SEC proposes reclassifying closed-end funds, easing registration

The Securities and Exchange Commission proposed reclassifying exchange-listed closed-end funds (CEFs) and business development companies (BDCs) as Eligible Listed Issuers (ELIs) and Seasoned ELIs (SELIs). The proposal would allow ELIs to use short-form registration, let SELIs use automatic shelf registration without SEC staff approval, and permit ELIs to communicate with investors and make offers before filing a registration statement.

The proposal would replace size-based tiers that used public-float thresholds of roughly $75 million and $700 million with a rules-based framework tied to timely SEC reporting and exchange listing status.

Under the proposal, an ELI would be an exchange-listed CEF or BDC that has filed all required SEC reports on time for the prior 12 months. A SELI would be an ELI that has met SEC reporting obligations for at least one full year.

All ELIs would be eligible to use short-form registration statements. Short-form registration lets issuers incorporate previously filed disclosure by reference, reducing the need to restate information in a new filing.

SELIs would be eligible for automatic shelf registration, which would allow them to register securities in advance and sell from that shelf without separate SEC staff review for each offering.

The proposal would permit ELIs to communicate with potential investors and make offers before a registration statement is filed. The proposal states it would enable issuers to seek investor interest earlier in the offering process.

Market participants, financial advisers, index providers and fund sponsors are monitoring the proposal for its potential effects on smaller CEFs and on product design for funds that target income and alternative sources.

Closed-end funds limit when investors can buy or redeem shares, which allows managers to hold less liquid or concentrated investments and pursue longer-term strategies. The proposal addresses how listed CEFs and BDCs access public capital and does not change fund investment mandates.

Investors and advisers should follow the SEC rulemaking process for final language and effective dates, as the proposal may be revised before a final rule is adopted.