Alert March 01, 2011

SEC Staff Issues No-Action Letter Providing Relief to Certain Closed-End Funds Seeking to Raise Additional Capital

The staff of the Division of Investment Management (the "staff") issued a no-action letter to three specifically named closed-end funds (the “funds”) providing relief under Section 5(b) or 6(a) of the Securities Act of 1933 (the “1933 Act”) for those funds to treat post-effective amendment filings involving changes to such funds’ financial statements or routine non‑material changes to such funds’ registration statements as immediately effective in reliance on Rule 486(b) under the 1933 Act, although the funds could not technically rely on such rule.  The relief enables the funds to take advantage of market conditions to more quickly sell securities from their effective shelf registration statements without the costs or delays of staff review and comment.

Section 5 of the 1933 Act, in relevant part, makes it unlawful for any person, including issuers, to: (1) transmit a prospectus, unless such prospectus meets the requirements set forth in Section 10 of the 1933 Act; and (2) carry a security for the purpose of sale or delivery, unless preceded or accompanied by a prospectus that meets the requirements of Section 10 of the 1933 Act.  Section 10 of the 1933 Act, in relevant part, requires that a prospectus: (1) contain certain information set forth in an issuer’s registration statement; and (2) for prospectuses that are used more than nine months after the effective date of the registration statement, contain information not more than 16 months old.  Closed-end funds, including the funds, undertake to file a post-effective amendment containing a prospectus that meets these requirements during any period in which offers or sales are being made. 

The funds had filed post-effective amendments annually with the Commission to meet these requirements.  Such post-effective amendments must typically be declared effective by the staff in order to take effect, subjecting those filings to staff review and comment, even for non-material amendments.  During such review and comment period, no issuances can take place potentially preventing the funds from taking advantage of what may be an attractive market to raise assets.

Accordingly, the funds sought relief to have such filings become effective immediately pursuant to Rule 486 under the 1933 Act.  Rule 486(b) is available to “interval” funds, which are closed-end funds or business development companies that make repurchase offers at periodic intervals under certain conditions.  The rule permits post-effective amendments filed by interval funds to become effective immediately, if, among other things, the post‑effective amendment is filed for no purpose other than, among other things, bringing the financial statements up to date or making non-material changes, and the registrant makes certain representations about the purpose of the amendment.  Although the funds were not interval funds, the funds contended that this line of thought should apply to them as well and that they, shareholders, and potential shareholders would benefit if they were permitted to rely on the rule.  The funds contended that that they would be able to raise capital in continuous offerings at non-dilutive prices, without significant periods of disruption to such offering process and that fund shareholders would benefit by reducing the costs of the typical post-effective amendment process.  In addition, the funds contended that their use of Rule 486 would not erode investor protections and that investors could have faster access to important information about the funds.

In granting the relief, the staff cited representations made by the funds that each fund would comply with the conditions of Rule 486(b), sell all shares at a price no lower than the sum of the fund’s net asset value plus the per share commission or underwriting discount, and file a post-effective amendment through the normal staff review and comment process prior to any offering of its securities at a price below net asset value.

Contrary to the more typical situation where the relief granted in a no-action letter is available to third parties whose circumstances are substantially similar to those of the party originally requesting the relief, the staff’s response noted that, in light of the very fact specific nature of the funds’ request, the position in the letter applied only to the funds and no other entity may rely on it.  In addition, the staff warned that it could withdraw any assurance granted in the letter if the staff finds that a fund is misusing Rule 486(b) for any other reason.  The staff did, however, note that it would be willing to consider similar requests from other registered closed-end funds or business development companies.