Closed-end funds offer some powerful strategies within their specific, tight rules. By limiting when investors can interact with them, said funds can take deep, long-term investment strategies and lean in, aiming to deliver powerful returns. However, because these funds are subject to strict restrictions and regulations, they have become a recent topic at the SEC. The regulatory body has proposed key rule changes that investors should keep on their radar.
Perhaps the biggest change in the proposed rules is a shift in “public float” requirements. Previously, the tiers determining the types of closed end and business development companies (BDCs) were decided by size at $75 and $700 million respectively. Under the proposed changes, these funds would be reclassified into new categories: Eligible Listed Issuer (ELI) and Seasoned Eligible Listed Issuer (SELI). An ELI is an exchange-listed CEF or BDC that has filed all required SEC reports on time for the past 12 months, while a SELI is an ELI that has met SEC reporting requirements for at least one full year.
The SEC is also looking to open up access to capital raising for smaller CEFs. The proposed changes would permit all ELIs to use short-form registration statements, while SELis would enjoy automatic shelf registration, without requiring SEC staff approval.
Finally, the new rules would also allow ELIs to communicate with the market and make offers before a registration statement is filed. This move would further streamline the overall registration process and potentially make the closed-end fund structure more accessible.
CEFs and ETFs
Together, the proposed changes would boost the appeal of CEFs by making them more relevant to a wider range investors types. For investors considering closed-end funds — or financial advisors looking out for their clients’ interests — staying ahead of these regulatory updates is well worth the time.
It’s also worth considering ETFs like the GraniteShares HIPS U.S. High Income ETF (HIPS), which can provide exposure to more advanced funds such as CEFs. HIPS emphasizes pass through funds and alternative sources of income through its index, charging a total expense ratio of 117 basis points. Should the SEC’s proposed changes take effect, a wider array of CEFs could become available for strategies like HIPS to target.
Originally published on Advisor Perspectives
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