SEC Refreshes Its “Dear CFO Letters” Practice– November 02, 2020 by Frank Barrie

To address the myriad of regulations over the investment industry, the U.S. Securities and Exchange Commission (SEC) provides a variety of guidance and reference materials to industry stakeholders. As a part of that effort, since November 1994, the Chief Accountant’s Office within the SEC Division of Investment Management (Division) has issued several “Dear CFO Letters.” These letters express its views relative to specific accounting matters facing registered investment companies, business development companies and their independent public accountants.

While not considered authoritative guidance, Dear CFO Letters provide a frame of reference to registrants and compliance professionals addressing certain accounting, disclosure and auditing matters. Last week the Division issued changes to existing and new letters. The changes highlight the SEC’s ongoing revival of its Dear CFO Letter practice and its goal to provide registrants with consistent and transparent information.

Below summarizes the changes to new letters, modified letters, rescinded letters.

New Dear CFO Letters

2020-01 Determining Commencement of Operations Date
(Issued October 23, 2020)

  • Once a fund’s registration statement is effective, it is deemed to have commenced operations and annual and periodic financial statements are required to be filed, including audited financial statements as of the fund’s initial fiscal year/period end date.
  • Funds should calculate average annual total return from the date of effectiveness of their registration statement or alternatively use the date they commenced investment operations, i.e., began to invest in accordance with its investment objectives.
  • Funds should use the commencement date that most accurately portrays their performance.
  • Funds with no operational activity, other than the initial seed capital and organization and offering costs, that have not commenced investment operations and that elect the alternative commencement date for performance calculation purposes may omit certain statements or schedules — such as statement of changes in net assets, statement of cash flows, and/or financial highlights — from their annual and periodic filings until such investment operations have commenced.
  • Funds using the alternative commencement date should be using trade date as a basis in that determination, and if the initial trade date is on or prior to the fund’s fiscal year-end, the fund should file audited financial statements, including financial highlights, as of that initial fiscal year-end.

2020-02 Business Development Companies — Financial Statements in Initial Registration Statements
(Issued October 23, 2020)

  • Each business development company (BDC) must file financial statements in connection with its registration on Form N-2 under the Securities Act of 1933, Investment Company Act of 1940 and Form 10 under the Securities Exchange Act of 1934.
  • If a BDC has only received seed capital as of the financial statement date, it need only include a statement of assets and liabilities in its financial statements filed on Form N-2 or Form 10.
  • If a BDC has only received seed capital and only incurred organization and offering expenses as of the financial statement date, it need only include a statement of assets and liabilities and a statement of operations in such financial statements in its financial statements filed on Form N-2 or Form 10.

2020-03 Combined Financial Statements for Compliance with Advisers Act Rule 206(4)-2
(Issued October 23, 2020)

  • Rule 206(4)-2 — Custody of Funds or Securities of Clients by Investment Advisers (Custody Rule) of the Investment Advisers Act of 1940 requires investment advisors who have custody of funds or securities of clients, among other things, to undergo independent verification of client assets via surprise examination by an independent public accountant.
  • The Custody Rule provides an “audit exception” whereby independent verification is not required if client assets are in the account of a limited partnership, limited liability company or pooled investment vehicle (collectively, PIVs) subject to an annual audit, as defined by Regulation S-X.
  • Investment advisors may determine combined financial reporting and annual audits for multiple PIVs is appropriate, in accordance with FASB ASC 810-10-55-1B, on the basis that the PIVs are under common control or management; however, they should consider a variety of additional factors as part of that determination. PIVs should each have:
    • Similar economics and pro rata shares of operations.
    • The same management, management fee and fee structure.
    • Clear legal ownership of its assets.
    • The same financial highlights.
  • Combined financial statements should present a statement of changes for each PIV separately and a combined aggregate total, provide clear disclosure of each PIV’s pro rata percentage ownership of the combined basis, total commitments of each PIV, and aggregated commitments on a combined basis.
  • SEC staff encourages investment advisors and their auditors to consult with the staff regarding questions or concerns about the ability to use audits of financial statements for multiple PIVs on a combined basis for purposes of satisfying the Custody Rule.

Changes to Modified Dear CFO Letters

1998-04 Change in Independent Public Accountants
(Issued 12/30/1998, Modified 11/22/2019 and 10/23/2020)

  • As applicable, investment companies are now required to report a change in independent public accountant on Instruction 4(iv) or 5(iv) to Item 28 of Form N-3.
  • Item 304 of Regulation S-K additionally requires the registrant to request the former independent registered public accounting firm to furnish a letter addressed to the Commission indicating whether the former accountant agrees with the statements made by the registrant in response to Item 304(a) and, if not, stating the respects in which it does not agree. The letter may be included as part of the exhibit filed for Item 13(a)(4) of Form N-CSR or a separate exhibit to Form N-CSR.

2001-02 Senior Securities Table Disclosure
(Issued 2/14/2001, Modified 10/23/2020)

  • Clarifies that the requirement to disclose certain tabular information for each class of senior securities per Item 4 of Form N-2 is applicable to registered closed-end funds and BDCs filing a short-form registration statement per General Instruction A.2 of Form N-2, and the tabular information is required to be audited.
  • Registrants may incorporate by reference the tabular information as included in the fund’s audited annual report; however, the tabular information should be disclosed within an audited section of the annual report, and therefore the requirement is not deemed to have been met if the tabular information is disclosed in an unaudited section.
  • Registrants will comply with requirement in any of the following options:
    • Disclose the senior securities table with the financial highlights.
    • Disclose the senior securities table elsewhere in the annual report, and the audit opinion expressly covers that section.
    • Disclose the senior securities table in the registration statement, if not filing in short-form, with a separate audit opinion covering the tabular information.

Rescinded Dear CFO Letters

1998-01 Average Commission Rate Disclosure
(Issued 12/30/1998, Rescinded 10/23/2020)

  • Eliminates confusion as to whether or not average commission rate disclosures are required to be included in the financial highlights table in either the prospectuses or annual reports of investment companies filing on Form N-1A, on the basis that this requirement was removed via amendments to Form N-1A in March 1998.


The latest refresh of Dear CFO Letters is yet another example of the SEC’s significant focus on the investment industry over the past year. Cohen & Company will continue to monitor the space for regulatory changes and updates to relevant guidance.


Contact Frank Barrie at fbarrie@cohencpa.com or a member of your service team to discuss this topic further.


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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.