February 27, 1991
TO: CLOSED-END FUND MEMBERS NO. 11-91
RE: SEC ADOPTS AMENDMENTS TO RULES UNDER SECTION 16
__________________________________________________________
The SEC has adopted amendments to the rules under Section
16 of the Securities Exchange Act of 1934, governing reporting
and short-swing profit recovery with respect to certain insider
transactions. The amendments, most of which become effective on
May 1, 1991, were proposed originally in December 1988 and were
reproposed in August 1989. The Institute submitted comment
letters in response to both proposals, and the final amendments
incorporate most of the Institute’s suggestions.
A summary of the amended rules as they pertain to both
closed-end funds as issuers and closed-end funds as shareholders
is set forth below. A copy of the adopting release is attached.
I. Closed-End Funds As Issuers
A. Application of Section 16
Pursuant to Section 30(f) of the Investment Company Act of
1940, the reporting and short-swing profit recovery requirements
of Section 16 apply to every person who is directly or indirectly
the beneficial owner of more than ten percent of any class of
outstanding securities (other than short-term paper) issued by a
registered closed-end investment company, and to any officer,
director, member of an advisory board, investment adviser or
affiliated person of an investment adviser of such investment
company.
Under the new rules, the term "officer" is defined to
include certain specified individuals as well as any other person
who performs significant policy-making functions.
B. Timing of Filing Reports
The rules have been amended to permit insiders to report
transactions on Form 4 on a date earlier than that which is
required by the rules. In addition, as amended, the rules
provide that a form is timely filed for purposes of Section 16 if
it is delivered to a third party business in sufficient time for
the third party business to guarantee delivery of the filing to
the SEC by its due date.
C. Form 5
The amended rules will require the filing of reports on
newly adopted Form 5, within 45 days after the issuer’s fiscal
year end, to disclose certain holdings and transactions not
previously reported on Forms 3, 4 or 5. These include
transactions exempt from Section 16(b), certain small
acquisitions, and holdings and transactions that should have been
reported during the most recent fiscal year but were not. (The
first Form 5 filing must disclose holdings and transactions that
should have been reported during each of the issuer’s last two
fiscal years.) Exempt transactions for this purpose include,
among others, acquisitions of securities pursuant to a dividend
reinvestment plan.
D. Compliance
To encourage increased compliance with Section 16
requirements, the amended rules require a closed-end fund to
disclose information regarding delinquent Section 16 filings in
Form N-SAR (as an annual supplement to the form filed after the
end of the fund’s fiscal year) and in the fund’s definitive proxy
materials. Specifically, the fund must disclose the identity of
insiders who filed late or failed to file, and the number of
delinquent filings and transactions for each such insider.
Delinquent filings reported prior to the effective date of the
new rules need not be disclosed.
II. Closed-End Funds As Shareholders
A. Determination of Insider Status
Under the amended rules, ten percent holders under Section
16 are those persons deemed ten percent holders under Section
13(d) of the 1934 Act and related rules. However, the reporting
and short-swing profit provisions of Section 16 apply only to
those securities in which a ten percent holder has a "pecuniary
interest".
In determining ten percent holder status, institutions that
are eligible to file ownership reports on Schedule 13G ( e.g., a
registered investment company or a registered investment adviser)
are not deemed beneficial owners of securities held for the
benefit of third parties or in customer oar fiduciary accounts in
the ordinary course of business, and without the purpose or
effect of changing or influencing control of the issuer. Thus,
an investment adviser generally would not have to aggregate
shares held by investment companies and private accounts managed
by the adviser and count those shares towards ten percent holder
status.
B. Pecuniary Interest Test
As noted above, the amended rules provide that the Section
16 reporting and short-swing profit recovery obligations apply
only with respect to securities in which an insider has a direct
or indirect pecuniary interest. As was proposed, the pecuniary
interest test includes a safe harbor with respect to certain
performance-related management fees. Specifically, no pecuniary
interest is created by a performance-related fee where the fee is
based on performance over a period of a year or more (regardless
of when it is payable), and no more than ten percent of the
portfolio’s market value is attributable to the issuer’s equity
securities. In addition, as suggested by the Institute, the
final rules make it clear that asset-based management fees do not
create a pecuniary interest on the part of an investment adviser
or trustee in the securities managed.
C. Attribution of Insider Status to Trusts
Under the original proposal, a trust would have become
subject to Section 16 if a trustee was an insider. However, the
rules as adopted attribute insider status to the trust only if an
insider trustee has or shares investment control over the trust’s
portfolio securities and the trustee, or a member of the
trustee’s immediate family, has a pecuniary interest in the
issuer’s securities held by the trust. As a result, as requested
by the Institute, an investment company organized as a trust
generally would not be subjected to Section 16 merely because a
member of the board of trustees was an insider. In addition, the
final rules provide that a trustee’s insider status does not
subject the trust to Section 16 if the trustee is an institution
eligible to file reports on Schedule 13G (e.g., a registered
investment adviser).
III. Effective Dates
Most of the rule changes take effect May 1, 1991. The
requirements for issuers to disclose delinquent filers take
effect with respect to their first fiscal year ending on or after
November 1, 1991.
Frances M. Stadler
Assistant General Counsel
Attachment