IM Guidance Update

October 2014 | No. 2014-11

US Securities and Exchange Commission

 Division of Investment Management

INVESTMENT COMPANY CONSOLIDATION

To further the Division’s mission to protect investors and facilitate informed investment 

decisions, the Division’s Chief Accountant’s Office periodically issues Guidance Updates 

to assist registrants.1

 This Guidance Update provides the views of the Division’s Chief 

Accountant’s Office regarding the presentation of consolidated financial statements 

for certain investment companies (“RICs”) registered under the Investment Company 

Act of 1940 (“1940 Act”) and investment companies that have elected to be treated 

as business development companies under the 1940 Act (“BDCs”) that have wholly 

owned subsidiaries.2

Regulation S-X

Regulation S-X governs the form and content of, and sets forth the requirements for, 

financial statements filed pursuant to, among other statutes, the Securities Act of 1933 

(“1933 Act”) and the 1940 Act. As such, the provisions of Regulation S-X apply to financial statements filed by, among others, RICs and BDCs. 

One of the topics addressed by Regulation S-X is the presentation of consolidated 

financial statements. Regulation S-X provides, in relevant part, as follows:

In deciding upon consolidation policy, the registrant must consider what financial 

presentation is most meaningful in the circumstances and should follow in the 

consolidated financial statements principles of inclusion or exclusion which will 

clearly exhibit the financial position and results of operations of the registrant. There 

is a presumption that consolidated statements are more meaningful than separate 

statements and that they are usually necessary for a fair presentation when one 

entity directly or indirectly has a controlling financial interest in another entity.3

The provisions of Regulation S-X that set forth additional, special rules for RICs and 

BDCs state that “[c]onsolidated . . . statements filed for [RICs and BDCs] shall be prepared in accordance with . . . [Article 3A quoted above] except that (i) statements of 

the registrant may be consolidated only with the statements of subsidiaries which are 

investment companies . . .”4
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In reviewing the financial statements of RICs and BDCs, periodically the staff has 

discussed these provisions with registrants and their counsel and independent auditors. 

This guidance highlights examples of the variety of situations that might arise and 

result in questions concerning consolidation based on comments the staff has provided, 

and invites registrants and their counsel and independent auditors to contact the staff 

if they have further questions about the application of these requirements to their 

particular situations. 

RICs that are Feeder Funds or Funds of Funds

The staff has observed that a RIC that is a feeder fund in a master-feeder structure, or 

a RIC that is a fund of funds in the same group of investment companies, may have 

“a controlling financial interest in another entity” for purposes of Regulation S-X. In 

a master-feeder arrangement, the securities issued by the master fund are the only 

investment securities held by the RIC feeder fund5 and may constitute a controlling 

financial interest in the master fund. A RIC that is a fund of funds may have a controlling 

financial interest in one or more of the underlying funds in the same group of 

investment companies as the fund of funds. 

In the circumstances of a feeder fund, generally, the staff has taken the position that the 

financial presentation that is most meaningful is unconsolidated,6 provided that, among 

other things: (i) the feeder fund attaches the financial statements of the master fund to 

its financial statements; 7 (ii) if the master fund is organized as a partnership,8 the feeder 

fund separately discloses on its statement of operations the net investment income, the 

net realized gain or loss, and the net change in unrealized gain or loss allocated from 

the master fund;9 and (iii) if the master fund is organized as a partnership,10 the feeder 

fund includes the net investment income and expenses allocated from the master fund 

in its net investment income and expense ratios in its financial highlights.11 In the staff’s 

view, because a feeder fund typically is one of several investors in the master fund, such 

disclosure provides a meaningful and appropriately transparent presentation of the 

financial position and results of operations of the feeder fund. 

In the circumstances of a fund of funds, generally, the staff has taken the position 

that the financial presentation that is most meaningful also is unconsolidated. A fund 

of funds typically invests in multiple underlying funds, may hold controlling financial 

interests in some underlying funds and non-controlling interests in other underlying 

funds, and the level of its interest in any particular underlying fund might fluctuate 

between controlling and non-controlling. In such circumstances, in the staff’s view, if the 

fund of funds were to consolidate the financial statements of certain of its underlying 

funds for certain periods, the resulting financial presentation may not be meaningful 
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and may be confusing to the fund of funds’ investors. The staff notes, a fund of funds 

also should consider whether its investment in a single underlying fund is so significant 

to the fund of funds that its presentation of financial statements should be made in a 

manner similar to a master-feeder fund.12

BDCs with Wholly Owned Subsidiaries13

In reviewing registration statements and financial statements, the staff has observed14 a 

number of BDCs that have wholly owned subsidiaries, for example, in order to facilitate 

investment in a portfolio company. Certain of these BDCs do not consolidate such 

subsidiaries, even though the design and purpose of the subsidiary (e.g., a holding 

company) may be to act as an extension of the BDC’s investment operations and to 

facilitate the execution of the BDC’s investment strategy. As part of the registration 

statement and financial statement review process, the staff has generally suggested 

BDCs consolidate such subsidiaries, because the staff believes that consolidation 

provides investors with the most meaningful financial presentation in those statements.15

If a BDC has questions about preparation of its financial statements in this regard, 

the BDC may contact the Division’s Chief Accountant’s Office at 202-551-6918 or 

IMOCA@sec.gov.

Endnotes

1 In September 2013, the Division’s Chief Accountant’s Office issued a 

Guidance Update concerning certain subsidiaries of business development 

companies, available at http://www.sec.gov/divisions/investment/guidance/imguidance-2013-07.pdf.

2 Rule 1-02(aa) of Regulation S-X defines a wholly owned subsidiary as a subsidiary 

substantially all of whose outstanding voting shares are owned by its parent and/or 

the parent’s other wholly owned subsidiaries. 

3 Rule 3A-02 of Regulation S-X. See also Financial Accounting Standards Board 

Accounting Standards Codification (FASB ASC) paragraph 810-10-10-1.

4 Rule 6-03(c) of Regulation S-X. Article 6 of Regulation S-X applies to RICs. BDCs 

are not registered under the 1940 Act, but they register their securities under the 

1933 Act on Form N-2. For purposes of Form N-2, “[a BDC] should comply with 

the provisions of Regulation S-X generally applicable to registered management 

investment companies. (See . . . Sections 210.6-01 through 210.6-10 of Regulation 

S-X . . .).” See Instruction 1.a to Item 8.6.c of Form N-2.
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5 See section 12(d)(1)(E) of the 1940 Act (providing an exemption from the limitations 

in section 12(d)(1) on, among other things, a RIC investing more than 5% of its 

total assets in securities issued by another investment company, provided that, 

among other requirements, such securities are the only investment securities held 

by the RIC). 

6 However, if the design and purpose of the master-feeder structure is for the master 

fund to be wholly owned by a sole feeder fund, the staff encourages registrants to 

consult with the staff on whether consolidated financial presentation would be the 

most meaningful.

7 See also SEC Staff Generic Comment Letter for Investment Company CFOs (Dec. 30, 

1998), available at http://www.sec.gov/divisions/investment/imlr1230.htm (indicating 

that: (1) a feeder fund’s shareholder report contains two sets of financial statements, 

one for the master fund and another for the feeder fund; and (2) in instances where 

the feeder fund and the master fund have different fiscal year-ends, the staff would 

not object if, at each feeder fund’s year-end, the audited shareholder report of 

the feeder fund is accompanied by the latest audited shareholder report of the 

master fund and by an unaudited balance sheet of the master fund and schedule 

of investments of the master fund as of the date of the feeder fund’s financial 

statements). 

8 It is the staff’s position that if the master fund is organized as a corporation, 

classification of the master fund’s income in the feeder fund’s financial statements 

depends upon the distribution policies of the master fund. Until it is distributed, 

income received by the master fund is recorded by a feeder fund as unrealized 

appreciation. See SEC Staff Generic Comment Letter for Investment Company 

CFOs (Nov. 2, 1995), available at http://www.sec.gov/divisions/investment/

noaction/1995/accountingcomment110295.pdf.

9 See generally FASB ASC paragraphs 946-225-45-11 and 946-225-45-12. In accordance with FASB ASC paragraph 946-225-45-11, a feeder fund should separately 

disclose its allocated interest, dividends, and expenses when disclosing on its statement of operations its net investment income allocated from the master fund. 

10 See supra note 8.

11 See generally FASB ASC paragraph 946-205-50-28.
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12 See generally FASB ASC paragraph 946-210-45-7, and SEC Staff Generic Comment 

Letter for Investment Company CFOs (Nov. 7, 1997), available at http://www.sec.

gov/divisions/investment/noaction/1997/cfo110797.pdf. The staff notes that this 

consideration should be made regardless of whether the fund of funds has a 

controlling financial interest or a non-controlling interest in the underlying fund.

13 See supra note 2.

14 The staff has also observed that some BDCs do not include in their financial 

statements disclosures required by FASB ASC paragraph 850-10-50-1 about certain 

transactions with investees that meet the definition of related parties in FASB ASC 

paragraph 850-10-20 (e.g., certain directly or indirectly held portfolio companies, 

including holding companies). BDCs are reminded of their obligations to comply 

with FASB ASC Topic 850, Related Party Disclosures, because disclosures about 

related party transactions are important for shareholders to understand the 

financial statements and make informed investment decisions.

15 In the staff’s view, RICs in similar circumstances also should consolidate wholly 

owned subsidiaries (e.g., a RIC that uses a wholly owned subsidiary as a ‘blocker’).

This IM Guidance Update summarizes the views of the Division of Investment Management 

regarding various requirements of the federal securities laws. Future changes in laws or 

regulations may supersede some of the discussion or issues raised herein. This IM Guidance 

Update is not a rule, regulation or statement of the Commission, and the Commission has 

neither approved nor disapproved of this IM Guidance Update.

The Investment Management Division works to:

s protect investors

s promote informed investment decisions and 

s facilitate appropriate innovation in investment products and services 

through regulating the asset management industry.

If you have any questions about this IM Guidance Update, please contact:

Chief Accountant’s Office

Phone: 202.551.6918

Email: IMOCA@sec.gov