- 1 -
August 6, 1992
TO: BOARD OF GOVERNORS NO. 55-92
RE: SEC PROPOSES RULES TO PERMIT PERIODIC REDEMPTIONS OF
INVESTMENT COMPANY SHARES
__________________________________________________________
The Securities and Exchange Commission has proposed rules
and rule amendments to create procedures for the repurchase and
redemption of shares of closed-end funds and open-end funds on a
periodic basis (e.g., quarterly). Specifically, proposed Rule
23c-3 would provide for periodic repurchases by closed-end funds
at net asset value. Proposed Rule 22e-3 would permit open-end
funds to effect redemptions less frequently than daily and to
extend the payment of redemption proceeds beyond the current 7
day requirement. These proposals would implement the
recommendations made in the recently issued report prepared by
the Division of Investment Management entitled "Protecting
Investors: A Half Century of Investment Company Regulation." A
copy of the SEC’s release is attached.
The proposed changes are consistent with the Institute’s
recommendation to remove the rigid open-end/closed-end dichotomy
so as to permit funds to redeem on a periodic basis, which was
submitted in connection with the SEC staff’s study of investment
company regulation.
The significant aspects of the proposals are summarized
below.
I. Repurchases By Closed-End Funds
Proposed Rule 23c-3 would permit a closed-end fund to make
periodic repurchases under the Rule if it adopted a fundamental
policy, changeable only by a shareholder vote, specifying (1)
that the company will make repurchase offers and (2) the terms of
such offers (which would include the intervals between repurchase
offers, the scheduled dates of the repurchase deadlines (i.e.,
the date by which a fund must receive repurchase requests), and
the minimum and maximum repurchase amounts). An existing closed-
end fund would need a majority vote of its shareholders adopting
such a policy in order to begin making periodic repurchases.
The Rule would require that repurchase offers be made to
all holders of the class of securities to be purchased. A fund
- 2 -
could not purchase less than 5% or more than 25% of the shares
outstanding. If the amount of shares tendered exceeded the
amount offered to be repurchased by the fund, the Rule would
require repurchases to be made on a pro rata basis. (However,
the Rule provides two options for avoiding this requirement.)
The Rule would set forth alternative periodic intervals at
which a fund could repurchase its securities. These intervals
are 3, 6, 12, 24 or 36 months. A change in the interval would
require a shareholder vote. The Rule also would require that
repurchase proceeds be paid within seven days after a repurchase
deadline. In addition, a fund relying on the Rule would be
required to price its shares at least weekly, on a day and at a
time determined by its board of directors (which would be
required to consist of a majority of independent directors).
The proposed Rule also includes a two-part portfolio
liquidity requirement. First, at all times a portion of the
fund’s portfolio equal to at least 150% of the minimum repurchase
amount, as set by the fund, would have to consist of assets that
can be sold in the ordinary course of business within 7 business
days at approximately the value that the fund uses in valuing its
investments. Second, at the time a fund sends out a notification
of a repurchase offer, the fund would need assets satisfying the
7 day standard in an amount equal to 150% of the repurchase offer
amount.
Under the Rule, notification of a repurchase offer would
have to be sent to shareholders at least 20 business days before
each repurchase deadline and include certain specified
information. A copy of the notification would have to be filed
with the SEC within 3 business days after it is sent to
shareholders. Funds whose repurchase policy provides for the
fund to make all repurchase offers for the same amount of
securities would be exempt from the notification requirement.
The SEC has also proposed a new staff guide to Form N-2
that details the types of prospectus disclosure that closed-end
funds making periodic repurchases of their securities would be
expected to make.
A change to Rule 10b-6 under the Securities Exchange Act of
1934 has been proposed to permit funds making periodic
repurchases to continuously offer their shares.
II. Limited Redemptions By Open-End Funds
Proposed Rule 22e-3 would allow a registered open-end fund
or registered insurance company separate account, other than a
money market fund, to offer redemptions at periodic intervals
- 3 -
("interval funds") or to extend the payment of redemption
proceeds beyond the currently required 7 day period ("extended
payment funds").
Both types of funds would be able to take up to one month
(31 days) to pay redemption proceeds. For interval funds that
period would begin with each periodic redemption deadline and the
funds would make payment by scheduled redemption payment dates;
for extended payment funds the period would begin with the
receipt of each redemption request and there would be a rolling
deadline for payments. Funds would be required to calculate the
net asset value applicable to a redemption request on the next
redemption pricing date, which would occur seven days before the
redemption payment date. Thus, shareholders who tender their
shares for redemption would bear the risk of market changes for
the period after they have tendered their shares and before the
shares are priced. Disclosure of this risk would be required in
the fund’s prospectus. For purposes of sales of shares, both
types of limited redemption funds would be required to compute
net assets value at least daily.
Interval funds would be permitted to redeem shares at
intervals of 1, 2 or 3 months. Rule 22e-3 would not permit
redemptions less frequently than quarterly. Interval fund
redemption requests would be revocable until the redemption
deadline, but not thereafter.
The redemption intervals (for interval funds) and the
period between redemption deadlines, pricing dates and payment
dates could be changed only upon a shareholder vote.
With respect to portfolio liquidity of interval funds and
extended payment funds, proposed Rule 22e-3 would require that at
least 85% of the assets of the fund satisfy either of two
requirements: the fund must reasonably believe that the asset can
be sold at approximately the price used in computing the fund’s
net asset value in a period equal to the fund’s period for paying
redemption proceeds (the period between an interval fund’s
redemption deadline and its redemption payment date, or the
period between tender and the redemption payment date for an
extended payment fund), or the asset must mature before the next
redemption payment date.
To prevent investor confusion, interval and extended
payment funds would be prohibited under Rule 22e-3 from holding
themselves out as mutual funds. In addition, a new staff guide
to Form N-1A, which focuses on critical areas of disclosure
describing a shareholder’s rights in a limited redemption
company, has been proposed.
- 4 -
III. Comment Period
The SEC has solicited comments on a number of aspects of
the proposed rules. Comments are due to the SEC 90 days from the
date the release is published in the Federal Register.
IV. September 1 Meeting
The Institute has scheduled a meeting for September 1, 1992
at 10:00 a.m. at the Institute to discuss the proposed rules.
Members of the Institute’s SEC Rules and Closed-End Fund
Committees have been invited to attend. If your firm is not
represented on one of those committees and you would like to send
someone to the meeting, please contact Terrye Rodgers at 202/955-
3515 by August 19 to let her know who will attend.
Amy B.R. Lancellotta
Associate Counsel
Attachment