SEC Staff Grants No-Action Relief Under Section 17 and Rule 17d-1 Thereunder Allowing Fund to Enter Transaction Agreement with New Adviser

Who may be interested: Registered Investment Companies; Boards of Directors; and Investment Advisers.

Quick Take: The staff of the SEC Division of Investment Management (Staff) recently issued a no-action letter stating that the Staff would not recommend enforcement action under Section 17(d) of the Investment Company Act, and Rule 17d-1 thereunder, with respect to a series of actions proposed to be taken by an exchange-traded closed-end fund (Fund), its prospective new adviser (Adviser) and certain shareholders beneficially owning 5% or more of the Fund’s shares (Supporting Shareholders), pursuant to a transaction agreement through which the Adviser would become the new investment adviser to the Fund.

Section 17(d) and Rule 17d-1 aim to protect investors and investment companies from self-dealing and overreaching when actions by affiliated persons might constitute a joint arrangement, enterprise, or profit-sharing plan without prior SEC approval.

As described in the Adviser’s no-action request, the Fund’s board approved the transaction agreement as part of a plan to change the Fund’s investment strategy, with a goal to reduce the market trading discount of the Fund’s shares, as compared to their net asset value (NAV). Upon closing of the transaction agreement, the Adviser would become the new investment adviser to the Fund and take other actions primarily designed to increase shareholder value and liquidity, namely making a special one-time payment to existing fund shareholders; launching a tender offer to purchase a specific number of outstanding Fund shares at NAV; and purchasing newly issued shares in a primary issuance by the Fund. Further, as part of the transaction agreement, the Fund and Adviser entered into voting, support, and standstill agreements with Supporting Shareholders (including some activist investors), who were affiliated persons of the Fund under Section 2(a)(3) of the Investment Company Act. Under these agreements, the Supporting Shareholders promised to vote to approve the new investment advisory arrangement, as well as other structural and governance initiatives.

While the Adviser was not an affiliate of the Fund at the time the transaction agreement was entered into, the Adviser, upon becoming investment adviser to the Fund, and the Supporting Shareholders would be deemed affiliated persons of the Fund. As discussed in correspondence filings, the Staff were concerned that, collectively, the series of actions contemplated under the transaction agreement could constitute violations of Section 17(d) and Rule 17d-1’s prohibitions on joint arrangements. However, the no-action letter demonstrated that the structure of the transaction, which was negotiated at arm’s length, did not implicate the policy concerns underlying Section 17 regarding conflicts of interest and self-dealing.

The Staff’s no-action letter explained that due to the highly fact-specific nature of the request, the relief applied only to the particular transaction at issue and could not be relied upon by others.

The Staff’s no-action letter is available here.

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