August 8, 1989
TO: BOARD OF GOVERNORS NO. 46-89
SEC RULES MEMBERS NO. 38-89
CLOSED-END FUND MEMBERS NO. 36-89
ACCOUNTING/TREASURERS COMMITTEE NO. 29-89
RE: PROPOSED AMENDMENTS TO FORM N-2; OEA STUDY ON
CLOSED-END FUNDS
__________________________________________________________
Attached is the release issued by the SEC proposing (i)
revisions to Form N-2, the registration form for closed-end funds
under the Investment Company Act of 1940 (the "1940 Act") and the
Securities Act of 1933 (the "1933 Act"), (ii) amendments to
various procedural rules under the 1933 Act and (iii) staff
guidelines for preparation of Form N-2. Also attached is a study
by the Office of Economic Analysis of the SEC on The Post-
Offering Price Performance of Closed-End Funds (the "OEA Study")
and an update of the OEA Study.
The release states that the Commission expects to consider
proposing for comment amendments to Form N-1A for mutual funds
that are similar to two of the changes it is proposing to Form N-
2. These changes concern the proposed requirement that total
return data be included in the per share table and that the
identity and background information of the portfolio manager be
disclosed.
Outlined below are the significant changes proposed to be
made to Form N-2 and a summary of the OEA Study.
Proposed Format of Form N-2
The proposed changes would divide the Form N-2 into three
parts: Part A would be a simplified prospectus; Part B would be
the "Statement of Additional Information", which would include
financial information about the fund to be provided promptly upon
request; and, Part C would be other information required to be in
the registration statement but not delivered to investors.
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Proposed Disclosure Requirements in Form N-2
Under the proposal, closed-end funds would be required to
include in the Form N-2:
1. Prominent disclosure on the cover page of the
prospectus used during a public offering informing shareholders
that closed-end fund shares frequently trade at a discount and
that there is a greater risk of loss for shareholders who
purchase shares in the initial offering. The Commission is
seeking comment on whether the disclosure requirements concerning
the discount should be different for bond funds and equity funds.
In addition, the Commission is requesting comment on whether
funds should be permitted to develop this disclosure or, instead,
the Commission should prescribe the legend.
2. A fee table detailing expenses paid directly and
indirectly by shareholders and the fund, e.g., sales loads and
expenses deducted from fund assets, such as management fees. In
addition, funds would be required to show in the table payments
to preferred shareholders. Unlike the fee table for mutual
funds, the proposed fee table for closed-end funds does not
instruct the fund to look at expenses during the last fiscal year
to determine the annual expenses; instead, closed-end funds are
instructed to state the basis on which expenses are deducted or,
if none, to estimate the expenses that will be deducted. The
proposed fee table would not be required for funds that offer
only debt securities.
3. Disclosure of the name and background of the portfolio
manager in the prospectus. As stated above, the Commission
expects to consider proposing a similar change to Form N-1A for
mutual funds.
4. Disclosure concerning any change of control provisions
in the fund's charter or bylaws.
5. Disclosure with respect to share repurchase programs
designed to reduce the discount from net asset value and other
issues relating to fund tender offers.
Per Share Table
The proposal includes extensive revisions to the per share
table required in the prospectus. The proposed changes include
shortening the table and requiring total return quotations for
each period. The release states that the Commission expects to
consider proposing similar changes to Form N-1A for mutual funds.
The per share table required for closed-end funds would continue
to be required only in prospectuses that are used in subsequent
offerings or in connection with certain business combinations.
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Annual Updating of Form N-2
The Commission is proposing to exempt closed-end funds from
the 1940 Act rule requiring investment companies to annually
update their registration statements.
Comment Period
The comment period for the proposed revisions to Form N-2
ends on October 20, 1989. Please provide me with any comments
you may have on the proposed revisions by September 22, 1989.
OEA Study
The OEA Study examined the post-offering price performance
of a sample of 64 closed-end funds that came to market between
1985 and 1987. In summary, the results of the Study reveal that
after the first 24 weeks following the initial public offerings:
bond funds traded at an average discount of 0.012%, and 58.3% of
the bond funds traded at a premium; domestic stock funds traded
at an average discount of 10.019%, and 11.1% of the domestic
stock funds traded at a premium; and, foreign stock funds traded
at an average discount of 11.424%, and 14.3% of the foreign stock
funds traded at a premium. Commissioner Grundfest noted in a
separate statement included in the release that during the period
following the OEA Study period, the number of initial public
offerings of closed-end funds declined, especially with respect
to domestic stock funds. Referring to data in the update of the
OEA Study, he observed that from January 1988 through May 1989
there were 77 closed-end funds offered in the U.S. of which 65
(84.4 percent) were bond funds, 7 (9.1 percent) were foreign
stock funds, and only 5 (6.5 percent) were domestic equity funds.
Amy B. Rosenblum
Assistant General Counsel
Attachments