Securities and Exchange Commission Open Meeting

Securities and Exchange Commission

Open Meeting

Wednesday, April 8, 2020

Opening Statements

Chairman Jay Clayton

In his opening statement, Clayton said that in the face of uncertainty resulting from the COVID-19 pandemic, the Securities and Exchange Commission (SEC) remains focused on protecting investors and the health of the markets. He said that the SEC continues to bring enforcement actions, conduct examinations of registered entities, conduct investor outreach, as well as propose and adopt rules including those mandated by Congress. Clayton noted that the single item on the meeting’s agenda is in response to congressional directives and represents a desire to harmonize the treatment of business development companies (BDCs) and most registered closed-end funds with that of operating companies, adding that the rules also tailor the disclosure and regulatory framework to enhance investor protection. He said that by extending to BDCs and other closed-end funds the modernized registration, offering and communication processes that are currently available to other issuers, today’s rulemaking is consistent with the SEC’s ongoing efforts to modernize rules to further all three aspects of its tripartite mission. He concluded that the rules would promote capital formation with respect to both the funds themselves and the small businesses in which they invest, and the communications reforms should also facilitate the more timely provision of information to investors, maintain market integrity, and enhance investor protection.

Discussion: Securities Offering Reform for Closed-End Investment Companies

Dalia Blass, SEC Division of Investment Management, said the recommendation implements rules that Congress mandated under the Small Business Credit Availability Act and the Economic Growth, Regulatory Relief, and Consumer Protection Act. She explained the rules make available to BDCs and certain registered closed-end funds certain registration, communication and offering practices that are currently available to operating companies, and that they are designed to tailor the framework for these funds and enhance investor protection.

Amy Miller, SEC Division of Investment Management, said that the rules make a number of reforms, particularly streamlining the registration process to allow certain closed-end funds, or affected funds, to utilize short-form registration statements and to allow certain funds with $700 million in public float to qualify as well-known seasoned issuers (WKSIs). She said the rule would tailor the disclosure and regulatory framework for affected funds, and these changes are designed to streamline offerings and protect investors by making it easier for investors to analyze fund data. Miller continued that the approach to securities registration fee payments currently used by mutual funds and ETFs will be extended to affected funds under the rule. She concluded that the rule will become effective on August 1, 2020.

S.P. Kothari, SEC Division of Economic and Risk Analysis, said his division considered the potential impact of the rules on investors, efficiency, competition and capital formation. Further, his division concluded that these rules will result in significant benefits by improving access to public capital markets and by possibly lowering the cost of capital. He noted the rules will provide parity in the securities offering process for affected funds as well as increase the flow of valuable information to investors to better inform their decisions. He noted that while the rules could result in certain compliance costs for certain affected funds, such costs could be alleviated by some of the discretionary amendments the SEC has made.

Commissioner Hester M. Peirce

Peirce said the rules will allow these funds to offer their shares and communicate with shareholders more effectively. She said that while she supports the relief, she cannot help but think the SEC could have offered additional relief without compromising investor protection. She said that although Congress called on the SEC to adopt regulations that offer parity, these rules have not achieved that goal in full. Peirce said that the rule restricts the number of funds that can benefit, adding that adjustments to the qualifying threshold were in order and it is a missed opportunity to provide more relief. She said that despite these critiques, she believes the rules will benefit funds, investors and the economy as a whole and noted her support for the measure.

Commissioner Elad L. Roisman

Roisman said that despite requests for the SEC to delay regulatory actions, he feels strongly that the SEC should continue its work as much as possible throughout the pandemic. He said much time and thought has been dedicated to developing the regulatory agenda, which has been designed to prioritize regulatory action in a way that fulfills the SEC’s mission and that blanket inaction would do a disservice to stakeholders and the SEC’s own staff. He noted that Congress has directed the SEC to promulgate rules that would allow BDCs and certain closed-end funds, including specifically interval funds, to use the securities offering rules and accommodations that are available to operating companies in our markets. He said the statutes containing these directives are self-executing, meaning that they will grant this relief to the targeted funds, even if the SEC does not act. He concluded that he supports the staff’s recommendation and commends the rulemaking team for implementing Congress’s mandates with thoughtfulness and care.

Commissioner Allison Herren Lee

Lee said that today’s rules extend to BDCs and closed-end funds the securities offering and communication provisions that the Commission granted to operating companies in its 2005 Securities Offering Reform rules, which made significant changes to the offering and communications provisions applicable to operating companies, especially with respect to WKSIs. She said that the rule dropped important features from the proposal that were specifically designed to ensure that BDC and closed-end fund investors, most of whom are retail investors, received timely access to material information, and to make additional changes that reduce staff and Commission oversight of material changes to existing funds, including certain funds not even covered by the legislation. She continued that due to these developments, she is therefore unable to support the rules. She added that the final rules purport to rest on the rationale that parity with operating companies is justified, but that parity is not applied to require funds to provide retail investors with more timely access to material information on Form 8-K. Additionally, she noted that the changes will allow certain continuously-offered closed-end funds and BDCs that do not qualify as WKSIs to make material changes to their registration statement without requiring those changes to be declared effective by the staff, saying this degrades a significant investor protection tool.

The proposal was approved 3-1, with Commissioner Lee dissenting.

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