Compliance
BDCs are closed-end investment companies that have elected to be regulated as such under the Investment Company Act of 1940, and are therefore regulated by the SEC under the Investment Company Act of 1940 (1940 Act), and are required to comply with Rule 38a-1 under the Investment Company Act, governing compliance programs for investment companies. BDCs that are managed by a registered investment adviser are also subject to the rules and regulations of the Investment Advisers Act of 1940 (Advisers Act), including Rule 206(4)-7 under the Advisers Act. Unlike other investment companies, BDCs function like traditional operating companies and are also subject to the Securities Act of 1933, the Securities Exchange Act of 1934, and the listing standards of the national securities exchange on which their shares of common stock are listed.
Due to the panoply of rules and regulations with which a BDC must comply, maintaining compliance with the federal securities laws and exchange listing standards requires a comprehensive compliance program that is diligently administered. We have worked with many BDCs to develop and maintain comprehensive compliance programs. We have significant experience in the following areas of compliance:
Investment Company Compliance
Rule 38a-1 requires, among other things, that a BDC:
- appoint a chief compliance officer (CCO);
- develop, maintain, and test a compliance program encompassing all rules and regulations under the relevant securities laws, including:
- code of ethics and business conduct policy;
- personal securities holdings procedures;
- valuation policy and related documentation;
- custody / safekeeping procedures;
- Section 57 screening procedures for joint or affiliated transactions;
- disclosure policy and procedures;
- proxy voting policy;
- document retention program; and
- have the CCO present a CCO report to the Board of Directors at least annually to report findings, and assess overall effectiveness of the compliance program.
Periodic Reporting Obligations
BDCs are also required to file periodic reports under the Securities Exchange Act, including 10-Qs, 10-Ks, 8-Ks and proxy statements. Sutherland has developed a summary matrix of required 8-K filings. If you'd like to receive a copy of this matrix, please contact us.
Sarbanes-Oxley Compliance
BDCs are subject to the various rules and additional disclosure obligations promulgated under the Sarbanes-Oxley Act of 2002, including the establishment of:
- an internal audit function, including management's assessment of its effectiveness, and an opinion of the issuer's auditors as to its effectiveness
- a whistleblower policy and procedures
- a retention program for audit documentation
Investment Advisers Compliance
Rule 206(4)-7 under the Advisers Act has similar requirements to Rule 38a-1, but also requires, among other things:
- filing and ongoing maintenance of Form ADV, the primary public disclosure document for RIAs
- determination of investment adviser representatives, if applicable, and determination of supervisory procedures
- trading policy
- best execution policy
- advertising procedures
- oversight of "pay to play" activities
- oversight of compliance of pooled investment vehicles
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SEC Exams - Are You Ready?
BDCs and RIAs are subject to routine SEC examinations, which may occur as often as every three years. Be ready by making sure all compliance program documentation, including all policies and procedures, is regularly updated and all testing data and evidentiary documentation is readily available, with the last year of documentation on site, and the last five years of data easily accessible within 24 hours.
If you'd like to discuss conducting a mock exam, please call us or contact us. Sutherland has conducted mock exams and has helped many clients through the examination process.
RIA Compliance
With the passage of Dodd-Frank, the 15-client exemption from registration as a registered investment adviser was eliminated. As a result, generally firms with more than $150 million in assets under management will be required to register as an RIA with the SEC. The deadline to register has been extended to March 30, 2012. If AUM is less than $150 million, the firm may still be required to register under state law - you should consult counsel on this matter. Sutherland has developed a concise summary of the compliance obligations under Rule 206(4)-7 for investment advisers that may be useful to new RIAs. If you are interested in receiving our RIA compliance summary for BDCs, please contact us.
Dodd-Frank Compliance
Sutherland has established an entire site to the regulatory changes related to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), and have conducted webinars and issued various publications. Topics relevant to BDCs include:
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