I want to start by recognizing the hard work of the staff in the Division of Investment Management, the Division of Corporation Finance, and the Division of Economic and Risk Analysis. The current circumstances present new and significant challenges to the staff every day, and you have continually done all that is asked of you and more. It would be an understatement to say that the Commission has been busy these past few weeks, and your diligence, professionalism, and commitment to the agency’s mission is an inspiration.

Today’s rules extend to business development companies (BDCs) and closed-end funds the securities offering and communication provisions that the Commission granted to operating companies in its 2005 Securities Offering Reform rules.[1] Those rules made significant changes to the offering and communications provisions applicable to operating companies, especially with respect to a category of the largest and most widely-followed public companies—known as “well-known seasoned issuers” or “WKSIs.”[2] The 2005 changes gave WKSIs and other operating companies increased flexibility and reduced the level of staff review over their disclosures.[3] We now extend those changes to non-operating companies.

Certain aspects of today’s final rules, in particular those applicable to BDCs, were specifically mandated by self-executing legislation that became effective a year ago. The Commission’s action today with respect to BDCs largely formalizes those changes.[4] However, much of what is in these final rules is 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.

Unfortunately, I am unable to support these rules both because of their timing and their substance.

TIMING

As I noted in a statement last week, the current market volatility and on-going national emergency require that the Commission proceed cautiously before undertaking action outside of what is specifically called for by the market effects of the immediate public health crisis.[5] In weighing the relevant considerations set forth in that statement, I cannot agree that we should undertake this rulemaking at this time.

These rules stem from a proposal published over a year ago, and do not address conditions stemming from the COVID-19 crisis. Moreover, we choose this moment to weaken protections for retail investors. Both BDCs and closed-end funds are largely owned by retail investors—those who have been hit hard by the recent market turmoil and who are least able to recover. In fact, the changes adopted today actually drop material disclosure requirements that were included in the proposal a year ago, and roll back important investor protection features. We are reducing protections in the midst of a crisis that has caused staggering losses for fund investors, with no clear idea when such losses may abate. As with other recent rulemakings, we roll back investor protections, asserting, without evidence, that we believe we are nevertheless maintaining sufficient protection.[6] This is not the time to engage in such speculation.

SUBSTANCE

Turning to the substance of the rules, the changes adopted today fall short in two significant investor protection areas. First, the final rules fail to include the proposed Form 8-K reporting requirements, similar to those for operating companies, despite the purported rationale of creating parity between funds and operating companies. And second, by allowing certain funds to make material changes automatically effective, the rules remove an important tool from the staff to ensure that fund sponsors adequately address our concerns. Had the the final rules come out differently on these two items, and had we at least waited past the peak of this public health crisis, I likely would have supported the rules.

Dropping the 8-K Requirement

For closed-end funds, the legislation specifically empowered the Commission to set appropriate conditions on the use of the 2005 offering and communications rules, leaving significant discretion to the Commission in crafting the rule.[7] The 2005 rules relied heavily on the fact that large issuers—especially WKSIs—are typically subject to scrutiny by a significant number of analysts and institutional investors, and that such scrutiny operated as a check on their disclosure.[8] BDCs and closed end funds, however, have limited analyst coverage and are largely held by retail, not institutional, investors.[9] Nevertheless, the final rules purport to rest on the rationale that parity with operating companies is justified. That parity, however, is notably not applied to require funds to provide retail investors with more timely access to material information on Form 8-K.

Last year’s proposal would have required closed-end funds to file current reports with the Commission on Form 8-K, as is already required of operating companies and BDCs.[10] Additionally, it proposed to add two new items to Form 8-K for both BDCs and closed-end funds that would have required a current report in the event of a material change in a fund’s investment strategy or policies,[11] or upon a material write-down of a significant investment of the fund.[12] These new items, which do not apply in the operating company context, were proposed specifically to add material information relevant to fund investors.[13] The proposal explained at the time that current reports were a significant component of the 2005 securities offering rules and specifically highlighted the need for mandatory—rather than voluntary—reporting to ensure timely and uniform disclosure practices across closed-end funds and BDCs.[14]

It is a fairly straightforward proposition that investors need timely information about material events, such as a material write-down of a significant investment, and the market volatility brought on by the current public health crisis brings this logic into sharp focus. Additionally, a fund may well determine to adapt to the present challenges by making changes to its investment strategies. More than ever, investors need timely information about the ways in which that fund is deploying or redeploying capital. Instead, today’s final rules fail to require that investors receive that information on a timely basis and rely too heavily on inconsistent existing disclosure practices.

Undermining Commission and Staff Oversight

In addition, today’s changes will allow certain continuously-offered closed-end funds and BDCs that do not qualify as WKSIs to make material changes to their registration statement without requiring those changes to be declared effective by the staff.[15] Such changes could include, among other things, material changes in investment strategy or the types of assets in which the fund will invest. This is a sea change that goes further than the proposal and degrades a significant and effective investor protection tool used by the staff. Last year’s proposal would have allowed continuously-offered closed-end funds and BDCs to make certain routine updates to their registration statements that would become effective automatically.[16] The final rules, however, significantly expand that proposed change and go well beyond the requirements of the legislation.

Most importantly, this change undermines our ability to ensure that continuously-offered closed-end funds and BDCs reasonably respond to staff comments and concerns prior to making material changes effective.[17] Staff has confronted a number of novel and complex issues in the closed-end fund space over the past several years. In many instances, the requirement that the staff declare an amendment effective has proven critical in helping to resolve those issues and adequately addressing staff and Commission concerns. This change eliminates an important and commonly used tool and erodes the ability of the staff and the Commission to address any investor protection issues before a material change becomes effective.[18]

We are an agency with a mission to protect investors. During this public health crisis, we have taken a number of important and necessary steps designed to ensure the effective operation of the capital markets that have resulted in a reduction, albeit temporarily, in the information available to investors. While I have supported most of these efforts, we must consider our actions today and the reduction in investor disclosure and protections in this context. I cannot support what I consider to be a particularly ill-timed additional rollback of protections for retail investors, and I respectfully dissent.