SEC Proposes Interval Fund Updates, Extension of Multi-Class Relief for Closed-End Funds and BDCs

Background

Interval Funds. The SEC established the interval fund framework in 1993 through the adoption of Rule 23c-3, which permits registered closed-end funds and BDCs (“regulated closed-end funds”) to provide liquidity to shareholders through periodic repurchase offers at net asset value (“NAV”). This would be the first substantive amendment to the repurchase mechanics of the rule since its adoption.

Multiple Share Classes. The SEC has long permitted funds to offer multiple share classes. However, while open-end funds have had the benefit of a rule since 1995, non-traded closed-end funds have needed to apply for individual exemptive relief for decades. This proposal would extend the multi-class rule, Rule 18f-3, to all non-traded closed-end funds (including BDCs), eliminating the time and expense of seeking individual relief.

The proposing release addresses both initiatives together.¹ The proposing release states that almost all prior individual exemptive orders permitting variations in interval fund repurchase offers and orders permitting closed-end fund and BDC multiple class structures would be rescinded.²

Key Proposed Changes - Interval Fund Proposal

• Deferral of the First Repurchase Offer. Under current Rule 23c-3(a)(7), an interval fund must complete its initial repurchase request no later than two intervals after the effective date of its registration statement (or the shareholder vote adopting its fundamental policy). The proposal would extend this deferral period to up to two years, regardless of the length of the fund’s periodic interval. At the SEC’s open meeting, Director Daly explained that this change would better accommodate private equity-style strategies, where the portfolio may not generate liquidity until later in the life of the fund.
• Addition of a Monthly Periodic Interval. Rule 23c-3 currently permits repurchase offers only at three, six, or twelve month intervals, although the Commission has routinely granted exemptive relief allowing applicant funds to conduct monthly repurchase offers. The proposal would add a one-month option to the rule, obviating individual exemptive relief. Notably, the proposed rule would retain the existing five percent minimum repurchase offer amount and would rescind most prior individual orders, including any orders permitting a two percent minimum for monthly repurchases.
• Liquidity Management. Rule 23c-3(b)(10) currently requires an interval fund to hold at least 100% of the repurchase offer amount in liquid assets between the repurchase notification and the repurchase pricing date. The proposal would eliminate this bright-line coverage test and replace it with a principles-based requirement that the fund manage its portfolio’s liquidity so it can satisfy repurchase requests without a sale or disposition of investments at a price that deviates significantly from the value of those investments.
• More Frequent Discretionary Repurchases. (Available for all closed-end funds and BDCs – not limited to interval funds). Under current Rule 23c-3(c), a discretionary repurchase may be made no more than once every two years. The proposal would permit discretionary repurchases as frequently as once every year.

Key Items - Multiple Share Class Proposal

• Codification of Multi-Class Relief. The proposal would amend Rule 18f-3 to extend multiple share class eligibility to all non-traded registered closed-end funds and BDCs.
• Elimination of FINRA Compliance Requirement. While the proposal retains many of the conditions of the individual exemptive orders, notably, the SEC is not proposing to require compliance with FINRA distribution fee rules (FINRA Rule 2341 for registered closed-end funds, or FINRA Rule 2310 for BDCs) as a condition of relying on amended Rule 18f-3. This is most relevant to multi-class privately offered BDCs. While the distribution of certain regulated closed-end funds would remain subject to the FINRA rules by operation of those rules, the distribution of privately offered BDCs is not otherwise subject to FINRA Rule 2310.
• Enhanced Disclosure and Reporting. The proposal includes conforming amendments to Form N-2, including a requirement to disclose Rule 12b-1 distribution fee arrangements by class, as well as to Form N-CEN. For all regulated closed-end funds that file on Form N-2 (not just multiple share class funds), the proposal would require a new shareholder report table showing the expenses of an ongoing $10,000 investment during the reporting period, on a semi-annual basis for registered closed-end funds and an annual basis for BDCs.

Practical Takeaways

The SEC frames the interval fund and multiple share class proposals as part of a broader effort to reduce regulatory obstacles to product innovation and to expand retail investor access to private-market-style strategies. Firms may want to review their existing fund lineup, as well as their product pipeline, and consider any impact the proposals may have. Firms may also want to consider whether to submit comments suggesting additional amendments that the proposals did not include.

Firms interested in commenting on the proposal should plan to provide comments before the end of the 60-day deadline.

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