USA Law and Practice Contributed by: Bill Sturman, Matthew Holt, Steven Starr and Cliff Cone, Clifford Chance
3.3.11 Approach of the Regulator The SEC engages with registrants during the filing process, generally via telephone or email. Face-to-face meetings with SEC officials also occasionally occur, particularly for complex issues, with the SEC’s regional offices facilitating such interactions. Additionally, the SEC provides various channels for inquiries and feedback, including hotlines, email, and public forums. 3.4 Operational Requirements All funds registered under the Investment Com - pany Act, including BDCs and both open- and closed-end funds, must elect to be either diver - sified or non-diversified, must disclose their pol - icy with respect to concentrating investments in an industry or a group of industries, and must appoint an authorised custodian (typically a bank) to safeguard their securities and cash and must also implement liquidity risk man - agement programmes. Registered funds must also be advised by SEC-registered investment advisers, must have a board of directors, and, in order for the funds to avail themselves of cer - tain rules under the Investment Company Act, a majority of these directors must be independ - ent. The Investment Company Act also gener - ally prohibits registered funds from engaging in transactions with their affiliates, including joint transactions, unless in compliance with certain exemptions, rules, or exemptive relief granted by the SEC. Open-end funds generally cannot engage in short selling due to daily liquidity requirements, whereas closed-end funds may engage in short selling under certain conditions. Shares of closed-end funds trade at market prices, gen - erally at a discount to a fund’s NAV. UITs have a fixed portfolio of securities and do not actively manage their investments. They are
designed to be passively managed with a prede - termined termination date. UITs must appoint an authorised trustee, typically a bank, to safeguard their assets. Due to their fixed portfolios, UITs have limited risk management requirements, generally do not engage in borrowing, and cal - culate their NAV only periodically. UITs cannot engage in short selling due to the fixed nature of their portfolios. 3.5 Fund Finance Most retail funds are registered with the SEC under the Investment Company Act, which imposes limits on the amount that these funds can borrow in order to ensure fund stability and protect shareholders. Open-end funds, such as mutual funds and ETFs, have limited borrowing capabilities. They cannot use greater than 33.3% leverage (one dollar of debt for every two dollars of equity assets, or 300% asset coverage, where asset coverage is measured as total assets, including the leverage incurred, over debt). Borrowing is typically used for short-term liquidity needs. Closed-end funds have more flexibility in bor - rowing and often use leverage to enhance returns, though this may also increase a fund’s volatility. These funds can issue debt and pre - ferred shares but cannot use greater than 33.3% leverage (one dollar of debt for every two dol - lars of equity assets, or 300% asset coverage) or 50% (in the event leverage is obtained solely through preferred stock – one dollar of debt for every dollar of equity, or 200% asset coverage) of their total assets. As of 2018, with board approval, BDCs are now allowed to use 100% leverage (two dollars of debt for every one dollar of equity assets, or
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