On July 6, 2020, the Securities and Exchange Commission (SEC) announced that it voted to (1) amend rule 0-5 under the Investment Company Act of 1940 (1940 Act) to establish an expedited review procedure for exemptive and other applications that are substantially identical to recent precedent and (2) adopt a new rule to establish an internal timeframe for review of applications that do not qualify for the new expedited procedure.1 In addition, the SEC adopted an amendment to rule 0-5 to deem an application outside of expedited review withdrawn when the applicant fails to respond in writing to comments from the staff of the SEC (Staff) within 120 days after the request.
These actions are intended to increase efficiency and transparency in the exemptive application process, while preserving the SEC’s ability to assess the appropriateness of the requested relief.
The new procedures will be effective 270 days following their publication in the Federal Register.
Key aspects of the Release are highlighted below.
Expedited Review Procedure for Routine Applications. An applicant may request expedited review of an application seeking an exemptive order or other relief if such application is “substantially identical” to two other applications for which an order granting the requested relief has been issued within three years of the date of the application’s initial filing. “Substantially identical” applications are those requesting relief from the same sections of the 1940 Act and rules thereunder, containing identical terms and conditions, and differing only with respect to factual differences that are not material to the relief requested.
The Release notes that the SEC is not explicitly excluding any particular types of applications from expedited review but believes, based on Staff experience, that certain lines of applications will generally not satisfy the expedited review standard because they are too fact specific to meet the substantially identical standard. In this regard, the SEC cites, as examples, applications filed under sections 2(a)(9) (declaration regarding control), 3(b)(2) (inadvertent investment companies), 6(b) (employees securities company), 8(f) (investment company deregistration), 9(c) (ineligible-disqualified firm), and 26(c) (fund substitution) of the 1940 Act as highly unlikely to be suitable for expedited review.
Applications seeking expedited review are required to contain a number of specific items, including exhibits with marked copies of the application showing changes from the final versions of the two applications identified as substantially identical; and a cover letter from the applicant signed by the same person executing the application certifying that the applicant believes that the application meets the requirements of expedited review and that the required marked copies are complete and accurate.
A notice for an application filed under expedited review will be issued2 no later than 45 days from the date of filing unless the application does not meet the eligibility criteria under rule 0-5 or additional time is necessary for appropriate Staff consideration.3
Certain conditions govern the operation of the 45-day time period. The 45-day period will stop running upon the filing of any unsolicited amendment (i.e., an amendment that is not in response to a Staff comment or request) of the application and will resume running on the 30th day after the amendment is filed; the Staff, however, may act before the end of the 30-day pause if the amendment only encompasses minor changes. In addition, any comment by the Staff requesting a modification of the application will pause the 45-day period (the Staff anticipates that it will issue few such comments on applications that qualify for expedited review) and will resume 14 days after the filing of an amended application that is responsive to the Staff’s request. An application for expedited review will be deemed withdrawn if the applicant does not file an amendment responsive to the Staff’s request for modification within 30 days of receiving the request.
Timeframe for Standard Review of Applications. In addition to an expedited review process, the SEC also adopted a rule to provide a timeframe for all other applications subject to rule 0-5. New rule 17 CFR 202.13 establishes an internal timeframe for the Staff to take action on applications outside of expedited review within 90 days of the initial filing and each of the first three amendments thereto, and within 60 days of any subsequent amendment. For the purposes of the rule, action on an application or amendment consists of (1) issuing a notice of application; (2) providing the applicant with comments; or (3) informing the applicant that the Staff will forward the application to the SEC.4 In addition, the rule states that the Staff may grant itself 60-day extensions to the timelines, and that the applicant should be notified of any such extension.
Application Deemed Withdrawn Under the Standard Review Process. The amendments to rule 0-5 will deem an application outside of expedited review withdrawn when the applicant does not respond in writing to comments from the Staff within 120 days. The withdrawal will be without prejudice, and the applicant would be free to refile; the timeline, however, would restart with the new application.
S&K Observations and Insights
A more efficient and transparent exemptive application process will allow applicants to obtain the benefits of relief more quickly. The new expedited review process may also make the applications process less expensive for applicants (which cost savings may be passed on to investors) and allow the Staff to direct its time and resources to the consideration of more novel requests for exemptive relief.
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If you have any questions regarding the items covered in this Seward & Kissel memorandum, please contact any of the partners and counsel listed below or your primary attorney in Seward & Kissel’s Registered Funds Group.