An Overview of Interval Funds: Rule 23c-3

An overview of Rule 23c-3 forms the foundation for understanding interval funds’ fundamental structure and later will be used to compare the interval fund structure to that of tender offer funds. Rule 23c-3 delineates the regulatory framework, mechanisms, and restrictions for how interval funds conduct repurchase offers. More specifically, Rule 23c-3, among other things, establishes the permitted frequency, amount, type, and timing of repurchases for interval funds.

Frequency

Repurchase offers can be set at intervals of 3, 6, or 12 months. Additionally, an interval fund may make a discretionary repurchase offer pursuant to Rule 23c-3 no more than once every two years. Unlike with periodic repurchase offers, the discretionary repurchase amount is not subject to size limitations.

Repurchase Offer Amount

The repurchase offer amount is defined as the amount of common stock an interval fund offers for repurchase. It is calculated as a percentage of common stock outstanding and must be between (or equal to) 5% and 25%. If repurchases exceed the repurchase offer amount, interval funds must accept repurchases on a pro rata basis. Interval funds are permitted to increase the repurchase offer amount by 2% to handle an oversubscription without accepting repurchases pro rata.

Repurchase Payment Deadline

The repurchase payment deadline occurs seven days after the repurchase pricing date, and it requires the interval fund to pay shareholders for any common stock repurchased.

Repurchase Pricing Date

The repurchase pricing date is the date on which the net asset value (NAV) for the securities being repurchased is determined. Subject to certain conditions, it must be no later than 14 days following the repurchase request deadline.

Repurchase Request Deadline

The repurchase request deadline is the date by which interval funds must receive repurchase requests from shareholders or receive modifications to previously submitted repurchase requests.

Repurchase Fees

Repurchase fees are paid to the interval fund to compensate for expenses directly related to the repurchase. It may not exceed 2% of the repurchase proceeds.

Rule 23c-3 requires interval funds to repurchase shares pursuant to a “fundamental policy” establishing an interval fund’s intent to make periodic repurchases of its common stock. The policy must specify the frequency, dates of repurchase request deadlines (and means of determining the deadlines), and the maximum number of days between the repurchase request deadline and the repurchase pricing date. An interval funds fundamental policy may only be modified by a majority vote of the outstanding voting securities of the interval fund. Suspension or postponement of repurchase offers is only permitted under limited emergency circumstances and requires a majority vote of an interval fund’s Board of Trustees (Board), including a majority of the disinterested directors. An interval fund’s annual report must include a statement of its fundamental policy and outline the preceding year’s repurchase offers, including the number of repurchase offers, the repurchase offer amount, and the amount tendered in each repurchase offer.

Rule 23c-3 also stipulates that interval funds must notify shareholders 21 to 42 days prior to a repurchase request deadline. The notification informs shareholders of all pertinent repurchase offer details: any repurchase-related fees, repurchase offer amount, repurchase request deadline, repurchase pricing date, repurchase payment deadline, risk of NAV fluctuation between repurchase request deadline and repurchase pricing date, procedures for withdrawing or changing their tenders, procedures for pro rata share repurchases, NAV of common stock calculated seven or less days prior to notification, and, if applicable, the market price of the common stock.

Valuation of illiquid holdings presents challenges for closed-end funds. Interval funds must calculate NAV at least every seven days, and NAV must be calculated daily for the five business days prior to a repurchase request deadline. In addition to valuation, an interval fund’s Board must adopt procedures to ensure the interval fund’s assets are “sufficiently liquid” to “comply with its fundamental policy on repurchases” and meet liquidity requirements by maintaining 100% of the repurchase offer amount in liquid assets.

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Considering launching a closed-end 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 funds 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.