On May 3, 2019, the SEC issued a proposal to amend certain rules and forms relating to required financial disclosures in business combination transactions involving investment companies.

First, the proposal would streamline applicable significance tests under Regulation S-X to more closely align with significance tests under the Investment Company Act of 1940. Proposed Rule 1-02(w)(2) of Regulation S-X would create a separate definition of “significant subsidiary” for investment companies using a modified version of the investment test and income test set forth in Rule 8b-2 under the Investment Company Act, as follows:

  • Investment Test. An acquisition would be significant if the value of a fund’s investment in and advances to the tested subsidiary (i.e., the acquired fund) exceed 10% of the value of the fund’s total investments as of the end of the most recently completed fiscal year.
  • Income Test. An acquisition would be significant if the total investment income of the tested subsidiary as of the most recently completed pre-acquisition fiscal year exceeds 10% of the total investment income of the acquiring fund. The income test includes (1) investment income, such as dividends; (2) net realized gains and losses; and (3) net change in unrealized gains and losses.

In addition, a tested subsidiary would be deemed significant if the income test yields a condition of greater than either (1) 80% by itself, or (2) 10% and the investment test yields a result of greater than 5%.

The proposal also would address required financial statements of acquiring and acquired investment funds, including registered investment companies and private funds relying on Section 3(c)(1) or 3(c)(7) of the Investment Company Act. Proposed Rule 6-11 of Regulation S-X would apply a facts and circumstances evaluation to determine whether a fund acquisition has occurred and, if so, would require only one year of audited financial statements. Financial statements of an acquired fund would need to be provided only if the investment and income significance tests above exceed 20%. For acquisitions of private funds, the financial statements may be prepared in accordance with U.S. GAAP.

Additionally, the proposal would eliminate the requirement for investment companies to provide pro forma financial statements in connection with business combination transactions, and instead require investment companies to provide certain supplemental information about the combined fund post-acquisition, including, among other things, (1) a pro forma fee table; (2) a schedule of the acquired fund’s investments and a related narrative discussion if there will be material changes to the acquired fund’s investment portfolio resulting from applicable investment restrictions; and (3) narrative disclosure about material differences between the accounting policies of the combined fund and those of the acquired fund.

Finally, the proposal would make certain conforming changes to Form N-14 to align the form with the new rules and amendments discussed above.

The SEC is seeking comments on the proposal on or before July 29, 2019.

The full text of the proposal can be found at: