April 7, 1989
TO: CLOSED-END FUND MEMBERS NO. 17-89
RE: MEETING WITH STAFF ON ISSUER TENDER OFFERS
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We previously distributed to you a copy of a letter
received by the Institute from the staff of the Securities and
Exchange Commission concerning issuer tender offers by closed-end
funds. (See Memorandum to Closed-End Fund Members No. 10-89,
dated February 13, 1989.) In that letter, the staff expressed
its concern that several recent prospectuses of closed-end funds
contained disclosure of prospective issuer tender offers that if
conducted as described would not be in compliance with Rule 13e-4
or Schedule 13E-4 under the Securities Exchange Act of 1934.
Recently, members of the ICI staff met with representatives
of the Divisions of Corporation Finance, Market Regulation and
Investment Management. The staff reiterated the concerns
expressed in its letter and discussed in greater detail some of
the problems they have observed in reviewing registration
statements of closed-end funds. Among the issues raised were the
following:
Review by Staff. Schedule 13E-4 is required to be filed
when a tender offer commences. Thus, the staff is not able to
comment before dissemination. If the Schedule is not in
compliance with the applicable provisions, a fund that has
already commenced a tender offer may be forced to amend the
offer, file an amended Schedule 13E-4 and re-disseminate the
offering material to shareholders. The staff stressed that funds
should contact the Division of Market Regulation with any
interpretive questions before commencing a tender offer.
Investment Company Act Release No. 3548 (October 3, 1962) implied
that tender offers by funds are reviewed only by the Division of
Investment Management. This is no longer the case.
"All Holders Rule". Rule 13e-4(f)(8)(i) requires issuer
tender offers to be open to all holders of the class of
securities subject to the offer. Some funds' prospectuses have
described tender offers in which only shareholders as of a
certain record date, earlier than the termination date of the
offer, would be eligible to tender their shares. The staff views
this as in conflict with the all holders rule. In addition,
closed-end funds should be aware that "odd lot tender offers"
(tender offers made only to holders of fewer than 100 shares),
which are permitted under Rule 13e-4(g)(5), may be prohibited
under the 1940 Act. Section 23(c)(2) of the 1940 Act permits
closed-end fund tender offers "after reasonable opportunity to
submit tenders given to all holders of securities of the class to
be purchased" (emphasis added). In such cases, funds would be
required to comply with Rule 23c-1 under the 1940 Act, which sets
forth various substantive provisions for repurchases that are not
made pursuant to Sections 23(c)(1) or (c)(2), or else seek an
exemptive order. This was noted in a recent no-action letter.
(Combined Penny Stock Fund, Inc., publicly available Jan. 4,
1989).
"Best Price Rule". Rule 13e-4(f)(8)(ii) requires that the
consideration paid to any security holder pursuant to a tender
offer be the highest consideration paid to any other security
holder during such offer. Some closed-end funds apparently have
described tender offers in which the fund would waive certain
charges or loads for tendering shareholders who are officers or
employees of the fund. Since such officers or employees would,
consequently, receive a higher price for their shares, this would
appear to violate the best price rule. Another way in which the
staff noted that the best price rule could be violated is by the
imposition on tendering shareholders of a flat fee that does not
vary with the number of shares tendered. Shareholders who
tendered a greater number of shares would be receiving a higher
price on a per share basis than shareholders who tendered fewer
shares.
In connection with the amount of consideration paid during
a tender offer, the staff noted that frequent dissemination of
price information is important, especially as the termination
date approaches. Many funds, which base the tender price on net
asset value on the last date of the offer, only calculate net
asset value weekly. Funds should be aware that, during a tender
offer, they may have to compute n.a.v. on a more frequent basis
and disseminate this information to shareholders. (The staff
suggested that one way to do this might be to have an 800 number
that shareholders could call to obtain the current net asset
value.)
Financing of Tender Offers. Schedule 13E-4 requires
disclosure of the source and amount of cash available for the
purchase of the maximum number of securities that may be
purchased during the offer. In addition, issuers should be aware
of Rule 13e-4(f)(5), which requires prompt payment for shares
tendered. Funds that hold illiquid securities may not be able to
comply with this requirement if the source of the cash requires a
liquidation of portfolio securities. If closed-end funds making
a tender offer have to utilize a different source of cash (e.g.,
borrowing) than that originally disclosed, this might constitute
a material change in the terms of the offer and might require
dissemination to shareholders and extension of the offering
period. (Closed-end funds may also be restricted in their
ability to borrow due to restrictions under the 1940 Act.).
Rule 10b-13. Rule 10b-13 prohibits a person making a
tender offer from purchasing, or making any arrangement to
purchase, any security other than pursuant to the tender offer
after the offer has been "publicly announced or otherwise made
known by such person to holders of the security to be acquired".
Thus, a fund that included in its prospectus disclosure of
possible future tender offers might be deemed to have announced a
tender offer and thereby prohibited from making other purchases
of its own securities. The staff of the Division of Market
Regulation, however, indicated that it would be willing to
consider granting a no-action position to allow a fund to make
open-market purchases until such time as the tender offer is
actually commenced.
Rule 10b-6. The staff also referred to a recent no-action
letter issued to a closed-end fund that wished to have the
flexibility to engage in quarterly tender offers while it engaged
in a continuous offering of shares that were the subject of a
shelf registration pursuant to Rule 415 under the 1933 Act. In
that letter, the staff granted the fund an exemption from Rule
10b-6, which generally prohibits a person engaging in a
distribution of securities from bidding for or purchasing a
security of the same class. It appeared that the staff viewed
the circumstances described in that letter as unique and that the
staff might be reluctant to grant future no-action requests in
the area.
Craig S. Tyle
Assistant General Counsel