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# Other

# Registered Investment Company Use of Senior Securities — Select Bibliography

                            Oct. 12, 2017                       

Section 18 of the Investment Company Act of 1940 circumscribes the ability of registered closed-end investment companies and registered open-end investment companies to issue or sell "senior securities," which the Act defines in section 18(g). Section 18(a)(1), for example, prohibits a closed-end investment company from issuing any class of senior security or selling any senior security of which it is the issuer, that represents indebtedness, unless immediately after such issuance or sale the investment company will have asset coverage of at least 300%. Section 18(f)(1) prohibits an open-end investment company from issuing any class of senior security, or selling any class of senior security of which it is the issuer, except that the investment company may borrow from a bank provided that immediately after any such borrowing there is asset coverage of at least 300% for all of its borrowings. "Asset coverage" is defined in section 18(h). The Commission and its staff have taken the position that reverse repurchase agreements, firm commitment agreements, standby commitment agreements, short sales, written options, forwards, futures, and certain other derivatives transactions may involve the issuance of a senior security subject to the prohibitions and asset coverage requirements of sections 18(a)(1) and 18(f)(1). The Commission and the staff have indicated, however, that they will not object to investment companies' engaging in such transactions without complying with the asset coverage and other requirements of sections 18(a)(1) and 18(f)(1), provided that the investment companies segregate assets, or otherwise “cover” their obligations under the instruments, consistent with Commission and staff guidance. As an aid to registered investment companies and their counsel, the staff is publishing the following bibliography of relevant authority and precedent relating to registered investment company use of senior securities.1

1 This bibliography focuses on Commission and staff guidance analyzing the application of section 18 to senior securities such as reverse repos, firm commitments, standby commitments, short sales, written options, forwards, futures, and certain other derivatives transactions that may involve the issuance of a senior security. This bibliography does not include relevant Commission and staff guidance concerning the application of section 18 to preferred stock and bank borrowings.

2 It is the staff's understanding that most funds no longer rely on these letters, but instead rely on the no-action letters and other authority cited above, particularly Release 10666, the Dreyfus no-action letter, the Merrill Lynch Asset Management no-action letter, and the Robertson Stephens Investment Trust no-action letter.

This document has been prepared by the staff of the Division of Investment Management, and has not been subject to Commission review or approval. Funds should consult the actual authority set out herein, as well as any other applicable legal authority not included herein (both under the 1940 Act and under other laws).

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