[Federal Register Volume 62, Number 101 (Tuesday, May 27, 1997)]
[Notices]
[Pages 28742-28745]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13694]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No. 22670; 812-10056]
Eaton Vance Management, et al.; Notice of Application
May 19, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for exemption under the Investment
Company Act of 1940 (the ``Act'').
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APLLICANTS: Eaton Vance Management, Eaton Vance Distributors, Inc.
(collectively, ``Eaton Vance''), Boston Management and Research
(``BMR''), Eaton Vance Prime Rate Reserves (``Prime Rate''), EV Classic
Senior Floating-Rate Fund (``Classic Senior''), and Senior Debt
Portfolio (the ``Portfolio''). Prime Rate and Classic Senior
collectively are referred to as the ``Funds.''
RELEVANT ACT SECTIONS: Order requested under sections 6(c) and 23(c) of
the Act for an exemption from certain provisions of rule 23c-3.
SUMMARY OF APPLICATION: Applicants seek an order to permit certain
closed-end investment companies to make rotating, monthly tender offers
and impose early withdrawal charges (``EWCs'').
FILING DATES: The application was filed on March 25, 1996, and amended
on October 21, 1996. Applicants have agreed to file an additional
amendment, the substance of which is incorporated herein, during the
notice period.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
applicants with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on June 13, 1997,
and should be accompanied by proof of service on applicants, in the
form of an affidavit, or, for lawyers, a certificate of service.
Hearing requests should state the nature of the writer's interest, the
reason for the request, and the issues contested. Persons who wish to
be notified of a hearing may request notification of a hearing by
writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 5th Street, N.W., Washington, D.C.
20549. Applicants: (except the Portfolio) 24 Federal Street, Boston, MA
02110; the Portfolio, c/o IBT Trust Company (Cayman), Ltd., The Bank of
Nova Scotia Building, P.O. Box 501, Georgetown, Grand Cayman, Cayman
Islands, BWI.
FOR FURTHER INFORMATION CONTACT:
Christine Y. Greenlees, Branch Chief, at (202) 942-0564, or Elizabeth
G. Osterman, Assistant Director, at (202) 942-0564 (Division of
Investment Management, Office of Investment Company Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application is available for a fee at the
SEC's Public Reference Branch.
Applicants' Representations
1. The Funds and the Portfolio are registered closed-end management
investment companies. Eaton Vance serves as principal underwriter,
investment adviser, and/or administrator for the Funds. BMR, a wholly-
owned subsidiary of Eaton Vance Management, serves as investment
adviser to the Portfolio. Applicants request that the order apply to
any registered closed-end investment company for which Eaton Vance,
BMR, or any entity controlling, controlled by, or under common control
with Eaton Vance acts as principal underwriter, investment adviser, or
administrator. Each investment company that presently intends to rely
on the requested relief is named as an applicant.
2. The Funds invest all of their investable assets in ``interests''
of the Portfolio pursuant to a master-feeder investment structure.\1\
Through their investment in the Portfolio, all three feeder funds
invest in senior secured floating rate loans. The Portfolio invests at
least 80 percent of its total assets in senior secured floating rate
loans under normal circumstances. Up to 20 percent of the Portfolio's
assets may be held in cash, and invested in investment grade short-term
debt obligations and interests in unsecured loans.
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\1\ A third feeder fund, EV Medallion Senior-Floating Rate Fund,
offers shares to foreign investors outside the United States.
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3. Investment management and custodial activities are performed,
and associated expenses are incurred, at the master fund level. The
feeder funds share in these expenses in proportion to their respective
interests in the master fund. Administration, distribution, and
shareholder servicing activities are performed, and related expenses
are incurred, at the feeder fund level. Such expenses vary among the
feeder funds.
4. The Funds continuously offer their shares to the public at net
asset value. There is no secondary market for shares of the Funds. The
Funds' trustees consider, with the expectation of adopting, quarterly
repurchase offers to shareholders under section 23(c)(2) of the Act.
The Funds obtain cash to consummate repurchase offers through quarterly
offers by the Portfolio to repurchase interests held by the Funds in
the Portfolio. Those repurchases are made at net asset value of the
interests on the expiration date of the Portfolio's repurchase offer.
Each Fund uses the proceeds from the interests that it tenders to the
Portfolio to purchase shares tendered by its shareholders at net asset
value on the Portfolio's
[[Page 28743]]
repurchase offer's expiration date (less any EWC).\2\
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\2\ To make tender offers while engaging in a continuous
offering of its shares under rule 415 under the Securities Act of
1933 (``Securities Act''), each Fund received an exemption from rule
10b-6 under the Securities Exchange Act of 1934 (``Exchange Act'')
that prohibited participants in a distribution of securities from
contemporaneously buying securities of the same class being
distributed. See Eaton Vance Prime Rate Reserves (pub. avail. July
20, 1989); EV Classic Senior Floating-Rate Fund (pub. avail. Apr.
13, 1995). On March 4, 1997, the SEC adopted Regulation M, which,
among other things, replaces rule 10b-6. If the requested relief is
granted, applicants will rely on the exception for interval funds
provided by rule 102 of Regulation M.
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5. The Funds impose EWCs on shares accepted for repurchase that
have been held for less than a certain period of time. The EWCs are
paid to Eaton Vance Distributions, Inc. to allow it to recover a
portion of its distribution expenses. Applicants state that are EWCs
also are intended to discourage investors from purchasing Fund shares
and quickly redeeming them in tender offers. Prime Rate's EWC varies
from three percent of the value of the shares accepted for repurchase
(for shares held less than one year) to zero (for shares held more than
five years). Classic Senior imposes an EWC of one percent of the value
of shares accepted for repurchase held less than one year.
6. Classic Senior also pays service fees pursuant to a plan (the
``Service Plan'') that is designed to meet the requirements of the
National Association of Securities Dealers (``NASD'') Conduct Rule
2830(d) as if Classic Senior were an open-end investment company.\3\
Under the Service Plan, Classic Senior may make service fee payments in
amounts not to exceed .25% of its average daily net assets for any
fiscal year. Classic Senior's trustees have implemented the Service
Plan by authorizing Classic Senior to make quarterly payments to Eaton
Vance Distributors, Inc. and other authorized firms in amounts not
expected to exceed .15% of Classic Senior's average daily net assets
for any fiscal year.
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\3\ Neither the Portfolio nor either of the Funds imposes
distribution fees similar to those charged by open-end investment
companies under rule 12b-1 under the Act.
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7. The Funds offer their shareholders an exchange option whereby
shareholders tendering shares may use proceeds from their shares to
invest in certain Eaton Vance open-end investment companies without
incurring the EWC they would have paid had they received cash for their
tendered shares.\4\ Any exchange option will comply with rule 11a-3
under the Act as if the Funds were open-end investment companies
subject to such rule. Applicants believe that the exchange option is
consistent with rule 23c-3 under the Act.
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\4\ The Funds offer the exchange option pursuant to exemptions
from the best price provisions of rule 13e-4(f)(8)(ii) under the
Exchange Act. See Eaton Vance Prime Rate Reserves (pub. avail. Jan.
15, 1993); EV Classic Senior Floating-Rate Fund (pub. avail. Apr.
13, 1995). The Funds expect to continue offering an exchange option
if the requested relief is granted, although they will no longer
rely on these exemptions. Rather, they intend to rely on the
exemption from rule 13e-4 provided for interval funds.
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8. Applicants propose to convert the Funds and the Portfolio to
``interval funds'' as provided in rule 23c-3 under the Act and to
organize additional interval funds in the future. The Funds and the
Portfolio expect to continue operating in a master-feeder structure
after conversion to interval fund status. The Funds would continue to
make quarterly repurchase offers to their shareholders at net asset
value, using the cash proceeds of interests they tender to the
Portfolio. Applicants propose, however, that the Portfolio would make
separate, quarterly tender offers to each feeder fund on a rotating
basis, with each of the feeder funds receiving a tender offer once a
quarter.
9. The Portfolio would offer to purchase an identical percentage of
the interests held by each feeder fund during each quarter. The
Portfolio's board would determine the applicable percentage in advance
of the upcoming quarter such that the first feeder fund making a tender
offer in that quarter would be able to notify its shareholders of the
repurchase offer amount no less than twenty-one days before the
repurchase request deadline for that tender offer.
10. If Eaton Vance creates additional feeder funds, such funds
would be assigned a tender offer schedule corresponding with the tender
offer schedule for one of the three existing feeder funds. Each new
feeder fund would be assigned a tender offer schedule so as to most
effectively balance the size of the Portfolio's monthly tender offers.
In all events, there would remain three dates in each quarter (one in
each month of the quarter) on which the Portfolio would make tender
offers.
11. Each feeder fund would make a tender offer to all of its
shareholders during the month in which the Portfolio makes a tender
offer to it, using the cash obtained from interests purchased by the
Portfolio to purchase shares tendered by its shareholders. All
shareholders in a particular feeder fund would receive a tender offer
at the same time, and under the same terms, as all of the other
shareholders in that feeder fund.
12. Consistent with rule 23c-3(b)(5), if shareholders in a feeder
fund tendered more than the repurchase offer amount, the feeder fund
could repurchase shares beyond the repurchase offer amount. To obtain
the cash necessary for the increased repurchase, the feeder fund could
request that the Portfolio agree to repurchase up to an additional two
percent of the outstanding interests in the Portfolio. To ensure equal
treatment of the feeder funds, if the Portfolio agreed to purchase a
certain percentage of additional interests from one feeder fund, it
would agree to maintain sufficient liquid assets to purchase an equal
percentage of additional interests from any other feeder fund making
such a request during the succeeding two tender offers. If a repurchase
offer were oversubscribed, the Portfolio and/or feeder funds would
repurchase the tendered interests or shares on a pro rata basis.
13. Under applicants' master-feeder structure, responsibility for
each requirement of rule 23c-3 would be allocated to the Portfolio, the
feeder funds, or both, as appropriate. Liquidity and portfolio
monitoring functions would be performed at the master fund level. The
Portfolio's board of trustees would, pursuant to rule 23c-
3(b)(10)(iii), adopt procedures reasonably designed to ensure that the
Portfolio has liquid assets sufficient to comply with its fundamental
policy to make repurchase offers to the feeder funds and satisfy the
liquidity requirements of the rule. The boards of the feeder funds
would oversee the Portfolio's board's administration of rule 23c-3's
liquidity requirements.
14. Notification and filing requirements would be performed at the
feeder fund level. The feeder funds would provide notice to their
shareholders about upcoming repurchase offers and suspensions or
postponements of repurchase offers in accordance with rule 23c-3(b)(4),
and would file such notices with the SEC as required by the rule.\5\
The feeder funds would comply with the requirements of rule 23c-
3(b)(11) related to advertisements and sales literature. Because the
Portfolio does not issue
[[Page 28744]]
shares to the public, rule 23c-3(b)(11) does not apply to the
Portfolio.
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\5\ Applicants submit that no purpose would be served by
requiring the Portfolio to duplicate the feeder funds' notice to
public shareholders regarding upcoming repurchase offers. Applicants
state that the Portfolio would, however, provide notice to the
feeder funds regarding the repurchase offer amount sufficiently in
advance of tender offers by the feeder funds to allow the feeder
funds to comply with rule 23c-3(b)(4)'s shareholder notice
requirements.
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15. Both the Portfolio and the feeder funds would comply with the
majority of the requirements of rule 23c-3, including the rule's
requirements related to pricing, adoption of fundamental policy to make
periodic repurchase offers, suspension of purchase offers, repurchase
of more than repurchase amount, withdrawal of repurchase requests,
composition of board of trustees, senior securities, and debt
obligations.
Applicants' Legal Analysis
1. Applicants request an order pursuant to sections 6(c) and 23(c)
of the Act exempting them from certain provisions of rule 23c-3 under
the Act to the extent necessary to: (a) Permit the Portfolio to make
rotating, monthly tender offers to one feeder fund at a time; and (b)
permit the Funds to impose EWCs.
2. Section 23(c) provides in relevant part that no registered
closed-end investment company shall purchase any securities of any
class of which it is the issue except: (a) On a securities exchange or
other open market; (b) purchase 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 SEC may
permit by rules and regulations or orders for the protection of
investors. The Funds currently repurchase their shares pursuant to
section 23(c)(2).
3. Rule 23c-3 permits a registered closed-end investment company
(an ``interval fund'') to make repurchase offers of between five and
twenty-five percent of its outstanding shares at net asset value to
shareholders at periodic intervals pursuant to a fundamental policy of
the investment company. An interval fund may not suspend or postpone a
repurchase offer except by vote of the fund's directors/trustees, and
then only under limited circumstances.
4. Applicants believe that conversion to interval fund status would
benefit shareholders for several reasons. First, each interval fund
would be required to adopt as a fundamental policy a commitment to its
shareholders to make periodic repurchase offers. Currently, neither the
Funds nor the Portfolio have adopted such policies. Second, applicants
believe that shareholders would benefit from cost savings to the Funds
created by exemptions from tender offer rules under the Exchange Act
for periodic tender offers made pursuant to rule 23c-3. Applicants also
believe that the Funds would benefit from rule 486 under the Securities
Act, which permits certain post-effective registration statements filed
by interval funds to become effective immediately.
5. Under rule 23c-3(b), interval funds are required to make
repurchases from their shareholders ``at periodic intervals, pursuant
to repurchase offers made to all holders of the stock.'' ``Periodic
interval'' is defined in rule 23c-3(a)(1) as an interval of three, six,
or twelve months. Applicants request relief from the requirements of
rule 23c-3(b) to permit the Portfolio to make quarterly tender offers
on a rotating basis to one of the three feeder funds during each month
within a quarter, with each of the feeder funds receiving a tender
offer once each quarter. Applicants request relief to the extent that
such rotating tender offers may be deemed inconsistent with rule 23c-
3(b)'s requirements that: (a) Repurchase offers made by interval funds
be made to all holders of the fund's shares; and (b) repurchase offers
be made at intervals of three, six, or twelve months.
6. Applicants believe that the use of staggered tender offers would
permit the Portfolio to satisfy the liquidity requirements of rule 23c-
3 while holding liquid assets that constitute a lower percentage of the
Portfolio's total assets than would be required for a tender offer to
all feeder funds at once. Applicants argue that, by tendering to the
feeder funds on a cyclical basis, rather than all at once, the
Portfolio would realize substantial cost savings. Applicants also
believe that the staggered tender offers may enable the Portfolio to
make larger tender offers to the Funds, thereby enabling the Funds to
make larger tender offers to their shareholders.
7. Rule 23c-3(b) requires that periodic repurchase offers be made
``to all holders of the stock.'' Separate, monthly tender offers by the
Portfolio to each feeder fund could be construed to be inconsistent
with this requirement because, in any given month, the Portfolio would
make a tender offer to one, rather than all, feeder funds. Applicants
believe, however, that staggered tender offers would not implicate the
abusive practices to which the ``all holders'' requirement is
addressed. Applicants cite the adopting release for rule 23c-3, which
provides that the all holders requirement ``is intended to protect
against unfair discrimination.'' \6\ According to applicants, rule 23c-
3's all holders requirement is substantially similar to the all holder
requirement in section 23(c)(2). Applicants argue that the legislative
purpose of that provision was to ``insure fair treatment of all
security holders'' in connection with tender offers by investment
companies.\7\ Applicants submit that all feeder funds (and all
shareholders of the feeder funds) would be treated alike in that they
would receive a quarterly tender offer on the same terms, i.e., at net
asset value. Applicants believe that the fact that one feeder fund
would receive a tender in a month different from another feeder fund
within the same quarter is not the unfair discrimination at which the
all holders requirement is directed.
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\6\ Investment Company Act Release No. 19399, Section II.A.1.b.2
(Apr. 7, 1993).
\7\ S. Rep. No. 1775, 76th Cong., 3d Sess. (1940) at 16; H.R.
Rep. No. 2639, 76th Cong., 3d Sess. (1940) at 21.
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8. If the Funds and the Portfolio became interval funds, they could
postpone or suspend a tender offer only under one of the extraordinary
circumstances set forth in rule 23c-3(b)(3), and then only pursuant to
a majority vote of the board of trustees. Applicants state that this
requirement would preclude the Portfolio's board from unfairly
discriminating among the feeder funds by making a tender offer to less
than all of the funds in a given quarter.
9. Because rule 23c-3(b)(1) would require the Portfolio to purchase
interests tendered at the Portfolio's net asset value as of the
repurchase pricing date, applicants believe that there would not be any
discrimination in the method by which the Portfolio calculates the
price paid to the feeder funds for the interests tendered. In addition,
applicants argue that, because the Portfolio invests in senior secured
loan interests that are unlikely to materially fluctuate in value, the
net asset value paid to one feeder fund would not vary substantially
from that paid to another feeder.
10. The Portfolio's monthly tenders may be construed to be
prohibited by rule 23c-3(b)'s requirement that repurchase offers be
made at periodic intervals, as defined in rule 23c-3(a)(1). Applicants
state that, according to the adopting release for rule 23c-3, shorter
intervals were not considered compatible with the notification
requirements of the rule.\8\ Applicants believe that the concern was
that a fund could be forced to notify shareholders of the repurchase
offer amount for an upcoming tender offer before knowing the amount of
shares tendered in the prior tender offer. This would cause a fund to
commit to a repurchase amount for the next tender offer and possibly
incur an obligation to maintain a high
[[Page 28745]]
level of liquid assets due to the rule's liquidity requirements, while
unaware of the number of shares tendered in the current repurchase
offer and the resulting decrease in liquid assets.
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\8\ Investment Company Act Release No. 19399, Section II.A.4.
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11. Applicants state that, because the Portfolio would determine
the repurchase offer amount at the beginning of each quarter,
information about the number of shares tendered in the previous offer
is not material. In addition, because staggered tender offers would
permit the Portfolio to maintain fewer liquid assets than it would
otherwise be required to maintain, applicants believe that maintaining
liquid assets sufficient for two tender offers in a quarter would not
unduly burden the Portfolio.
12. Rule 23c-3(b)(1) provides that an interval fund may deduct from
repurchase proceeds only a repurchase fee, not to exceed two percent of
the proceeds, that is reasonably intended to compensate the fund for
expenses directly related to the repurchase. Applicants request relief
from this provision to the extent that it would prohibit the imposition
of an EWC on tendered shares that have been held for less than a
specified period.
13. Applicants note that, in the release adopting rule 23c-3, the
SEC stated that ``consideration [regarding the use of contingent
deferred sales loads by closed-end interval funds] may be appropriate
after the [SEC] considers whether to adopt proposed rule 6c-10.'' Rule
6c-10 was adopted on February 23, 1995,\9\ and applicants have agreed
as a condition to any relief granted that they will comply with rule
6c-10 under the Act as if such rule were applicable to them. The Funds
also will comply with the NASD Conduct Rule's limits on service fees.
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\9\ Investment Company Act Release No. 20916 (Feb. 23, 1995).
Rule 6c-10 permits open-end funds to charge contingent deferred
sales loads, subject to certain requirements for calculating those
changes and a uniform treatment requirement.
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14. Applicants believe that EWCs may be necessary for its
distributor to recover distribution costs from shareholders who redeem
early. In addition, EWCs may create a disincentive for shareholders to
engage in frequent trading, which applicants believe imposes costs on
shareholders.
15. Section 6(c) provides that the SEC may exempt any person,
security, or transaction from my provision of the Act, if and to the
extent that 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 believe that the requested relief meets this standard.
Applicants' Conditions
Applicants agree that any order granting the requested relief shall
be subject to the following conditions:
1. The Portfolio will offer to repurchase an identical percentage
of the interests held by each feeder fund during each quarter.
2. The determination of the percentage in condition 1 will be made
by the Portfolio's board in time for the first feeder fund to make a
tender offer in the upcoming quarter to notify its shareholders of the
repurchase offer amount no less than 21 days before the repurchase
request deadline for that tender offer.
3. If the Portfolio agrees to purchase from a feeder fund a
percentage of shares in addition to the repurchase offer amount
pursuant to rule 23c-3(b)(5), it will agree to maintain liquid assets
sufficient to repurchase the same percentage of additional shares from
all feeder funds requesting the purchase of additional shares during
the succeeding two tender offers.
4. Any feeder fund imposing an EWC will comply with rule 6c-10
under the Act as if such rule were applicable. Any feeder fund imposing
a service fee will comply with the National Association of Securities
Dealers Conduct Rule 2830(d) as if such rule were applicable.
5. Any fund operating under relief granted through the application
will maintain an investment policy that requires, under normal
conditions, that at least 65 percent of the value of its total assets
will be invested in senior secured floating-rate loan interests.
6. The boards of the feeder funds and the Portfolio will review
annually the repurchase offer procedures set forth in the application
to ensure that no feeder fund is being disadvantaged as a result of
such procedures.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-13694 Filed 5-23-97; 8:45 am]
BILLING CODE 8010-01-M
