This is the ninth installment of our review of the compliance requirements of new Rule 18f‑4. Our last post explained why unfunded commitment agreements present asset sufficiency risk but did not create leverage risk. In this post, we will explain how paragraph (e) of the new rule controls asset sufficiency risk, tracing its origins back to Release No. IC-10666 (“Release 10666”).
Continue Reading Unfunded Commitment Agreements under Rule 18f-4: The Last Vestige of Release 10666

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 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?


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

Earlier this year, the staff of the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) published its annual list of examination priorities, which included firms’ preparation for the transition away from LIBOR as a widely used reference rate for various financial instruments. On June 18, OCIE followed-up with a risk alert that provides additional details about how it evaluates firms’ LIBOR transition preparedness.
Continue Reading OCIE Issues Risk Alert on LIBOR Transition Preparedness

On April 14, 2020, the staff of the SEC’s Division of Investment Management (the “Division”) published a Statement on the Importance of Delivering Timely and Material Information to Investment Company Investors (the “Statement”). The Statement gives notice that the Division has a keen eye on prospectus risk disclosure as it continues to monitor the ongoing impacts of the COVID‑19 pandemic on investment companies. “In light of the current uncertainties and market disruptions,” the Division explains, “investors need high-quality financial information more than ever.”

The Statement comes amid other guidance and temporary regulatory relief from the SEC, including public statements by Chairman Jay Clayton and Chief Accountant Sagar Teotia emphasizing the need to assist “Main Street investors” in navigating turbulent markets. Uniquely, the Statement focuses explicitly on how fund complexes might modify existing disclosures.
Continue Reading SEC Staff Speaks to COVID-19 and Fund Prospectus Disclosure