November 25, 1992
TO: BOARD OF GOVERNORS NO. 85-92
CLOSED-END FUND MEMBERS NO. 49-92
SEC RULES MEMBERS NO. 64-92
RE: SEC ADOPTS CHANGES TO FORM N-2
__________________________________________________________
The Securities and Exchange Commission has adopted
amendments to Form N-2 (the registration statement for closed-end
funds) and to rules governing filing requirements, and has
published staff guidelines to the Form. As adopted, the
amendments incorporate many of the Institute’s recommendations.
Revised Form N-2 permits closed-end funds to use a
simplified prospectus similar to that used by mutual funds. In
addition, many closed-end funds will be required to disclose the
names and backgrounds of their portfolio managers. However, a
fund is required only to disclose the name of the person who is
"primarily responsible for the day-to-day management of the
fund’s portfolio" and, where this is done by a committee, a fund
is required to disclose only that the portfolio is managed by a
committee, without naming individual members. Disclosure of
portfolio managers also has been proposed for open-end fund
prospectuses. (See Memorandum to Board of Governors No. 3-90 and
SEC Rules Members No. 2-90, dated January 9, 1990.)
The amendments will become effective for closed-end funds
whose registration statements are initially filed on or after
January 1, 1993, except for the amendments to the annual filing
requirement contained in Rule 8b-16 under the Investment Company
Act of 1940, which will become effective upon publication in the
Federal Register. A copy of the SEC’s release is attached.
Set forth below is a summary of the significant amendments
to Form N-2.
A. Two-Part Format
As amended, Form N-2 will permit, but not require, closed-
end funds to use a simplified prospectus similar to that used by
mutual funds. Specifically, revised Form N-2 contains three
parts: Part A sets forth the requirements for the simplified
prospectus, Part B (the SAI), which must be made available upon
request, provides additional information about the fund,
including the financial statements, and Part C contains exhibits
and other information about the fund that must be filed with the
registration statement.
B. Portfolio Management Disclosure
Item 9 of amended Form N-2 includes a new item requiring a
fund to disclose the name and title of the person or persons "who
are primarily responsible for the day-to-day management of the
fund’s portfolio", the length of time that each person has been
primarily responsible for management of the portfolio, and each
person’s business experience during the past five years.
This requirement is narrower than the original proposal,
which would have required disclosure about all persons who
"significantly contribute to the fund’s investment advice." The
Institute’s letter on the original proposal expressed concern
about the large number of persons whose identity would have to be
disclosed and the difficulty in complying with the proposed
standard for funds that have complex investment decision-making
processes. To alleviate the concern that the new item could be
interpreted to require disclosure of numerous advisory
professionals, the instructions to Item 9 state that a fund can
comply with this requirement by identifying the person who serves
as its portfolio manager. An instruction also has been included
to address those instances where funds are managed by committees,
stating that this item can be satisfied by disclosing that the
fund’s portfolio is managed by a committee, without having to
name the individual members.
At the meeting adopting the changes to Form N-2, Chairman
Breeden and other Commissioners expressed the view that the
portfolio manager disclosure requirement should be extended to
mutual funds.
C. Cover Page Disclosure
The caption on the table required on the cover page of a
prospectus that referred to underwriting discounts and
commissions has been changed to "Sales Load".
Instead of requiring a legend warning investors of the
tendency of closed-end fund shares to trade at a discount, as
originally proposed, prominent disclosure is required on the
cover page of an initial offering prospectus that the fund’s
securities have no history of public trading, that closed-end
funds frequently trade at a price below net asset value, and the
risk of loss this creates for investors purchasing shares in the
initial offering. A fund may omit this disclosure if it believes
that its shares are unlikely to trade at a discount from net
asset value, so long as the fund’s prospectus contains a
description of the basis for this belief. The SEC stated in the
release that the disclosure describing the frequency of closed-
end funds to trade at discounts must be made in a manner that is
not misleading and that disclosure creating the impression that
closed-end funds shares are as likely to trade at a premium as at
a discount would be considered misleading.
D. Fee Table
Form N-2, as amended, requires that a tabular presentation
of expenses (the "fee table") be included in the beginning of a
prospectus that offers common stock. A fee table is not required
in prospectuses offering preferred stock, as was originally
proposed.
E. Financial Highlights
Extensive revisions have been adopted to shorten and
simplify the "per share table". The table is divided into three
parts: per share operating performance, total investment return,
and ratios and supplemental data. Total investment return is
required to be calculated based on the market price of the fund’s
shares. However, funds also may provide total return information
based on per share net asset values, so long as a brief
explanation of the differences between the two calculations is
provided in a note to the financial highlights.
F. Effects of Leverage
Funds that have (or are issuing) a class of senior
securities will be required to include in their prospectuses
a table to illustrate the effects and extent of leveraging.
G. Annual Updating
Closed-end funds are no longer required to update their
registration statements on an annual basis under Rule 8b-16 of
the 1940 Act, so long as certain information is provided to
shareholders in the fund’s annual report.
* * *
The Institute will be holding a special one-day workshop on
revised Form N-2. Details about the workshop will be sent to you
as soon as they are available.
Matthew P. Fink
President
Attachment