On November 22, 2019 the staff of the Chief Accountant’s Office of the Securities and Exchange Commission’s (the “SEC”) Division of Investment Management (the “Division”) issued an industry comment letter (commonly referred to as a “Dear CFO Letter”) to investment company registrants that points to the Dear CFO Letter as a valuable tool for addressing certain accounting and reporting matters that don’t have specific guidance. The SEC’s views expressed in this letter, and in past and future Dear CFO Letters, apply to the auditing and administration of investment companies and the SEC filings, including reports to shareholders, made by registered investment companies and business development companies. [1]
Between 1994 and 2001, the staff of the Division issued Dear CFO Letters sparingly (eight in total) and now after almost two decades since the last one, the Division is looking to bring back the practice. The Division staff believes that, although they have numerous avenues to express views currently, the Dear CFO Letters “can convey current views to all registrants in a consistent and transparent manner.”[1]
Additionally the staff of the Division is engaging in a full review of prior staff statements and previously issued Dear CFO Letters.[2] Over the years that the Division has been in place, many statements and opinions have changed due to either “rule making” or a changing focus. This comprehensive review will ensure that all industry developments, accounting and auditing standards and amendments to SEC rules and forms are being conveyed in a consistent manner and can be dynamic if necessary.
All current statements of the Division are available at the SEC website via the Accounting Matters Bibliography, which is newly formed.[3] The website is meant to serve as a place where all the current Staff positions on accounting matters expressed in Dear CFO Letters can be viewed. On an ongoing basis, the information will be updated to designate any rescissions, modifications, or supplements of prior views and also be a depository for new positions being issued.
In the November 22, 2019 Dear CFO Letter, the staff of the Division announced a new position regarding Investment Company Act of 1940 Section 19(a) notice requirements. Section 19(a) prohibits a fund from making a distribution from any source other than the fund’s net income, unless that payment is accompanied by a written statement that adequately discloses the source of any payment or dividend distribution wholly or partly from any source other than: accumulated undistributed net income, determined in accordance with good accounting practice, or net income determined for the current or preceding fiscal year.[3] The current staff position does not change the reporting requirements of the Section 19(a) Notice, but does clarify that a “good accounting practice” can be translated as “financial information prepared in accordance with U.S. generally accepted accounting principles.” The staff also notes that it would not object if notices are prepared using tax basis information, so long as the basis for calculating distribution sources is used consistently. Further, as income tax calculations are typically not prepared until the end of the year, registrants should ensure the rule 19a-1 notice contains the best estimate at the time of delivery.[3] Lastly in the new staff position, the staff believes income tax forms provided to investment company investors, including IRS Form 1099-DIV, are not appropriate vehicles to comply with the communication requirements of Section 19(a) because the timing of the release of these forms to shareholders are not consistent with each distribution paid.
The SEC makes clear in the November 22, 2019 Dear CFO Letter that any views that are expressed in Dear CFO Letters are “not rules, regulations, guidance, or statements of the Commission, and the Commission has neither approved nor disapproved their content. These statements, like all staff guidance, have no legal force or effect: they do not alter or amend applicable law, and create no new or additional obligations for any person.”[1]
[1] Letter from the Chief Accountant of the Division of Investment Management (November 22, 2019) (“2019 Letter”) available at https://www.sec.gov/files/industry-comment-letter-112219.pdf.
[2] Previously issued Dear CFO Letters are available at https://www.sec.gov/investment/accounting-and-disclosure-information.
[3] Accounting Matters Bibliography can be found at https://www.sec.gov/investment/accounting-matters-bibliography.
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