposes covered by the provision); rule 486(e) (requiring a fund to have filed a posteffective amendment or registration statement relating to its common stock that became effective within two years prior to the filing made under rule 486(a) or (b)). 141 See rule 486(c). 56 effective amendments and for registration statements filed for purposes of registering additional shares of common stock for which a Form N-2 registration statement is effective. This generally reflects the scope of amendments and registration statement filings interval funds make after their initial registration statements are effective. However, unlike interval funds, the affected funds that will newly be eligible to rely on rule 486 generally are required to file new registration statements every three years under rule 415(a)(5) and (6). We are amending rule 486 to allow these registration statements to be immediately or automatically effective under the rule, depending on the substance of the disclosure. 142 Specifically, a registration statement a fund files to comply with rule 415(a)(5) and (6) could be immediately effective upon filing if it is filed for no purpose other than to comply with those provisions of rule 415 or for other purposes listed in rule 486(b), such as making non-material changes or updating the fund’s financial statements under section 10(a)(3). If the registration statement does not qualify under rule 486(b) because, for example, it includes material changes to the fund’s disclosure, the registration statement could be automatically effective 60 days after filing under rule 486(a). As a result of the amendments, affected funds that make continuous offerings under rule 415(a)(1)(ix) will be able to rely on rule 486 for registration statements filed to comply with rule 415(a)(5) and (6), regardless of whether they choose to register additional shares at the time these provisions requires them to file new registration statements. This will promote consistent treatment of these funds’ filings under the rule. 142 See amended rule 486(a), (b)(1)(vi), and (g). 57 Although one commenter suggested that we retain or codify the staff no-action letters discussed above to allow affected funds that conduct delayed or continuous offerings under rule 415(a)(1)(x) to file post-effective amendments that are immediately effective under rule 486(b), we believe the final rule makes such rel [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3Ad571af36a4760bbe. Public record. Not legal advice.