Middle-Market Public Policy Roundup

In this week’s roundup, we look at how the Securities and Exchange Commission is considering a change to long-standing regulations that would expand the amount of shares investor companies can hold in some funds. The proposal would allow investors to circumvent current limitations so long as they obey other agency rules.

Less than a month after the longest federal government shutdown in history came to an end, the possibility of another funding lapse looms. President Trump met with congressional negotiators this week to work out a compromise on border security, but with only a few days left before the stopgap funding agreement expires, uncertainty remains.

SEC Proposes Fund-of-Funds Rules for Investment Companies

A new SEC proposal would allow some funds to acquire shares in excess of current regulations without obtaining individual exceptions from the commission.

The proposed rule, published in the Federal Register on Feb. 1, would amend the Investment Company Act to allow registered investment companies or business development companies to purchase shares in excess of the “3-5-10 rule,” which limits fund-to-fund investment to 3 percent of outstanding securities in any single fund, 5 percent of the investing fund’s total assets in any single fund, and 10 percent of the investing fund’s total assets in investment companies generally.

Since the 3-5-10 rule was created, funds have increasingly invested in each other for various reasons, such as diversification, and congressional and agency-level measures have been implemented in order to grant relief to such funds while still protecting investors from issues such as excessive fees and overly complex structures.

The 3-5-10 limits could be avoided under the proposal as long as the acquiring funds comply with SEC-requirements to avoid direct voting control of the acquired fund, avoid selling more than 3 percent of an acquired fund’s shares in any 30-day period, avoid complex fund structures (including multi-tiered arrangements) and observe conditions regarding an extensive consideration of fees.

International law firm Ropes and Gray provided additional analysis of the requirements that must be met in order to be exempted under the rule.

The proposal corresponds with remarks made by SEC Chairman Jay Clayton, who spoke at the SEC Government-Business Forum on Small Business Capital Formation in December about the agency’s responsibility to examine its complex patchwork of regulatory exemptions in order to create a comprehensive regulatory framework.

If you are an ACG member interested in this rulemaking, please reach out to policy@acg.org to share your input.

Tenuous Shutdown Deal to Be Decided

Nearly a month after the longest government shutdown in history ended, House and Senate negotiators came to an agreement as of Monday night on a border security package. The legislation still needs to pass through both chambers of Congress and be signed by the president before Friday to avert another shutdown.

The deal would provide $1.4 billion in funding for border barriers, significantly less than the $5.7 billion President Trump requested.

Trump said he was “not happy” with the deal and hasn’t committed to signing the agreement, but he has ruled out another government shutdown, he told reporters at a cabinet meeting this week. Additional compromises have also been made between Republicans and Democrats. Trump said he was “adding things” as of Tuesday.

Were the government to shut down again, the effects would likely serve to compound the already-backlogged SEC and Treasury, further delaying initiatives that include guidance for opportunity zones and obstructing tax filings.

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