On October 23, 2020, the staff of the SEC Chief Accountant’s Office of the Division of Investment Management (Staff) issued its latest industry comment letters (Dear CFO Letters) directed to chief financial officers and independent public accountants of funds and business development companies (BDCs) regarding accounting- and auditing-related disclosure matters. The Staff announced in November 2019 that it was reviving the practice of issuing Dear CFO Letters, which as of that date the Staff had not issued since February 2001. The rescinded, modified or new Staff positions cited in the Dear CFO Letters are listed below and are compiled in an accounting matters bibliography that is available on the SEC’s website.
- Determining Commencement of Operations Date (2020-01): A new Staff position permits a fund to omit certain statements or schedules from its financial statements, such as a statement of cash flows and financial highlights, until investment operations have commenced if the fund determines its commencement of operations, for purposes of performance calculations, to be after the effective date of its registration statement. The date a fund commences operations may be different for financial reporting and performance calculations. For financial reporting purposes, a fund commences operations when the fund’s registration statement is effective. For performance calculation purposes, historical Staff positions permit a fund to calculate its performance either from (i) the date of effectiveness of the fund’s registration statement (effective date) or (ii) the date that the fund commenced investment operations after the effective date, depending on which alternative is a more accurate portrayal of the fund’s performance. The Staff also reminded funds that transactions are recorded as of the trade date for financial reporting purposes and that when the trade date of a transaction is on or prior to the fund’s fiscal year end, it would require complete audited financial statements for such fiscal year end.
- Combined Financial Statements for Compliance with the Custody Rule Under the Advisers Act (2020-03): The Staff’s new position limits the ability of a registered investment adviser (RIA) to rely on the “audit exception” under the custody rule when combining (under ASC 810-10-55-1B guidance) audited financial statements of multiple related limited partnerships or other pooled investment vehicles (PIVs) on the basis of the PIVs’ common management. The position referenced in the Dear CFO Letter provides a list of factors a RIA should consider when using combined audited financial statements for multiple PIVs and seeking to rely on the audit exception.
- BDC Financial Statements in Initial Registration Statements (2020-02): This new Staff position permits BDCs to include limited financial statements in their initial registration statements filed on Form N-2 or Form 10 if, as of the date of the BDC’s financial statements, the BDC has received only initial seed capital, or has incurred only organizational and offering expenses.
In other new Dear CFO Letters, the Staff: (i) modified its position with respect to the senior securities table audit requirement (2001-02) for BDCs and closed-end funds (CEFs) arising from changes to the offering disclosure requirements for such funds through the BDC-CEF offering reforms; (ii) modified its position on the methods by which registrants should be reporting a change in auditor (1998-04); and (iii) rescinded its position on average commission rate disclosure (1998-01), which is no longer required as a result of the BDC-CEF offering reforms.
The latest Dear CFO Letters and the accounting matters bibliography are available at the links below: