Statement on Securities Offering Reform for Closed-End Investment Companies
April 8, 2020
I appreciate the work of the Divisions of Investment Management, Corporation Finance, and Economic and Risk Analysis, Office of General Counsel, and others at the Commission on these amendments to afford certain business development companies (“BDCs”) and closed-end funds the benefits of the offering reforms long enjoyed by many operating companies. These amendments will allow these funds to offer their shares and communicate with shareholders more efficiently and effectively. These are welcome changes, undertaken at the direction of Congress, to the investment company offering landscape.
Although I am pleased to support this relief, I cannot help but think we could have offered additional relief without compromising investor protection. The statutes that prompted these amendments—the “Small Business Credit Availability Act” with respect to BDCs and the “Economic Growth, Regulatory Relief, and Consumer Protection Act” with respect to closed-end funds—called upon the Commission, in pertinent part, to adopt regulations affording these funds parity with other issuers in the matter of securities offerings. These amendments have not achieved those goals in full. By insisting on a direct application of the criteria used for operating companies to determine which BDC or closed-end fund will qualify for the benefits of these reforms, the Commission has unnecessarily restricted the number of funds that can benefit from these amendments.
As the release accompanying these amendments states, the well-known seasoned issuer (WKSI) “framework, which the Commission designed specifically for operating companies, is not well-tailored to the specific characteristics of affected funds.” Adjustments to the qualifying threshold were therefore in order and consistent with our congressional directive. For example, in an alternative to the approach chosen, one commenter called for the reduction in the public float amount needed for a BDC or closed-end fund to qualify as a WKSI from $700 million to $480 million. This different approach, the commenter argued, would lead to a rough equality (approximately 30%) in the percentage of funds and operating companies that qualified as WKSIs. As it happens, according to the economic analysis, 100 BDCs and closed-end funds (15 and 85 respectively) out of approximately 800 affected funds will qualify for WKSI status, in other words, roughly 12.5%. Still other commenters recommended, in the case of non-listed funds, the use of net asset value instead of the public float. If no BDCs or closed-end funds qualified, would the Commission still be insisting on a $700 million threshold? I suspect not. A more tailored response to the offering reform challenges facing investment companies might be appropriate, but we missed an opportunity to take a sensible interim step here.
Not only could we have afforded more relief than we did, we could have avoided adding unnecessary burdens. The Commission, in implementing congressional directives to eliminate regulatory requirements, often throws in a few new regulatory requirements, but we ought to think carefully before doing so. This rulemaking, for example, includes structured data mandates and a new requirement to publish material disputes with disclosure review staff. While our disclosure review staff plays an essential role in protecting retail investors, this requirement may not support those efforts. Absent an ombudsman mechanism at the Commission to enable funds to raise and resolve legitimate disclosure disputes, a publication requirement could lead to changes in disclosure or even substantive changes to the fund that are not optimal for investors.
Again, my thanks go to the agency’s staff who worked so diligently on this rulemaking, including Dalia Blass, Sarah ten Siethoff, Brian Johnson, Jay Krawitz, Asaf Barouk, Joel Cavanaugh, Terri Jordan, Amy Miller, Angela Mokodean, Amanda Hollander Wagner, David Marcinkus, Charles Kwon, Hari Phatak, and Vladimir Ivanov. I also thank commenters for their thoughtful insights, which greatly aided my consideration of this rulemaking.
 See Letter from Gifford R. Zimmerman, Managing Director & Associate General Counsel, Teachers Insurance and Annuity Association of America (June 13, 2019), File No. S7-03-19. The comment letters on the Proposing Release (Release No. 33-10619) are available at https://www.sec.gov/comments/s7-03-19/s70319.htm.
 Id. at 2, 6.
 See, e.g., Letter from Susan Olson, General Counsel, Investment Company Institute (June 10, 2019), File No. S7-03-19.