[Federal Register Volume 85, Number 37 (Tuesday, February 25, 2020)]
[Notices]
[Pages 10774-10776]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-03676]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 33800; File No. 812-15037]
Prospect Capital Management L.P., et al.
February 19, 2020.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice.
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Notice of an application under section 6(c) of the Investment
Company Act of 1940 (the ``Act'') for an exemption from sections
18(a)(2), 18(c), and 18(i) of the Act, under sections 6(c) and 23(c) of
the Act for an exemption from rule 23c-3 under the Act, and for an
order pursuant to section 17(d) of the Act and rule 17d-1 under the
Act.
SUMMARY OF APPLICATION: Applicants request an order to permit certain
registered closed-end management investment companies to issue multiple
classes of shares and to impose asset-based distribution and/or service
fees, and early withdrawal charges (``EWCs'').
APPLICANTS: Prospect Capital Management L.P. (the ``Adviser''),
Priority Senior Secured Income Management, LLC (``PSSIM''), and
Priority Income Fund, Inc. (the ``Initial Fund'').
FILING DATES: The application was filed on May 28, 2019 and amended on
September 17, 2019 and December 10, 2019.
HEARING OR NOTIFICATION OF HEARING: An order granting the requested
relief will be issued unless the Commission orders a hearing.
Interested persons may request a hearing by writing to the Commission's
Secretary and serving applicants with a copy of the request, personally
or by mail. Hearing requests should be received by the Commission by
5:30 p.m. on March 16, 2020, and should be accompanied by proof of
service on the applicants, in the form of an affidavit, or, for
lawyers, a certificate of service. Pursuant to rule 0-5 under the Act,
hearing requests should state the nature of the writer's interest, any
facts bearing upon the desirability of a hearing on the matter, the
reason for the request, and the issues contested. Persons who wish to
be notified of a hearing may request notification by writing to the
Commission's Secretary.
ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F
Street NE, Washington, DC 20549-1090; Applicants: 10 East 40th Street,
42nd Floor, New York, NY 10016.
FOR FURTHER INFORMATION CONTACT: Barbara T. Heussler, Senior Counsel,
at (202) 551-6990, or Trace W. Rakestraw, Branch Chief, at (202) 551-
6825 (Division of Investment Management, Chief Counsel's Office).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's website by searching for the file number, or for an
applicant using the Company name box, at http://www.sec.gov/search/search.htm or by calling (202) 551-8090.
Applicants' Representations
1. The Initial Fund is a Maryland corporation that is registered
under the Act as an externally managed, non-diversified, closed-end
management investment company. The Initial Fund's investment objective
is to generate current income and, as a secondary objective, long-term
capital appreciation.
2. PSSIM is a Delaware limited liability company registered as an
investment adviser under the Investment Advisers Act of 1940
(``Advisers Act'') and currently serves as investment adviser to the
Initial Fund pursuant to an advisory agreement. The Adviser is a
Delaware limited partnership and is registered as an investment adviser
under the Advisers Act. The Adviser owns 50% of PSSIM and is the
operating member of PSSIM, responsible for making all investment and
operational decisions for PSSIM.
3. The applicants seek an order to permit the Initial Fund to issue
multiple classes of shares and to impose asset-based distribution and/
or service fees, and EWCs.
4. Applicants request that the order also apply to any continuously
offered registered closed-end management investment company, existing
now or in the future, for which the Adviser or any entity controlling,
controlled by, or under common control with the Adviser, or any
successor in interest to any such entity,\1\ acts as investment adviser
and that operates as an interval fund pursuant to rule 23c-3 under the
Act or provides periodic liquidity with respect to its shares pursuant
to rule 13e-4 under the Securities Exchange Act of 1934 (``Exchange
Act'') (each, a ``Future Fund'' and together with the Initial Fund, the
``Funds'').\2\
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\1\ A successor in interest is limited to an entity that results
from a reorganization into another jurisdiction or a change in the
type of business organization.
\2\ Any Fund relying on this relief in the future will do so in
compliance with the terms and conditions of the application.
Applicants represent that each entity presently intending to rely on
the requested relief is listed as an applicant.
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5. The Initial Fund currently makes a continuous public offering of
its shares. Applicants state that additional offerings by any Fund
relying on the order may be on a private placement or public offering
basis. Shares of the Funds will not be listed on any securities
exchange, nor quoted on any quotation medium. The Funds do not expect
there to be a secondary trading market for their shares.
6. If the requested relief is granted, the Initial Fund may also
offer additional classes of shares in the future, with each class
having its own fee and expense structure.
7. Applicants state that, from time to time, the Funds may create
additional classes of shares, the terms of which may differ from the
initial class pursuant to and in compliance with rule 18f-3 under the
Act.
8. The Initial Fund provides periodic liquidity with respect to its
shares
[[Page 10775]]
pursuant to rule 13e-4 under the Exchange Act. Each Future Fund will
either adopt fundamental investment policies in compliance with rule
23c-3 under the Act and make periodic repurchase offers to its
shareholders, or provide periodic liquidity with respect to its shares
pursuant to rule 13e-4 under the Exchange Act.\3\ Any repurchase offers
made by the Funds, whether pursuant to rule 13e-4 under the Exchange
Act or rule 23c-3 under the Act, will be made to all holders of shares
of each such Fund.
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\3\ Applicants submit that rule 23c-3 and Regulation M under the
Exchange Act permit an interval fund to make repurchase offers to
repurchase its shares while engaging in a continuous offering of its
shares pursuant to rule 415 under the Securities Act of 1933.
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9. Applicants represent that any asset-based distribution and/or
service fees for each class of shares will comply with the provisions
of Rule 2341 (``Sales Charge Rule'') of the Financial Industry
Regulatory Authority, Inc. (``FINRA'').\4\ Applicants also represent
that each Fund will disclose in its prospectus the fees, expenses, and
other characteristics of each class of shares offered for sale by the
prospectus, as is required for open-end multiple class funds under Form
N-1A. As is required for open-end funds, each Fund will disclose its
expenses in shareholder reports, and describe any arrangements that
result in breakpoints in or elimination of sales loads in its
prospectus.\5\ In addition, applicants will comply with applicable
enhanced fee disclosure requirements for fund of funds, including
registered funds of hedge funds.\6\
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\4\ Any references in the application to the Sales Charge Rule
include any FINRA successor or replacement rule to the Sales Charge
Rule.
\5\ Shareholder Reports and Quarterly Portfolio Disclosure of
Registered Management Investment Companies, Investment Company Act
Rel. No. 26372 (Feb. 27, 2004) (adopting release); and Disclosure of
Breakpoint Discounts by Mutual Funds, Investment Company Act Rel.
No. 26464 (June 7, 2004) (adopting release).
\6\ Fund of Funds Investments, Investment Company Act Rel. Nos.
26198 (Oct. 1, 2003) (proposing release) and 27399 (Jun. 20, 2006)
(adopting release). See also Rules 12d1-1, et seq. of the Act.
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10. Each Fund will comply with any requirements that the Commission
or FINRA may adopt regarding disclosure at the point of sale and in
transaction confirmations about the costs and conflicts of interest
arising out of the distribution of open-end investment company shares,
and regarding prospectus disclosure of sales loads and revenue sharing
arrangements, as if those requirements applied to each Fund. In
addition, each Fund will contractually require that any distributor of
the Fund's shares comply with such requirements in connection with the
distribution of such Fund's shares.
11. Applicants state that each Fund may impose an EWC on shares
submitted for repurchase that have been held less than a specified
period and may waive the EWC for certain categories of shareholders or
transactions to be established from time to time. Applicants state that
each Fund will apply the EWC (and any waivers, scheduled variations or
eliminations of the EWC) uniformly to all shareholders in a given class
and consistently with the requirements of rule 22d-1 under the Act as
if the Funds were open-end investment companies.
12. Each Fund operating as an interval fund pursuant to rule 23c-3
under the Act may offer its shareholders an exchange feature under
which the shareholders of the Fund may, in connection with the such
Fund's periodic repurchase offers, exchange their shares of the Fund
for shares of the same class of (i) registered open-end investment
companies or (ii) other registered closed-end investment companies that
comply with rule 23c-3 under the Act and continuously offer their
shares at net asset value, that are in the Fund's group of investment
companies (collectively, ``Other Funds''). Shares of a Fund operating
pursuant to rule 23c-3 that are exchanged for shares of Other Funds
will be included as part of the amount of the repurchase offer amount
for such Fund as specified in rule 23c-3 under the Act. Any exchange
option will comply with rule 11a-3 under the Act, as if the Fund were
an open-end investment company subject to rule 11a-3. In complying with
rule 11a-3, each Fund will treat an EWC as if it were a contingent
deferred sales load (``CDSL'').
Applicants' Legal Analysis
Multiple Classes of Shares
1. Section 18(a)(2) of the Act makes it unlawful for a closed-end
investment company to issue a senior security that is a stock unless
certain requirements are met. Applicants state that the creation of
multiple classes of shares of the Funds may violate section 18(a)(2)
because the Funds may not meet such requirements with respect to a
class of shares that may be a senior security.
2. Section 18(c) of the Act provides, in relevant part, that a
registered closed-end investment company may not issue or sell any
senior security that is stock if, immediately thereafter, the company
has outstanding more than one class of senior security that is stock.
Section 18(g) of the Act defines ``senior security'' that is stock as
``any stock of a class having priority over any other class as to
distribution of assets or payment of dividends''. Applicants state that
the creation of multiple classes of shares of a Fund proposed herein
may result in shares of a class having priority over another class as
to payment of dividends, and being deemed a ``senior security,''
because shareholders of different classes may pay different
distribution fees, different shareholder services fees, and any other
expense (as described elsewhere in this notice). Accordingly applicants
state that the creation of multiple classes of shares of a Fund with
different fees and expenses may be prohibited by section 18(c).
3. Section 18(i) of the Act provides that each share of stock
issued by a registered management investment company will be a voting
stock and have equal voting rights with every other outstanding voting
stock. Applicants state that multiple classes of shares of the Funds
may violate section 18(i) of the Act because each class would be
entitled to exclusive voting rights with respect to matters solely
related to that class.
4. Section 6(c) of the Act provides that the Commission may exempt
any person, security or transaction or any class or classes of persons,
securities or transactions from any provision of the Act, or from any
rule or regulation under the Act, if and to the extent such exemption
is necessary or appropriate in the public interest and consistent with
the protection of investors and the purposes fairly intended by the
policy and provisions of the Act. Applicants request an exemption under
section 6(c) from sections 18(a)(2), 18(c) and 18(i) to permit the
Funds to issue multiple classes of shares.
5. Applicants submit that the proposed allocation of expenses
relating to distribution and voting rights among multiple classes is
equitable and will not discriminate against any group or class of
shareholders. Applicants submit that the proposed arrangements would
permit a Fund to facilitate the distribution of its securities and
provide investors with a broader choice of shareholder services.
Applicants assert that the proposed closed-end investment company
multiple class structure does not raise the concerns underlying section
18 of the Act to any greater degree than open-end investment companies'
multiple class structures that are permitted by rule 18f-3 under the
Act. Applicants state that each Fund will comply with the provisions of
rule 18f-3 as if it were an open-end investment company.
[[Page 10776]]
Early Withdrawal Charges
1. Section 23(c) of the Act provides, in relevant part, that no
registered closed-end investment company shall purchase securities of
which it is the issuer, except: (a) On a securities exchange or other
open market; (b) pursuant to tenders, after reasonable opportunity to
submit tenders given to all holders of securities of the class to be
purchased; or (c) under other circumstances as the Commission may
permit by rules and regulations or orders for the protection of
investors.
2. Rule 23c-3 under the Act permits an interval fund to make
repurchase offers of between five and twenty-five percent of its
outstanding shares at net asset value at periodic intervals pursuant to
a fundamental policy of the interval fund. Rule 23c-3(b)(1) under the
Act permits an interval fund to deduct from repurchase proceeds only a
repurchase fee, not to exceed two percent of the proceeds, that is paid
to the interval fund and is reasonably intended to compensate the fund
for expenses directly related to the repurchase. A Fund will not impose
a repurchase fee on investors who purchase and tender their shares.
3. Section 23(c)(3) provides that the Commission may issue an order
that would permit a closed-end investment company to repurchase its
shares in circumstances in which the repurchase is made in a manner or
on a basis that does not unfairly discriminate against any holders of
the class or classes of securities to be purchased.
4. Applicants request relief under section 6(c), discussed above,
and section 23(c)(3) from rule 23c-3 to the extent necessary for the
Funds to impose EWCs on shares of the Funds submitted for repurchase
that have been held for less than a specified period.
5. Applicants state that the EWCs they intend to impose are
functionally similar to CDSLs imposed by open-end investment companies
under rule 6c-10 under the Act. Rule 6c-10 permits open-end investment
companies to impose CDSLs, subject to certain conditions. Applicants
note that rule 6c-10 is grounded in policy considerations supporting
the employment of CDSLs where there are adequate safeguards for the
investor and state that the same policy considerations support
imposition of EWCs in the interval fund context. In addition,
applicants state that EWCs may be necessary for the distributor to
recover distribution costs. Applicants represent that any EWC imposed
by the Funds will comply with rule 6c-10 under the Act as if the rule
were applicable to closed-end investment companies. The Funds will
disclose EWCs in accordance with the requirements of Form N-1A
concerning CDSLs.
Asset-Based Distribution and/or Service Fees
1. Section 17(d) of the Act and rule 17d-1 under the Act prohibit
an affiliated person of a registered investment company, or an
affiliated person of such person, acting as principal, from
participating in or effecting any transaction in connection with any
joint enterprise or joint arrangement in which the investment company
participates unless the Commission issues an order permitting the
transaction. In reviewing applications submitted under section 17(d)
and rule 17d-1, the Commission considers whether the participation of
the investment company in a joint enterprise or joint arrangement is
consistent with the provisions, policies and purposes of the Act, and
the extent to which the participation is on a basis different from or
less advantageous than that of other participants.
2. Rule 17d-3 under the Act provides an exemption from section
17(d) and rule 17d-1 to permit open-end investment companies to enter
into distribution arrangements pursuant to rule 12b-1 under the Act.
Applicants request an order under section 17(d) and rule 17d-1 under
the Act to the extent necessary to permit the Funds to impose asset-
based distribution and/or service fees. Applicants have agreed to
comply with rules 12b-1 and 17d-3 as if those rules applied to closed-
end investment companies, which they believe will resolve any concerns
that might arise in connection with a Fund financing the distribution
of its shares through asset-based distribution and/or service fees.
3. For the reasons stated above, applicants submit that the
exemptions requested under section 6(c) are necessary and appropriate
in the public interest and are consistent with the protection of
investors and the purposes fairly intended by the policy and provisions
of the Act. Applicants further submit that the relief requested
pursuant to section 23(c)(3) will be consistent with the protection of
investors and will insure that applicants do not unfairly discriminate
against any holders of the class of securities to be purchased.
Finally, applicants state that the Funds' imposition of asset-based
distribution and/or service fees is consistent with the provisions,
policies, and purposes of the Act and does not involve participation on
a basis different from or less advantageous than that of other
participants.
Applicants' Condition
Applicants agree that any order granting the requested relief will
be subject to the following condition:
Each Fund relying on the order will comply with the provisions of
rules 6c-10, 12b-1, 17d-3, 18f-3, 22d-1, and, where applicable, 11a-3
under the Act, as amended from time to time, as if those rules applied
to closed-end management investment companies, and will comply with the
Sales Charge Rule, as amended from time to time, as if that rule
applied to all closed-end management investment companies.
For the Commission, by the Division of Investment Management,
under delegated authority.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2020-03676 Filed 2-24-20; 8:45 am]
BILLING CODE 8011-01-P