November 6, 1992
TO: BOARD OF GOVERNORS NO. 79-92
SEC RULES COMMITTEE NO. 84-92
CLOSED-END FUND COMMITTEE NO. 28-92
CLOSED-END FUND DIVISIONAL COMMITTEE
INTERVAL FUNDS AD HOC COMMITTEE
RE: INSTITUTE LETTER ON SEC’S INTERVAL FUND PROPOSALS
__________________________________________________________
As we previously informed you, the SEC has proposed rules
and rule amendments to permit (1) closed-end funds to repurchase
their shares at periodic intervals ("Closed-End Interval Funds"),
(2) open-end funds to redeem their shares at periodic intervals
and take up to 31 days to pay redemption proceeds ("Open-End
Interval Funds"), and (3) open-end funds to accept daily
redemptions and take up to 31 days to pay redemption proceeds
("Daily Extended Payment Funds"). (See Memorandum to Board of
Governors No. 55-92, dated August 9, 1992, and Memorandum to SEC
Rules Committee No. 52-92 and Closed-End Fund Committee No. 13-
92, dated August 3, 1992.) The Institute submitted the attached
comment letter on the SEC’s proposals.
In its letter, the Institute expressed support for the
Closed-End and Open-End Interval Fund proposals, with
modifications. However, the Institute urged the SEC not to adopt
the Daily Extended Payment Fund proposal at this time because of
concerns that these funds could cause investor confusion since
they would closely resemble traditional mutual funds -- in that
they both would accept daily redemptions -- but would not be
required to pay redemption proceeds within 7 days. In contrast,
we concluded that since Interval Funds would accept repurchases
and redemptions only on a predetermined periodic basis, there was
less likelihood of investor confusion with traditional mutual
funds.
Set forth below is a brief summary of the Institute’s
comments on the Closed-End and Open-End Interval Funds proposals.
I. Closed-End Interval Funds (Proposed Rule 23c-3)
A. Terms of Repurchase Offers
1. Fundamental Policies - The Institute
recommended that instead of requiring a Closed-End Interval Fund
1to adopt a fundamental policy specifying that the fund will make
repurchase offers and the terms of such offers, as proposed by
the SEC, many of the features of a repurchase program should be
left to the discretion of the fund and its directors.
2. Repurchase Amounts - The SEC proposed to limit
each Closed-End Interval Fund repurchase offer to no less than 5%
and not more than 25% of the fund’s outstanding shares. The
Institute supported the proposed 5% minimum but recommended that,
instead of the proposed 25% maximum, funds be permitted to
establish their own maximum (up to and including 100%).
3. Periodic Intervals - The Institute suggested
modifying the SEC’s proposal, which would permit periodic
intervals of 3, 6, 12, 24, and 36 months, to drop the 24 and 36
month alternatives.
4. Notification - The Institute objected to the
proposed requirement that funds send shareholders a notice
disclosing information about the repurchase offer before each
offer. The Institute recommended that the proposal be modified
to permit a Closed-End Interval Fund to provide the relevant
information in its prospectus, supplemented by a notice either
sent to shareholders or published in a newspaper ad, if the
information included in the prospectus is not complete or has
been modified. In addition, we recommended that funds be
required to send the information about their repurchase offers
that is included in their prospectuses separately to shareholders
on an annual basis.
5. Payment of Repurchase Proceeds - The Institute
recommended that Closed-End Interval Funds be permitted to pay
repurchase proceeds to shareholders within 31 days after a
repurchase deadline (which is the date by which funds must
receive repurchase requests from shareholders). The SEC proposed
allowing Open-End Interval Funds to take up to 31 days to pay
such proceeds, but would limit Closed-End Interval Funds to 7
days after the repurchase deadline.
B. Issuance of Senior Securities - The SEC proposed
limiting the ability of Closed-End Interval Funds to issue senior
securities to a standard similar to that for open-end funds under
the 1940 Act, except that these funds would be permitted to
borrow from other lenders as well as banks. The Institute
recommended amending the proposal so that Closed-End Interval
Funds would be permitted to issue senior securities pursuant to
the standard applicable to traditional closed-end funds, so long
as the senior securities are callable by the fund within the time
period that the fund chooses to pay repurchase proceeds or will
mature within that period.
C. Portfolio Liquidity - The Institute opposed the two-
2part liquidity requirement proposed by the SEC for Closed-End
3Interval Funds, which would require that: (1) at all times, a
portion of a fund’s assets equal to at least 150% of the minimum
repurchase amount consist of liquid securities; and (2) at the
time a fund sends a notification of a repurchase offer, the fund
would have to be invested in liquid securities in an amount equal
to 150% of the repurchase offer amount. Instead, we recommended
that Closed-End Interval Funds be required to be invested, as of
each repurchase deadline, in an amount no less than 85% of the
repurchase offer amount in liquid securities, which would be
defined as securities that can be sold, in the ordinary course of
business, at approximately the value that the fund uses in
valuing its investments, within a period of time equal to the
period between the repurchase deadline and the repurchase payment
date (which, as noted above, we recommended be up to 31 days).
D. Disclosure of Periodic Repurchases - In addition to
the proposed disclosure requirements about Closed-End Interval
Fund periodic repurchase offers, we recommended that these funds
be required to use a descriptive term (such as "periodic
repurchase" or "interval") on the cover page of their
prospectuses and in their advertisements and sales literature to
educate the public that this is a new type of fund, and not a
traditional open-end or closed-end fund.
II. Open-End Interval Funds (Proposed Rule 22e-3)
A. Terms of Repurchases
1. Ability to Delay Payment - The Institute
generally supported the SEC’s proposal to permit open-end funds
to delay payment of redemption proceeds beyond the current 7 day
requirement. However, as noted above, we believe that the
ability of funds to take up to 31 days to pay redemption proceeds
should be available only to open-end funds that make redemptions
on a periodic basis (i.e., Open-End Interval Funds).
2. Fundamental Policies - The Institute
recommended that the provisions of proposed Rule 22e-3 requiring
Open-End Interval Funds to adopt fundamental policies specifying
their redemption procedures be modified by leaving several
features of such procedures to the discretion of the funds and
their directors (similar to our recommendation for Closed-End
Interval Funds, noted above).
3. Periodic Intervals - The Institute supported
the proposed intervals of 1, 2, and 3 months for Open-End
Interval Funds.
B. Liquidity - The Institute opposed the proposed
liquidity requirement for Open-End Interval Funds, which would
require at least 85% of a fund’s assets to satisfy at all times
either of two standards: the fund must reasonably believe that
4the asset can be sold in the ordinary course of business, at
5approximately the price used in computing the fund’s net asset
value, in a period equal to the fund’s period for paying
redemption proceeds (which could be up to 31 days); or the asset
must mature before the next redemption payment date. The
Institute recommended that the proposal be modified so that the
liquidity standard applies only as of each redemption deadline,
rather than at all times.
C. Disclosure; Use of the Term "Mutual Fund"
The Institute recommended that Open-End Interval Funds be
required to include a descriptive term on the cover page of their
prospectuses and in advertisements and sales literature
distinguishing these funds from traditional mutual funds (such as
"limited redemption" or "interval"). In addition, we recommended
that Open-End Interval Funds be prohibited from holding
themselves out as "mutual funds".
Amy B.R. Lancellotta
Associate Counsel
Attachment (in .pdf format)