Modifications and additions to Dear CFO Letters

The 1995-09 Dear CFO letter explains how registered funds should present and disclose fee waivers, expense reimbursements, and any later recapture of those amounts in the statement of operations, financial highlights and fee table. It emphasizes that waivers and reimbursements should generally be shown as reductions of total expenses.

The letter also addresses recapture arrangements, under which advisers may recover previously waived fees or reimbursed expenses if actual expenses later fall below the expense cap. The Staff indicates that a liability for potential recapture is generally not recorded unless recovery is probable and reasonably estimable, and that this assessment must consider both the recapture period and the adviser’s actual ability to recover the amounts. Recaptured amounts should be separately presented in the fee table (or within other expenses). 

Additionally, if a fund increases its expense cap, previously waived expenses may not be recaptured above the original cap at the time of waiver.

New and clarified guidance:

• The Staff acknowledges that US GAAP requires disclosure of the effect of only voluntary waivers on the expense ratio, while Form N-1A Item 13 only requires disclosure of the net expense ratio, and clarifies that expense ratios should generally be presented both gross and net of the impact of all waivers/reimbursements.
• Guidance is introduced for fund-of-funds scenarios where waivers exceed total expenses and emphasizes that negative expense presentation is not acceptable under US GAAP.
• The Staff emphasizes that the presentation of waivers and reimbursements should be based on the facts and circumstances of the arrangement, rather than a prescribed uniform presentation.

The 1998-03 Dear CFO letter addresses financial reporting for master/feeder investment company structures. When the master and feeder funds have different fiscal year-ends, the Staff states it would not object to the feeder’s audited shareholder report being accompanied by the latest audited shareholder report of the master together with an unaudited balance sheet and schedule of investments of the master as of the feeder’s year-end.

New guidance:

• If the master fund is a closed-end management investment company and prepares a summary schedule of investments, the registrant must disclose where the complete schedule of investments is available.

The 1998-04 Dear CFO letter clarifies how registered investment companies should report a change in independent registered public accounting firm. The staff emphasizes that these disclosures should conform to Item 304 of Regulation S K, including required narrative discussion of the change and any disagreements with the former auditor.  

Further, when a predecessor auditor’s report or audited financial statements continue to be referenced in a registration statement, the predecessor auditor should provide a consent. For investment companies, this is generally most relevant for the years in which the traditional components of the financial statements (including the statement of changes in net assets) are presented. The Staff has historically not objected to the common practice of including that consent in the filing made in the year after the auditor change.

New guidance:

• Explicit requirements are introduced related to PCAOB cessation letters, including a requirement for audit firms to notify the SEC within five business days when an auditor-client relationship ceases by dismissal or resignation.
• Registrants are reminded that they are required to disclose the information in Item 8 of Form N-CSR to reflect changes that occurred during the reporting period by conforming to the requirements of Item 304 of Regulation S-K.  This aligns with the requirement that funds must include a high-level summary of changes in and disagreements with accountants in their semi-annual and annual shareholder reports.
• Registrants are only required to provide the 'Agreement Letter' from the former independent registered public accounting firm once. Specifically, the updated language states that the Staff would not object if the Agreement Letter is not included as an exhibit in Form N-CSR that covers the most recent fiscal year if it was previously included with the filing that covered the most recent fiscal half-year and there was no change in the statements previously made.
• Other updates to conform to changes in rules, particularly rule changes related to the introduction of the Tailored Shareholder Reports, are included.

The 2001-02 Dear CFO letter explains that the senior securities table required by Item 4.3 of Form N-2 must itself be audited for at least the latest five fiscal years. The Staff emphasizes that it is not enough for the table’s data to be derived from audited financial statements; instead, the auditor must expressly opine on the senior securities table itself or on financial statements or financial highlights that include that table, and that opinion must be included in or incorporated by reference into the registration statement.

The letter also outlines several acceptable ways to satisfy this requirement. Registrants could: 

• include the senior securities table in the financial highlights, which are specifically covered by the audit opinion¹;
• include the table elsewhere in the annual report with the audit opinion expressly covering it; or, 
• if the registrant is not filing a short-form Form N-2 registration statement, include the table only in the registration statement with a separate audit opinion in the registration statement covering the senior securities table information.

New guidance:

• The updates make minor clarifications to the footnotes included at the end of the Dear CFO letter.

¹ While not explicitly stated in the Dear CFO letter, when the financial highlights are not presented as a separate schedule but are included in one of the notes to the financial statements, they are still explicitly covered by the audit opinion because the audit opinion explicitly covers the notes to the financial statements.

The IM-DCFO 2020-02 Dear CFO letter clarifies the financial statements required for initial registration statements.  Specifically, the letter focuses on including financial statements relevant to the matters existing during the financial statement period.

New guidance:

• The changes expand the guidance to cover all investment companies not just BDCs, including those filing Form N-1A.
• The Staff clarifies guidance related to certain situations with limited operations by replacing certain narrow guidance with a general reference to S-X Rule 4-03(b) that states, “Financial statements not required or inapplicable because the required matter is not present need not be filed.”

The IM-DCFO 2021-01 Dear CFO letter includes reminders for registrants that are transitioning from providing depositor financial statements prepared under US GAAP to those prepared under Statutory Accounting Principles (SAP). The Staff encourages registrants to seek consultation if they are transitioning and have questions about these views.

New guidance:

• The footnotes now refer to no-action letters on sec.gov rather than summarizing the letters.

Although US GAAP eliminated the concept of extraordinary items in ASU 2015-01, Form N-1A still includes a definition of 'extraordinary expenses' for open-end investment companies. Under that definition, an expense must be both unusual in nature and infrequent in occurrence, considering the environment in which the fund operates, including industry practices and regulatory requirements.  

The 2026-01 Dear CFO letter emphasizes that expenses meeting this standard should be extremely rare. Costs such as proxy solicitation, legal and audit-related expenses generally would not qualify as extraordinary because they are common within the investment company industry, even if they have not previously been incurred by a particular fund. The letter also reminds registrants to consider the Form N-1A definition when referring to extraordinary expenses in expense limitation agreements.

The 2026-02 Dear CFO letter reminds registered investment companies that amendments to Form N-CSR must include new certifications from the principal executive and principal financial officers under Rule 30a-2 of the Investment Company Act and Section 302(a) of the Sarbanes-Oxley Act. The Staff notes that this certification requirement applies not only to annual reports, but also to amendments and transition reports and it may monitor amended filings for compliance.

The letter also highlights several filing mechanics for amended reports. If an amendment will neither contain nor amend financial statements, registrants may be able to omit paragraph 3 of the certification consistent with Staff guidance. In addition, the Staff encourages registrants to include an explanatory note with the amendment and reminds them that amendments generally should include the full text of each item being amended and a complete amended response.  However, amendments to financial statements may include only the specific statements or schedules revised.