Continuing a recent push to ease regulations, the Securities and Exchange Commission recently adopted a final rule that loosens compliance requirements on business development companies, which invest in small and medium-size businesses.
The measure, which was adopted on March 12, significantly raises the bar for a public registrant to be considered what is known as an accelerated filer or large accelerated filer.
Under the new rule, the SEC will exclude a BDC from the accelerated filer and large accelerated filer definitions if it has a public float of $75 million or more, but less than $700 million, and has investment income of less than $100 million.
The final amendments will take effect 30 days after they are published in the Federal Register. The amendments will apply to an annual report filing due on or after the effective date.
BDCs that meet the criteria to be classified as non-accelerated filers under the amendments will still be required to establish and maintain internal control over financial reporting and have management assess its effectiveness. But they will not be subject to the ICFR auditor attestation requirement. Eligible BDCs will also qualify to comply with the 45-day and 90-day filing deadlines for the quarterly report on Form 10-Q and annual report on Form 10-K, respectively.
Public float for the determination of filing status is measured on the last business day of the registrant’s most recently completed second fiscal quarter. Given recent market turmoil and the performance of BDC stocks since the end of February, many BDCs may meet the public float criteria for the 2020 fiscal year.
In addition, as the U.S. economy reels from the effect of the coronavirus, the Fed has responded by cutting its benchmark rate to near zero and launched large-scale asset purchases and other funding programs to stabilize credit conditions.
These actions are expected to keep interest rates low for some time, which should depress investment income. As a result, if investment income declines, more BDCs may meet the investment income criteria.
BDCs entered bear market territory as interest rates fell…
The amendments are set to benefit a number of small-to-medium size BDCs by loosening the regulatory and compliance burden. BDC sponsors should review the new rule and discuss the new definitions with their advisers to determine whether they will be eligible for this relief.