SEC Adopts Amendments to Regulation S-X Applicable to BDCs

Eversheds Sutherland (US) LLP

Sutherland Asbill & Brennan LLP

On October 13, 2016, the Securities and Exchange Commission (SEC) issued a release adopting final rules to modernize and enhance the reporting and disclosure of information by registered investment companies (the Final Rules). Though the Final Rules primarily address the reporting and disclosure obligations of registered investment companies, they also include amendments to Regulation S-X applicable to business development companies (BDCs).1

This Legal Alert provides a summary of the amendments to Regulation S-X, which require standardized, enhanced disclosure about derivatives in BDC financial statements, among other amendments. The compliance date for the amendments to Regulation S-X is August 1, 2017.

Amendments to Regulation S-X

Regulation S-X establishes general requirements for the form and content of financial statements required in registration statements and periodic reports. Regulation S-X, however, currently does not require standardized information to be included in financial statements for most types of derivatives, including swaps, futures, and forwards. To address this, the Final Rules amend Regulation S-X to, among other things, standardize the reporting of certain derivative investments in a BDC’s financial statements. In addition, the Final Rules update the disclosures for other investments and investments in and advances to affiliates and amend the rules regarding the general form and content of a BDC’s financial statements. 

The Final Rules will renumber the current schedules in Article 12 of Regulation S-X and break out into separate schedules the reporting of derivatives currently on Schedule 12-13, as summarized in the table below:

* Denotes new or renumbered schedules

Enhanced Derivatives Disclosures

To address the issues of inconsistent disclosure and lack of transparency in financial statements with regard to derivative instruments, the Final Rules amend Regulation S-X by adopting new schedules for open futures contracts (new rule 12-13A), open forward foreign currency contracts (new rule 12-13B) and open swap contracts (new rule 12-13C). The Final Rules also modify the current disclosure requirements for purchased and written option contracts (new rule 12-13 for open option contracts written and new rule 12-12 for options purchased). 

  • Open Futures Contracts (New Rule 12-13A) – New rule 12-13A amends current rule 12-13 to require that BDCs report the notional amount and value of each open futures contract to provide investors with more insight into the economics of a BDC’s investment in futures contracts. 
  • Open Forward Foreign Currency Contracts (New Rule 12-13B) – New rule 12-13B amends current rule 12-13 to require that BDCs disclose the counterparty to each open forward foreign currency contract to allow investors a better understanding of counterparty risk for such transactions. 
  • Open Swap Contracts (New Rule 12-13C) – New rule 12-13C amends current rule 12-13 to require that BDCs report the counterparty to each open swap contract (except for exchange-traded and centrally cleared swaps), the value of the contract, and any upfront payments or receipts. The new requirements are intended to provide investors with a better picture of the economics of the relevant transaction and its associated risks. 

In addition, with regard to swap contracts with a referenced asset that is an index with components that are publicly available on a website as of the relevant BDC’s balance sheet date, or if the notional amount of the portfolio holding constitutes 1% or less of the BDC’s net asset value (NAV) as of the close of the period, new rule 12-13C requires that the BDC provide information sufficient to identify the referenced asset, such as a description. Alternatively, if the referenced asset is an index or custom basket with components that are not publicly available on a website as of the date of the balance sheet, and the notional amount of the derivative exceeds 1% of the BDC’s NAV as of the close of the period, the BDC must describe the index or custom basket and list separately (i) the index’s or custom basket’s 50 largest components and (ii) any other components for which notional value exceeds 1% of the notional value of the index or custom basket. For each separately listed investment, the BDC must, as part of the description, include the description of the underlying investment as would be required by Article 12 of Regulation S-X, the quantity held, the value at the close of the period, and the percentage value when compared to the net assets of the custom basket.

Amendments to Current Rules 12-12 through 12-12C and Instructions Common to Rules 12-12 through 12-12B and 12-13 through 12-13D

The Final Rules do not change the schedules for rules 12-12, 12-12A, and 12-12C, but rather provide additional rules for new schedules, as well as clarify existing rules, including by renumbering several schedules. With respect to the instructions to rule 12-12, the Final Rules adopted the following requirements: 

  • With regard to variable rate debt securities, a BDC must describe the referenced rate and spread, as well as provide each investment’s end-of-period interest rate, or disclose each referenced rate at the end of the period. 
  • For securities with payments-in-kind (PIK), a BDC must provide the PIK interest rate.
  • When identifying each issue of securities held in connection with open put or call option contracts and loans for short sales, a BDC must disclose where any portion of the issue is on loan. 

In addition, the Final Rules amended instructions common to rules 12-12 through 12-12B and 12-13 through 12-13D to be consistent with the disclosures required by current rules 12-12 and 12-13. For example, whereas current rule 12-13 instructs BDCs to identify “each investment not readily marketable,” the Final Rules will instead require BDCs to (1) indicate whether the BDC valued an investment using significant unobservable inputs, and (2) identify any derivative that cannot be sold because of restrictions or conditions applicable to such derivative. 

Investments in and Advances to Affiliates under Rule 12-14

The Final Rules also include amendments to rule 12-14, which currently requires a BDC to make certain disclosures about its investments in and advances to any “affiliates” or companies in which the BDC owns 5% or more of the outstanding voting securities. The SEC’s amendments include changes to the instructions to rule 12-14 to conform the rule to the disclosure requirements in rules 12-12 and 12-13. Under the current rule, a BDC must disclose the “amount of equity in net profit and loss for the period” for each affiliated company, but is not required to disclose realized or unrealized gains or losses. The Final Rules, however, modify rule 12-14 to require for each affiliated investment disclosure of “net realized gain or loss for the period” and “net increase or decrease in unrealized appreciation or depreciation for the period” instead of disclosure of the “amount of equity in net profit and loss for the period.”

In addition, to better correlate with the statement of operations the totals required to be disclosed by rule 12-14, the Final Rules amend the instructions to rule 12-14 to require BDCs to disclose total realized gain or loss and total net increase or decrease in unrealized appreciation or depreciation for affiliated investments. The Final Rules also add a new instruction to make the categorization of investment in and advances to affiliates consistent with the categorization method used in rules 12-12, 12-12A, and 12-12B. Other than the above, the amendments to rule 12-14 set forth in the Final Rules are consistent with the amendments described in the Proposing Release.3

Form and Content of Financial Statements

The Final Rules also generally amend the form and content of financial statements filed by BDCs to conform to the other changes implemented by the Final Rules, including, but not limited to, the following:

  • Modification of a specific instruction in subparagraph (a) of rule 6-10 in order to clarify that all schedules required by rule 6-10 should be presented together within the financial statements, and not in the notes thereto.
  • Implementation of changes to rules 6-03 and 6-04 to specifically reference the investments required to be reported on separate schedules in amended Article 12.
  • Elimination of current rule 6-04.4, which requires disclosure of “Total investments” on the balance sheet under “Assets,” and a corresponding change in rule 6-03(d).
  • Addition of a requirement to rule 6-03(h) requiring BDCs to report the cost of all investments in an unrealized appreciation and the cost of all assets in an unrealized depreciation on a gross basis.
  • An amendment to rule 6-04 to refer individually to the derivatives disclosures in new rules 12-13A through 12-13C.
  • Amendments to rule 6-05.3 to require BDC financial statements to reflect all unaffiliated investments other than securities presented on separate schedules under Article 12.
  • Addition of subsection (m) to rule 6-03 to require BDCs to make certain disclosures in their Statement of Additional Information in connection with securities lending activities and cash collateral management.
  • Amendment to rule 6-07 to require that BDCs make a separate disclosure for income from non-cash dividends and PIK interest on the statement of operations if all income of this type exceeds 5% of the BDC’s investment.
  • Amendment to rule 6-07.7(a) to conform statement of operations disclosures of the net realized gains or losses from investments to include the additional derivatives disclosures in new rules 12-13A through 12-13C; and amendment to new rule 6-07.7(c) (current rule 6-07.7(d)) to conform statement of operations disclosures of the net increase or decrease in the unrealized appreciation or depreciation of investments to include the additional derivatives disclosures in new rules 12-13A through 12-13C. 
  • Elimination of Regulation S-X’s requirement for specific disclosure of written options activity under current rule 6-07.7(c).
  • Elimination of the exception in Schedule II of current rule 6-10, which does not require reporting under current rule 12-13 if the investments, at both the beginning and end of the period, amount to 1% or less of the value of total investments. 


The SEC’s amendments to Regulation S-X most significantly change the current reporting regime for BDCs by standardizing the reporting of certain derivative investments, but otherwise make only modest changes to the Regulation S-X rules applicable to BDCs. Notwithstanding such, BDCs should begin to review and prepare to comply with the new rule amendments given the approaching August 1, 2017 compliance date.

1 The full text of the Final Rules can be found at

2 Current rule 12-12C has been renumbered as rule 12-12B.

3 The full text of the Proposing Release can be found at

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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