[co-author: Elena Schlickenmaier]
On June 8, 2017, the US House of Representatives passed the Financial CHOICE Act of 2017 (H.R. 10) (the CHOICE Act) with 233 votes for, 186 votes against and 11 abstaining. Rep. Jeb Hensarling (R-TX), the chairman of the House Financial Services Committee, introduced the CHOICE Act on April 26, 2017, to eliminate many of the most significant components of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Consumer Financial Protection Act of 2010. The Republican Party claimed the passage of the CHOICE Act as a symbolic victory even though both parties and commentators agree that it is unlikely to become law.
As part of the CHOICE Act, the House also passed an amendment introduced by Rep. Trey Hollingsworth (R-IN), which is Section 499A of Subtitle X of Title IV of the CHOICE Act (the Amendment). The Amendment would provide significant benefits to registered closed-end investment companies1 (Funds) by allowing them to operate under the streamlined registration and offering process currently available to publicly traded operating companies. The Amendment requires that the US Securities and Exchange Commission (SEC) revise certain rules no later than one year after the date of enactment of the CHOICE Act as follows:
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WKSI Status. The Amendment would delete the current exclusion of Funds from the definition of “well-known seasoned issuers” (WKSI)2 and would add Form N-2 registration statements to the definition of “automatic shelf registration statement” that a WKSI is permitted to use. WKSIs benefit from a number of streamlined offering, filing and communication requirements including, but not limited to, automatic shelf registration, simplified registration disclosures and communications with the public prior to the effectiveness of a registration statement.
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Incorporation by Reference. The Amendment would require Form N-2 to be revised to allow Funds to incorporate by reference their annual and semi-annual reports into Form N-2 registration statements, thereby greatly reducing the time and expense involved in preparing such registration statements.3
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Pre-Offering Communication and Disclosures. The Amendment would relax restrictions on Fund communications with the public4 prior to filing a registration statement and allow Funds to disseminate certain information about the Funds and the offering5 including, but not limited to, general business or financial information, earnings releases, financial projections, statements about future operations, products or services, and statements about future economic performance, as well as assumptions underlying any of these topics.6 Further, the Amendment would preserve the current ability of the Funds to distribute sales material.7
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Continuous Offerings. The Amendment would allow Funds to conduct offerings on a continuous or delayed basis without having to meet certain conditions regarding the type of offering and registration8 and without having to provide certain undertakings that are currently required by Form N-2.9
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Prospectus Delivery. The Amendment would simplify Funds’ prospectus delivery requirements by allowing Funds to only file those prospectuses that contain substantive changes from, or additions to, a prospectus previously filed with the SEC as part of a registration statement.10 Further, Funds and underwriters would also be permitted to, subject to certain conditions, send certain materials to investors after the effective date of a registration statement without having to deliver a prospectus.11
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Reports to the SEC. The Amendment would exclude Funds from having to provide certain reports to the SEC relating to their “business, operations or products” which have been prepared within the past 12 months for or by the Fund, any of its affiliates or its principal underwriter.12
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Proxy Statements. The Amendment would permit Funds to incorporate by reference into their proxy statements certain limited information from other materials previously filed with the SEC.13
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Regulation FD. The Amendment would allow Funds, similar to other companies eligible to file Forms S-3 and S-8, to meet the filing requirements for Form N-2 regardless of whether they comply with certain requirements under Regulation FD.14
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Research Reports. The Amendment would permit broker-dealers to issue research reports15 on or relating to a Fund, subject to certain conditions, at a time when the Fund is conducting a public offering of its securities.16
The CHOICE Act will now move to consideration by the US Senate. Republicans control only 52 seats in the Senate, and there is no indication that any of the 46 Democrats, or two independents who caucus with the Democrats, would support the CHOICE Act in its current form. As a result, the CHOICE Act—including the Amendment—may be revised significantly before becoming law.
1 The Amendment only applies to closed-end management investment companies registered with the US Securities and Exchange Commission (SEC) under the Investment Company Act of 1940, as amended.
2Generally, Rule 405 under the Securities Act of 1933, as amended (Securities Act), defines a WKSI as an issuer that may use Form S-3 for registration of a primary offering of securities and has a worldwide public float of at least $700 million or has sold at least $1 billion in aggregate principal amount of registered debt or other nonconvertible securities in primary offerings for cash.
3 Incorporation by reference would be subject to the same requirements imposed in Form S-3 for operating companies, which include, but are not limited to, certain statements in the prospectus regarding what is incorporated by reference, legends regarding where and how such materials can be obtained, and identification of the type of reports and other information filed with the SEC.
4 Rule 163 and Rule 163A under the Securities Act permit “communication[s] made by or on behalf of an issuer more than 30 days before the date of the filing of the registration statement” as long as they contain certain legends and comply with certain conditions.
5 Rule 134 under the Securities Act allows certain information about the issuer and the offering to be shared with the public before a registration statement is effective. Rule 164 and Rule 433 under the Securities Act address communications about the offering after the registration statement has been filed and whether such communications would be considered “free writing prospectuses” as long as the communications conform to certain requirements and include certain legends.
6 Rule 168 and Rule 169 under the Securities Act discuss the scope of permitted disclosure for “factual business information” and “forward-looking information".
7 Rule 482 under the Securities Act currently governs the requirements for advertisements or other sales materials with respect to the securities of Funds.
8 Rule 415 under the Securities Act provides the conditions for conducting delayed or continuous offerings and sales of securities.
9A Form N-2 registrant, such as a Fund, would no longer need to furnish the undertakings required by item 34.4 of Form N-2.
10 Rule 497 and Rule 424(b) under the Securities Act address the filing requirements of a prospectus of a Fund and an operating company, respectively, after the effective date of a registration statement or the commencement of a public offering after the effective date of a registration statement.
11 Rule 172 under the Securities Act, subject to certain conditions, allows confirmations, notices of allocations and deliveries of securities after the effective date of a registration statement without having to deliver a prospectus. Rule 173 under the Securities Act, subject to certain conditions, allows notice of prospectus delivery instead of actual delivery of such prospectus.
12 Rule 418(a)(3) under the Securities Act requires companies to provide to the SEC “promptly upon request” “any engineering, management or similar reports or memoranda relating to broad aspects of the business, operations or products of the registrant, which have been prepared within the past twelve months for or by the registrant and any affiliate of the registrant or any principal underwriter.”
13 Schedule 14A under the Securities Exchange Act of 1934, as amended (Exchange Act), allows entities meeting the eligibility requirements of General Instruction I.A of Form S-3, to incorporate by reference to previously filed documents any of the information required by Schedule 14A Item 13, including financial statements and information required by Regulation S-X and Regulation S-K.
14 Regulation FD, Rule 103 provides that Regulation FD, Rule 100 disclosures that have been made by companies filing Forms S-3 and S-8 shall not affect whether they have complied with the filing requirements of Section 13 or Section 15(d) of the Exchange Act. Regulation FD, Rule 100 requires that, if “an issuer, or any person acting on its behalf, discloses any material nonpublic information regarding that issuer or its securities to” certain persons, that information must also be disclosed “(1) [s]imultaneously, in the case of an intentional disclosure; and (2) [p]romptly, in the case of a non-intentional disclosure.”
15 Rule 139(d) under the Securities Act defines “research report” as “a written communication…that includes information, opinions, or recommendations with respect to securities of an issuer or an analysis of a security or an issuer, whether or not it provides information reasonably sufficient upon which to base an investment decision.”
16 Rule 139 under the Securities Act addresses the dissemination of information by a broker-dealer involved in the distribution of the offering. Rule 138 under the Securities Act addresses dissemination of information by a broker-dealer not involved in the distribution of the offering.
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