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The SEC’s Acting Chair, Commissioner Allison Herren Lee, was a vocal critic of the SEC’s approach to environmental, social and governance (“ESG”) matters under former Chair Jay Clayton. She voted against the SEC’s 2020 guidance and amendments to Regulation S-K because they did not go far enough in requiring disclosure from public companies about climate change and diversity metrics, noting that climate risk is a new type of systemic risk of “colossal and potentially irreversible risk of staggering complexity” and arguing that “it’s time to consider how to get investors the diversity information they need to allocate their capital wisely.”  “Consistent, reliable, and comparable disclosures of the risks and opportunities related to sustainability measures, particularly climate risk,” she said, is material information that investors need in their decision-making process.

The Statement on the Review of Climate-Related Disclosure from Commissioner Lee and the ESG Funds Investor Bulletin from the SEC’s Office of Investor Education and Advocacy released last week were thus not surprising. They were also likely only the first in a series of ESG-related actions to come from the SEC.…
Continue Reading ESG at the SEC: Hints of More to Come

Subject to Steve’s caveat regarding the definition of an “unfunded commitment agreement,” we continue our exploration of Rule 18f-4 with a focus on the treatment of such commitments under paragraph (e) of the new rule. Like paragraph (d), (e) applies only to business development companies, closed-end funds and open-end funds other than money market funds (“Funds”). We begin with a conceptual question: how can a contract to lend money and a contract to repay borrowed money both be “senior securities” under Section 18?…
Continue Reading Why Are Unfunded Commitment Agreements “Senior Securities?”

This is the seventh installment of Andrew Cross and my review of the compliance requirements of new Rule 18f‑4 and the first to deal with “unfunded commitment agreements.” Before plunging into the substance of paragraph (e) of Rule 18f-4, which regulates unfunded commitment agreements, I want to revisit a problem I have with the definition. My problem stems from trying to answer a basic question: Is a binding commitment to make a loan upon demand by the borrower, with stated principal and term and a fixed interest rate, an “unfunded commitment agreement?”…
Continue Reading Rule 18f-4 Still Has Commitment Issues

This is the sixth installment of our discussion of the compliance requirements of new Rule 18f‑4 and wraps up our discussion of paragraph (d) of the new rule and its application to business development companies (“BDCs”), closed-end funds and open-end funds other than money market funds (collectively, “Funds”). This posts identifies which Funds need to update their asset coverage procedures for compliance with Section 18 of the Investment Company Act of 1940 and what those updates should entail.…
Continue Reading Checklist for Including Reverse Repos and Similar Financing Transactions in Asset Coverage Procedures

This is the fifth installment of our discussion of the compliance requirements of new Rule 18f‑4 and completes our consideration of paragraph (d) of the new rule and its application to business development companies, closed-end funds and open-end funds other than money market funds (“Funds”). Our two previous posts considered the application of that paragraph to reverse repurchase agreements (“reverse repos”) and “similar financing transactions.” This posts identifies transactions that the adopting release (the “Release”) indicates would not be similar to reverse repos. These transactions fall into two categories: (a) derivatives instruments that will be subject to the conditions of paragraph (c) of Rule 18f‑4 and (b) transactions not at all subject to Rule 18f‑4.…
Continue Reading Transactions Not Similar to Reverse Repos under Rule 18f-4(d)

This is the fourth installment of our discussion of the compliance requirements of new Rule 18f‑4. Our last post considered the application of paragraph (d) of the new rule to reverse repurchase agreements (“reverse repos”) and the compliance alternatives provided to business development companies, closed-end funds and open-end funds other than money market funds (collectively, “Funds”). Paragraph (d) also applies to financing transactions that are similar to reverse repos. This post discusses examples of “similar financing transactions” provided in the adopting release (the “Release”).…
Continue Reading Financial Transactions Similar to Reverse Repos (and Why they Matter)

This post is the third installment of our discussion of the compliance requirements of new Rule 18f‑4. From this point forward, we will be dealing with exemptions that apply only to business development companies (“BDCs”), closed-end funds and open-end funds other than money market funds (collectively, “Funds”). We first consider paragraph (d) of Rule 18f‑4, relating to reverse repurchase agreements (“reverse repos”).…
Continue Reading Reverse Repos and Rule 18f-4—The Easy and the Hard Ways

This post is the second installment of our discussion of the compliance requirements of new Rule 18f-4.

The comments on proposed Rule 18f-4 revealed a significant lacuna in the rule resulting from two unrelated changes to current regulations. First, the SEC will rescind Investment Company Act Release No. 10666 (“Release 10666”) as of August 19, 2022, the same day funds must comply with Rule 18f-4. Second, money market funds are excluded from the exemptions for derivatives transactions provided by Rule 18f-4. This post will explain why this was a problem and how the final rule addresses it.…
Continue Reading Exclusion of Non-Standard Settlements—Something for Every Fund in Rule 18f-4

Following onto our recent podcast discussing new Rule 18f-4 at a very high level, we thought it would help to post a series of blogs that go into more detail and point out some open questions. We begin with the most basic elements:

  • What is Rule 18f-4?
  • What alternatives are available for compliance?
  • When must funds comply with Rule 18f-4?

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Continue Reading Dealing with the New Derivatives Rule—Definition of Derivatives Transactions and Classifications of Funds

In an October 2019 update, we highlighted that the SEC’s attention to Rule 12b-1 fees for over 40 years, along with more recent initiatives, enforcement activities, and FAQs suggested that the Commission would likely continue to closely scrutinize investment advisers’ share class selection and related compensation practices at least for the foreseeable future.

In…