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News April 23, 2012 Issue

SEC Again Eases Disclosure Burden on Closed-End Funds and BDCs

Closed-end funds and business development companies (BDCs) have a problem that the SEC may be willing to help them solve.

Unlike mutual funds, which sell and redeem shares directly with investors on a daily basis, closed-end funds and BDCs must use the public offering process to sell shares and raise capital for investment and operating purposes. These funds often maintain an effective registration statement "on the shelf" from which they can offer securities into the markets from time to time.

Such offerings rely on the ability to capitalize on favorable market conditions for their success, which has grown increasingly difficult in the wake of the financial crisis.

The problem is, closed-end funds and BDCs must update their financial statements before offering securities from a shelf registration statement, and that process requires SEC review and approval.

The delay can be deadly to the success of an offering.

Mutual funds have an immediately effective process for updating financial statements under Securities Act Rule 486(b) that requires no SEC review. Specialized closed-end "interval" funds, which conduct repurchase offerings on a quarterly or more frequent regular basis pursuant to Rule 23c-3 under the Investment Company Act, may also use Rule 486(b).

On April 12, the staff issued a no-action letter to Aberdeen Australia Equity Fund and its sister funds, the Aberdeen Chile Fund and the Aberdeen Global Income Fund, that permits the group of closed-end funds to use Rule 486(b) to update their financial statements with immediate effectiveness and no staff review. The process isnít allowed for sales that would occur below a fundís net asset value.

This is the third time the staff has issued this type of no-action relief. The Nuveen Municipal High Income Opportunity Fund received similar relief on November 9, 2010, and the Calamos Convertible Opportunities and Income Fund received similar relief on February 14, 2011.

The SEC staff has opened the door of capital raising for these funds a little wider by granting the relief, but is doing so cautiously.

While third parties under similar circumstances may generally rely on no-action relief granted by the Division of Investment Management, this relief is specifically limited to the requesting parties. The letters note however, that "[t]he staff is willing to consider similar requests from other registered closed-end management investment companies or business development companies."

Think of it like the "frequent flyer" clearance travelers can get from the Transportation Security Administration that lets them whisk through security at the airport.

Just pony up a little more information in advance to elevate the staffís comfort level, and your closed-end fund or BDC could earn a pass on the file-and-review process for updating fund financials that is currently in place.