The History of Interval and Tender Offer Funds

Unlike the more recently created interval fund structure, today’s tender offer funds date back to the early twentieth century — a time when closed-end funds were the most prominent investment company type. In 1940, when the Investment Company Act established the classification system for traditional closed-end and open-end management investment companies, assets in open-end funds equaled only two-thirds the value of closed-end funds (traditional CEFs). Open-end funds quickly surpassed traditional CEFs, accounting for 82% of industry assets by 1966. By the time the closed-end interval fund structure was established in 1993, open-end funds accounted for 95% of industry assets. The federal regulatory framework created by the passage of the Securities Act, the Exchange Act, and, ultimately, the Investment Company Act contributed to the shift in assets to open-end funds.

Tender offer funds operated in an exacting regulatory environment following the passage of the Investment Company Act. The Investment Company Act inaugurated standards to counter pervasive market abuses in the 1920s and 30s. Between 1938 and 1940, the U.S. Securities and Exchange Commission’s (SEC’s) Study on Investment Trusts and Investment Companies chronicled these abuses.1

Among them, the study found that closed-end funds “aggressively repurchased” their discounted shares to manipulate the market for the benefit of insiders and to the detriment of shareholders. The study also cited the “dangerous leveraging effects that threatened the viability” of many closed-end funds. As a result, Congress permitted share repurchases and leverage, but subjected their use to restrictions under Section 23(c) and Section 18 of the Investment Company Act, respectively.

Additional cumbersome repurchase requirements under the Exchange Act and Securities Act have constrained sponsors. Without efficient share repurchases, sponsors were limited in their efforts to reduce the discount to net asset value (NAV) at which their shares were trading. In turn, trading discounts curtailed closed-end funds’ ability to issue new shares and sponsors’ ability to launch closed-end funds. The maturation of tender offer funds during the 1980s, including their involvement with semi-liquid securities and the development of novel share repurchasing mechanisms, led the SEC to re-examine the classification system of investment companies and recommend changes to Section 23 of the Investment Company Act in the SEC Division of Investment Management’s 1992 report. The report evidenced the “rigidity” of the classification system and sought “to chart new territory between the two extremes of the open-end and closed-end forms” by developing new investment companies with “a degree of redeemability.”2 A year later, the SEC adopted Rule 23c-3 and established the closed-end interval fund structure under the Investment Company Act.

Download our white paper

Considering launching a closed-end structure fund interval or tender offer fund? Download our white paper for more information to help you choose the right path. 
This white paper distills closed-end funds’ regulatory framework and operational considerations for existing and prospective closed-end fund asset managers. We will guide you through their regulatory intricacies, offering comparisons between interval funds and tender offer funds along the way. Later we will connect their structure with an examination of how closed-end funds should be approached from a distribution perspective.

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How we help

Since 2005, we have been helping asset management firms achieve compliant distribution of their products, through the use of our broker-dealers. Interval fund structures require a broker-dealer to provide statutory distributor/legal underwriting, DTCC/NSCC fund sponsorship, and registered rep licensing to promote the fund.

ACA Foreside can support your interval fund launch and will work with your compliance, marketing, and sales teams to review fund marketing material, engage in dealer/selling agreements, establish NSCC/AIP connectivity, license your business development staff, and consult with you to design an effective distribution strategy for your product. We can also work with the administrator or law firm of your choice, or provide introductions as needed.

Contact us today to find out how we can help your firm launch a new fund or convert an existing fund.

¹ SEC, Investment Trusts and Investment Companies, pt. 3, H.R. Doc. No. 279, 76th Cong., 1st Sess. (1939)

² SEC, Division of Investment Management, Protecting Investors: A Half Century of Investment Company Regulation, p. 424