On June 8, 2017, the US House of Representatives passed the Financial CHOICE Act of 2017 (H.R. 10) (the CHOICE Act) with 233 votes for, 186 votes against and 11 abstaining. Rep. Jeb Hensarling (R-TX), the chairman of the House Financial Services Committee, introduced the CHOICE Act on April 26, 2017, to eliminate many of the most significant components of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Consumer Financial Protection Act of 2010. The Republican Party claimed the passage of the CHOICE Act as a symbolic victory even though both parties and commentators agree that it is unlikely to become law.
As part of the CHOICE Act, the House also passed an amendment introduced by Rep. Trey Hollingsworth (R-IN), which is Section 499A of Subtitle X of Title IV of the CHOICE Act (the Amendment). The Amendment would provide significant benefits to registered closed-end investment companies1 (Funds) by allowing them to operate under the streamlined registration and offering process currently available to publicly traded operating companies. The Amendment requires that the US Securities and Exchange Commission (SEC) revise certain rules no later than one year after the date of enactment of the CHOICE Act as follows:
- WKSI Status. The Amendment would delete the current exclusion of Funds from the definition of “well-known seasoned issuers” (WKSI)2 and would add Form N-2 registration statements to the definition of “automatic shelf registration statement” that a WKSI is permitted to use. WKSIs benefit from a number of streamlined offering, filing and communication requirements including, but not limited to, automatic shelf registration, simplified registration disclosures and communications with the public prior to the effectiveness of a registration statement.
- Incorporation by Reference. The Amendment would require Form N-2 to be revised to allow Funds to incorporate by reference their annual and semi-annual reports into Form N-2 registration statements, thereby greatly reducing the time and expense involved in preparing such registration statements.3
- Pre-Offering Communication and Disclosures. The Amendment would relax restrictions on Fund communications with the public4 prior to filing a registration statement and allow Funds to disseminate certain information about the Funds and the offering5 including, but not limited to, general business or financial information, earnings releases, financial projections, statements about future operations, products or services, and statements about future economic performance, as well as assumptions underlying any of these topics.6 Further, the Amendment would preserve the current ability of the Funds to distribute sales material.7
- Continuous Offerings. The Amendment would allow Funds to conduct offerings on a continuous or delayed basis without having to meet certain conditions regarding the type of offering and registration8 and without having to provide certain undertakings that are currently required by Form N-2.9
- Prospectus Delivery. The Amendment would simplify Funds’ prospectus delivery requirements by allowing Funds to only file those prospectuses that contain substantive changes from, or additions to, a prospectus previously filed with the SEC as part of a registration statement.10 Further, Funds and underwriters would also be permitted to, subject to certain conditions, send certain materials to investors after the effective date of a registration statement without having to deliver a prospectus.11
- Reports to the SEC. The Amendment would exclude Funds from having to provide certain reports to the SEC relating to their “business, operations or products” which have been prepared within the past 12 months for or by the Fund, any of its affiliates or its principal underwriter.12
- Proxy Statements. The Amendment would permit Funds to incorporate by reference into their proxy statements certain limited information from other materials previously filed with the SEC.13
- Regulation FD. The Amendment would allow Funds, similar to other companies eligible to file Forms S-3 and S-8, to meet the filing requirements for Form N-2 regardless of whether they comply with certain requirements under Regulation FD.14
- Research Reports. The Amendment would permit broker-dealers to issue research reports15 on or relating to a Fund, subject to certain conditions, at a time when the Fund is conducting a public offering of its securities.16
The CHOICE Act will now move to consideration by the US Senate. Republicans control only 52 seats in the Senate, and there is no indication that any of the 46 Democrats, or two independents who caucus with the Democrats, would support the CHOICE Act in its current form. As a result, the CHOICE Act—including the Amendment—may be revised significantly before becoming law.