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News February 21, 2011 Issue

No-Action Relief Eases Capital-Raising For Closed-Ends

This is information closed-end fund managers may want to know.

Very quietly, behind all the hubbub surrounding the passage of the Dodd-Frank Act, the SEC has permitted certain closed-end funds to offer shares from a shelf registration based on an immediately effective amendment filing.

Normally, the SEC staff must declare such an amendment effective before the fund can make its offering. This process takes an indeterminate amount of time, and is often too lengthy when an issuer is seeking to take advantage of favorable market conditions.

Certain closed-end funds, most recently three Calamos funds, have successfully persuaded the staff to let them bypass that process using a mechanism available to interval funds.

Interval funds are closed-end funds that make regular, periodic offerings at set times throughout the year, generally quarterly or monthly. They do so in a process that is not subject to the delays associated with the staff review and comment process for ordinary closed-end funds.

Pursuant to Securities Act Rule 486(b), interval funds, including business development companies, that conduct offerings pursuant to Investment Company Act Rule 23c-3 (the interval fund rule) may do so upon filing a post-effective amendment that is immediately effective. In promulgating Rule 486(b), the staff specifically recognized the benefit to these closed-end funds if certain filings could become effective automatically.

"The Funds believe that this line of thought should be extended to them," said K&L Gates partner Eric Purple in a February 14 letter to the staff on Calamosí behalf.

Apparently the staff agreed, at least under the limited circumstances of the no-action position. In granting the relief, the staff noted its past acknowledgements of the benefits of automatically effective filings to non-interval funds such as the Calamos funds. Automatic effectiveness would give the funds "the flexibility to take advantage of favorable market conditions to raise additional capital through continuous or delayed offerings of their securities," said the SEC.

The relief isnít for everyone, however.

Unlike many other no-action positions taken by the Division of Investment Management, where third parties under substantially similar facts and circumstances may rely on the relief, this one is limited to the funds that apply for it. "The staff is willing to consider similar requests from other registered closed-end management investment companies or business development companies," noted the SECís response.

The staff has issued three other no-action letters in this regard, to Tortoise Energy Infrastructure Corporation, Energy Income and Growth Fund, and Nuveen Municipal High Income Opportunity Fund, all since April 2010.

In general, the relief is subject to the following conditions:

  • The respective fundsí board of directors approved the fundsí delayed or continuous offerings;
  • Each fundsí post-effective amendments will comply with the conditions of Rule 486(b); and
  • The funds may not use the relief to offer shares below net asset value.

"Each fund that relies on the requested relief to sell common shares will sell newly issued shares at a price no lower than the sum of the Fundís net asset value plus the per share commission or underwriting discount," noted the Calamos request.

Also to note for aspiring requesters, although Rule 486(b) permits registering new shares as one of its purposes, the staffís relief has been granted specifically where a closed-end fund has an effective shelf registration statement only, for the purposes of offering shares already registered.