SEC Staff Grants a Closed-End Fund No-Action Relief Under Rule 486(b) Covering Securities Other Than Common Stock

The staff of the Division of Investment Management (Staff) of the U.S. Securities and Exchange Commission (SEC or Commission) on February 14, 2018 issued a no-action letter (Letter) that would specifically permit the requesting registered closed-end fund (Requesting Fund) to file immediately effective amendments to its shelf registration statement, pursuant to Rule 486(b) under the Securities Act of 1933 (Securities Act), where the registration statement covers the issuance of securities other than common stock.¹

Highlights

• Absent no-action or other relief to rely on Rule 486(b) (Rule 486(b) relief), each post-effective amendment to a shelf registration statement of a closed-end management investment company (closed-end fund) other than an interval fund must be reviewed by the Staff and declared effective by the Commission.
• Rule 486(b) allows interval funds to avoid the standard SEC review process and file immediately effective amendments that solely update fund financial statements and/or make certain specified changes to their shelf registration statements.
• Previous no-action letters granting Rule 486(b) relief to closed-end funds (Previous Rule 486(b) Letters) generally included reference to the fact that the requesting closed-end funds had shelf registration statements on file under which the funds could issue common stock.²
• The Letter is significant because the Staff specifically acknowledged that the Requesting Fund has filed, and had declared effective by the Commission, a shelf registration statement pursuant to which the Requesting Fund has registered, and may issue, common stock, preferred stock, subscription rights representing rights to purchase common stock (subscription rights), and debt securities.

Background and Overview of Prior Rule 486(b) Relief 

Post-Effective Amendment Filing Process for Closed-End Funds. A closed-end fund offering its securities pursuant to a shelf registration statement must file a post-effective amendment on an annual basis to update its shelf registration statement with its current audited financial statements.³ Closed-end funds that use shelf registration statements to offer securities on a continuous or delayed basis typically satisfy this obligation by filing post-effective amendments with the Commission pursuant to Section 8(c) of the Securities Act. 

Section 8(c) does not provide a mechanism for automatic or immediate effectiveness. Instead, a post-effective amendment filed pursuant to Section 8(c) must be declared effective in order to take effect. This process subjects such filings, including routine and non-material amendments, to Staff review and comment, which can be a lengthy and costly process. Prior to the post-effective amendment being declared effective, closed-end funds may not issue securities pursuant to such post-effective amendment. Attendant delays for review by the Staff may prevent these funds from taking advantage of an attractive market to raise assets for the benefit of stockholders. 

Rule 486(b): Immediately Effective Amendments for Interval Funds. An interval fund is a closed-end fund (or a business development company) which makes periodic repurchase offers pursuant to Rule 23c-3 under the Investment Company Act. Interval funds are not subject to the delays noted above. Instead, Rule 486(b) provides that a post-effective amendment to a registration statement, or a registration statement for additional shares of common stock, filed by an interval fund shall become immediately effective on the date it is filed, or on a later date designated by the registrant that is no more than 30 days after the filing is made. 

Rule 486(b) further provides that such a post-effective amendment or registration statement may be filed solely for the following purposes: 

1. to register additional shares of common stock for which a registration statement filed on Form N-2 is effective; 
2. to bring the financial statements up to date under Section 10(a)(3) of the Securities Act or Rule 3-18 of Regulation S-X; 
3. to designate a new effective date for a previously filed post-effective amendment or registration statement for additional shares under Rule 486(a), which has not yet become effective; 
4. to disclose or update the information required by Item 9c of Form N-2 (treated as a reference to Item 9.1.c.); 
5. to make any non-material changes the registrant deems appropriate; and 
6. for any other purpose the Commission shall approve. 

In the adopting release for Rule 486, the Commission stated that “[t]he initial proposal of rule 486 recognized that closed-end interval funds may need continuously effective registration statements and would benefit if certain filings could become effective automatically.”⁴ 

Previous Rule 486(b) Letters: Immediately Effective Amendments for Requesting Closed-End Funds. In the Previous Rule 486(b) Letters, the requesting closed-end funds (1) had filed and had declared effective by the Commission shelf registration statements and (2) were engaged in a delayed or continuous offering pursuant to Rule 415(a)(1)(x) under the Securities Act. The Staff agreed in the Previous Rule 486(b) Letters not to recommend enforcement action to the Commission under Sections 5 and 6(a) of the Securities Act if the requesting closed-end funds filed automatically-effective post-effective amendments to their shelf registration statements pursuant to Rule 486(b). 

The Staff cited the rationale for the adoption of Rule 486 as a basis for extending relief to the requesting closed-end funds, and representations of the requesting funds that: 

1. the closed-end fund’s post-effective amendments would comply with the conditions of Rule 486(b); 
2. the closed-end fund would file a post-effective amendment containing a prospectus pursuant to Section 8(c) prior to any offering of its common stock at a price below net asset value (NAV) plus the per share commission or underwriting discount; and 
3. in relying on the requested relief, the closed-end fund will sell newly issued common stock at a price no lower than the sum of the closed-end fund’s NAV plus the per share commission or underwriting discount. 

In each of the Previous Rule 486(b) Letters, the Staff noted an acknowledgment that the Staff may withdraw the Rule 486(b) relief if the Staff finds that the requesting fund has misused Rule 486(b) or for any other reason. In addition, the relief in each of the Previous Rule 486(b) Letters was limited to the addressees of the letters “in light of the fact-specific nature of the requests.” As noted above, the Previous Rule 486(b) Letters generally referenced that the requesting closed-end fund had a shelf registration statement on file under which the fund could issue common stock, but did not specifically address whether the requesting fund could rely on the Rule 486(b) relief to update a registration statement offering other securities pursuant to Rule 486(b). 

486(b) Relief Extended to Other Securities 

The Letter specifically acknowledges that the Requesting Fund has filed, and had declared effective by the Commission, a shelf registration statement pursuant to which the Requesting Fund has registered, and may issue, securities other than common stock. In this regard, the Staff confirmed that it “would not recommend that the Commission take any enforcement action under Section 5(b) or Section 6(a) of the Securities Act against the Requesting Fund if it files Post-Effective Amendments to its Registration Statement pursuant to Rule 486(b) under the Securities Act in connection with the Securities.” The term "Securities" is defined to include the Requesting Fund’s common stock, preferred stock, subscription rights, and debt securities. 

The Letter is based on the same representations and acknowledgment as generally cited in the Previous Rule 486(b) Letters, except that the representations in the Previous Rule 486(b) Letters relating to the offering and issuance of common stock relative to the closed-end fund’s NAV were expanded to impose certain limitations on the offering and issuance of subscription rights exercisable at a price equivalent to less than the then-current NAV per share (adjusted to reflect any per share commission or underwriting discount). 

Consistent with the Previous Rule 486(b) Letters, registrants other than the Requesting Fund may not rely on the Letter. In addition, as with all no-action letters issued by the Staff, different facts or representations may require a different outcome. 

Footnotes 

_{1) Eagle Point Credit Company Inc., SEC Staff No-Action Letter (Feb. 14, 2018). While Dechert represented the requesting party in connection with the request for relief, all factual statements herein are based solely on publicly available information.
2) The Previous Rule 486(b) Letters are available here. Reliance on the Previous Rule 486(b) Letters has been limited to the specific requesting fund “in light of the fact-specific nature of the requests.”
3) While there is no statutory requirement mandating that closed-end funds make a post-effective filing, closed-end funds that offer securities on a continuous or delayed basis are required by Rule 415(a)(3) and Item 34.4 of Form N-2 to undertake “to file, during any period in which offers or sales are being made, a post-effective amendment to the registration statement: (1) to include any prospectus required by Section 10(a)(3) of the 1933 Act.” By contrast, open-end management investment companies (open-end funds), unit investment trusts, and face-amount certificate companies are required by Section 24(e) of the Investment Company Act to use a prospectus, subject to Section 10(a)(3) of the Securities Act, that does not vary from the latest prospectus filed as part of a post-effective amendment to the fund’s registration statement. Section 10(a)(3) requires that a prospectus that is used more than nine months after the effective date of the registration statement must have information as of a date not more than sixteen months prior to such use. Open-end funds satisfy this requirement by filing a post-effective amendment pursuant to Rule 485 under the Securities Act, which provides for automatic or immediate effectiveness.
4) Post-Effective Amendments to Investment Company Registration Statements, SEC Rel. No. 33-7083 (Aug. 17, 1994).}