April 17, 2019 / 7:07 PM / a month ago

SEC proposal pushes managers to disclose more information

NEW YORK, April 17 (LPC) - A new regulatory proposal would force managers of closed-end funds to disclose more information including factors affecting performance as well as investment strategies, a requirement previously reserved for other types of investments.

The Securities and Exchange Commission (SEC) released a proposed rule calling for closed-end funds to provide investors with more detailed fund analysis, as well as for streamlined regulatory filing requirements for business development companies (BDCs). There is a 60-day comment period ending June 10 to allow the market to weigh in.

The proposal is viewed as a positive for investors in closed-end funds who for years were not required to receive the same type of information holders of similar investments such as open-end mutual funds and exchange-traded funds (ETFs) received.

While a boon for holders of the fund, the process may be costly and time-consuming, at least initially, for some managers as they gather the required information to comply.

“Administratively, there will likely be additional costs that will flow through to the fund and ultimately its investors,” said John Mahon, a partner at law firm at Schulte Roth & Zabel.

MDFP DISCLOSURE

To date, closed-end funds were not required to provide the detailed discussion and analysis of financial results required by operating companies and certain other funds such as BDCs. The funds needed only to release financial statements, without explanation.

There are some sponsors that currently do semi-annual and annual reviews and provide very detailed information in the shareholder letter and also hold a question-and-answer session, according to Kimberly Flynn, a managing director at XA Investments. Other managers provide the bare minimum required.

“There were few requirements before, so now, instead of being extra credit, (the additional information) is a useful tool for shareholders,” she said.

The SEC recommends a management’s discussion of fund performance, known as an MDFP, now be obligatory for all registered closed-end funds. The MDFP would evaluate factors materially affecting the fund’s performance and include a discussion of market conditions and the fund’s investment strategies.

Closed-end funds would also share total returns for one-, five- and 10-year periods, as well as a discussion of the effect of any policy or practice of maintaining a specified level of distributions to shareholders on the fund’s investment strategies and per share net asset value.

An SEC spokesperson declined to comment.

TRANSPARENCY

The SEC proposal stems from legislation passed in 2018 including the Small Business Credit Availability Act, which mandated the regulator to amend existing rules, permitting BDCs to use the same offering rules available for corporations, to improve the efficiency with which they go to market. The Economic Growth, Regulatory Relief, and Consumer Protection Act directed the regulator to finalize rules to allow registered closed-end funds to use the same documents available to other issuers.

The SEC took the opportunity to also bring the reporting requirements for closed-end funds in line with other similar funds that require more disclosure, according to sources.

The proposal comes on the heels of other regulatory initiatives to enhance operational transparency and regulatory oversight of markets.

In 2016, concerned about the ability of mutual funds to meet redemption requests, particularly those that invest in leveraged loans, which have long settlement times, the SEC adopted rules to improve the liquidity risk management of ETFs and open-end mutual funds.

“This is all consistent of the general sentiment of the SEC..for better disclosure, more transparency and also more user-friendly disclosure,” said Nathan Briggs, a partner at law firm Ropes & Gray, focused on advising registered investment companies. (Reporting by Kristen Haunss and Leela Parker Deo. Editing by Michelle Sierra and Jon Methven)

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