The Securities and Exchange Commission finalized reforms Wednesday to streamline the registration, offering and investor communications processes for business development companies and registered closed-end funds.
In a 3-1 vote — the commission's lone Democrat, Allison Herren Lee, dissented — the SEC adopted rule amendments to allow BDCs and other closed-end funds to use the securities offering rules that are already available to operating companies. In 2018, Congress passed two bills — the Small Business Credit Availability Act and the Economic Growth, Regulatory Relief, and Consumer Protection Act — that directed the SEC to harmonize the treatment of BDCs and most registered closed-end funds with that of operating companies.
BDCs are used by private equity firms to get a permanent source of capital through mostly publicly traded closed-end funds that provide debt to small- and middle-market companies.
The reforms approved Wednesday, which were proposed in March 2019, are designed to better "align the modern immediately effective or automatically effective offering process long available to other types of funds with the structures of the newly eligible funds," according to an SEC fact sheet. Moreover, the changes include disclosure requirements and new structured data requirements that will make it easier for investors and others to analyze fund data.
"The amendments we are adopting will modernize the offering process for eligible funds in a way that, as borne out by our experience with operating companies, will benefit both investors in these funds and the companies in which they invest," SEC Chairman Jay Clayton said in a statement after the vote.
Ms. Lee took issue with some of the choices SEC staff made when crafting the reforms. She noted that much of what was included Wednesday was not dictated by legislation, but left to the commission's discretion.
"That discretion has been exercised to drop 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 said.
Ms. Lee took issue with staff removing a portion of last year's proposal that would have required closed-end funds to file current reports with the commission on Form 8-K, as is already required.
SEC Commissioner Elad L. Roisman applauded the reforms during his prepared remarks Wednesday. "The team not only crafted rules to address Congress' specific requirements, but made further changes to the offering rules applicable to BDCs and closed-end funds to make them more consistent with those that apply to operating companies," he said.
The reforms take effect Aug. 1.
Separately, the SEC on Wednesday provided temporary, conditional exemptive relief for BDCs to make additional investments in small and medium-sized businesses, including those affected by the COVID-19 pandemic. The relief grants additional flexibility for BDCs to issue and sell senior securities to provide capital to such companies, and to participate in investments in these companies alongside certain private funds that are affiliated with the BDC, according to the SEC.