[Federal Register Volume 85, Number 37 (Tuesday, February 25, 2020)]
[Notices]
[Pages 10774-10776]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-03676]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 33800; File No. 812-15037]


Prospect Capital Management L.P., et al.

February 19, 2020.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice.

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    Notice of an application under section 6(c) of the Investment 
Company Act of 1940 (the ``Act'') for an exemption from sections 
18(a)(2), 18(c), and 18(i) of the Act, under sections 6(c) and 23(c) of 
the Act for an exemption from rule 23c-3 under the Act, and for an 
order pursuant to section 17(d) of the Act and rule 17d-1 under the 
Act.

SUMMARY OF APPLICATION: Applicants request an order to permit certain 
registered closed-end management investment companies to issue multiple 
classes of shares and to impose asset-based distribution and/or service 
fees, and early withdrawal charges (``EWCs'').

APPLICANTS: Prospect Capital Management L.P. (the ``Adviser''), 
Priority Senior Secured Income Management, LLC (``PSSIM''), and 
Priority Income Fund, Inc. (the ``Initial Fund'').

FILING DATES: The application was filed on May 28, 2019 and amended on 
September 17, 2019 and December 10, 2019.

HEARING OR NOTIFICATION OF HEARING: An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on March 16, 2020, and should be accompanied by proof of 
service on the applicants, in the form of an affidavit, or, for 
lawyers, a certificate of service. Pursuant to rule 0-5 under the Act, 
hearing requests should state the nature of the writer's interest, any 
facts bearing upon the desirability of a hearing on the matter, the 
reason for the request, and the issues contested. Persons who wish to 
be notified of a hearing may request notification by writing to the 
Commission's Secretary.

ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F 
Street NE, Washington, DC 20549-1090; Applicants: 10 East 40th Street, 
42nd Floor, New York, NY 10016.

FOR FURTHER INFORMATION CONTACT: Barbara T. Heussler, Senior Counsel, 
at (202) 551-6990, or Trace W. Rakestraw, Branch Chief, at (202) 551-
6825 (Division of Investment Management, Chief Counsel's Office).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained via the 
Commission's website by searching for the file number, or for an 
applicant using the Company name box, at http://www.sec.gov/search/search.htm or by calling (202) 551-8090.

Applicants' Representations

    1. The Initial Fund is a Maryland corporation that is registered 
under the Act as an externally managed, non-diversified, closed-end 
management investment company. The Initial Fund's investment objective 
is to generate current income and, as a secondary objective, long-term 
capital appreciation.
    2. PSSIM is a Delaware limited liability company registered as an 
investment adviser under the Investment Advisers Act of 1940 
(``Advisers Act'') and currently serves as investment adviser to the 
Initial Fund pursuant to an advisory agreement. The Adviser is a 
Delaware limited partnership and is registered as an investment adviser 
under the Advisers Act. The Adviser owns 50% of PSSIM and is the 
operating member of PSSIM, responsible for making all investment and 
operational decisions for PSSIM.
    3. The applicants seek an order to permit the Initial Fund to issue 
multiple classes of shares and to impose asset-based distribution and/
or service fees, and EWCs.
    4. Applicants request that the order also apply to any continuously 
offered registered closed-end management investment company, existing 
now or in the future, for which the Adviser or any entity controlling, 
controlled by, or under common control with the Adviser, or any 
successor in interest to any such entity,\1\ acts as investment adviser 
and that operates as an interval fund pursuant to rule 23c-3 under the 
Act or provides periodic liquidity with respect to its shares pursuant 
to rule 13e-4 under the Securities Exchange Act of 1934 (``Exchange 
Act'') (each, a ``Future Fund'' and together with the Initial Fund, the 
``Funds'').\2\
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    \1\ A successor in interest is limited to an entity that results 
from a reorganization into another jurisdiction or a change in the 
type of business organization.
    \2\ Any Fund relying on this relief in the future will do so in 
compliance with the terms and conditions of the application. 
Applicants represent that each entity presently intending to rely on 
the requested relief is listed as an applicant.
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    5. The Initial Fund currently makes a continuous public offering of 
its shares. Applicants state that additional offerings by any Fund 
relying on the order may be on a private placement or public offering 
basis. Shares of the Funds will not be listed on any securities 
exchange, nor quoted on any quotation medium. The Funds do not expect 
there to be a secondary trading market for their shares.
    6. If the requested relief is granted, the Initial Fund may also 
offer additional classes of shares in the future, with each class 
having its own fee and expense structure.
    7. Applicants state that, from time to time, the Funds may create 
additional classes of shares, the terms of which may differ from the 
initial class pursuant to and in compliance with rule 18f-3 under the 
Act.
    8. The Initial Fund provides periodic liquidity with respect to its 
shares

[[Page 10775]]

pursuant to rule 13e-4 under the Exchange Act. Each Future Fund will 
either adopt fundamental investment policies in compliance with rule 
23c-3 under the Act and make periodic repurchase offers to its 
shareholders, or provide periodic liquidity with respect to its shares 
pursuant to rule 13e-4 under the Exchange Act.\3\ Any repurchase offers 
made by the Funds, whether pursuant to rule 13e-4 under the Exchange 
Act or rule 23c-3 under the Act, will be made to all holders of shares 
of each such Fund.
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    \3\ Applicants submit that rule 23c-3 and Regulation M under the 
Exchange Act permit an interval fund to make repurchase offers to 
repurchase its shares while engaging in a continuous offering of its 
shares pursuant to rule 415 under the Securities Act of 1933.
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    9. Applicants represent that any asset-based distribution and/or 
service fees for each class of shares will comply with the provisions 
of Rule 2341 (``Sales Charge Rule'') of the Financial Industry 
Regulatory Authority, Inc. (``FINRA'').\4\ Applicants also represent 
that each Fund will disclose in its prospectus the fees, expenses, and 
other characteristics of each class of shares offered for sale by the 
prospectus, as is required for open-end multiple class funds under Form 
N-1A. As is required for open-end funds, each Fund will disclose its 
expenses in shareholder reports, and describe any arrangements that 
result in breakpoints in or elimination of sales loads in its 
prospectus.\5\ In addition, applicants will comply with applicable 
enhanced fee disclosure requirements for fund of funds, including 
registered funds of hedge funds.\6\
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    \4\ Any references in the application to the Sales Charge Rule 
include any FINRA successor or replacement rule to the Sales Charge 
Rule.
    \5\ Shareholder Reports and Quarterly Portfolio Disclosure of 
Registered Management Investment Companies, Investment Company Act 
Rel. No. 26372 (Feb. 27, 2004) (adopting release); and Disclosure of 
Breakpoint Discounts by Mutual Funds, Investment Company Act Rel. 
No. 26464 (June 7, 2004) (adopting release).
    \6\ Fund of Funds Investments, Investment Company Act Rel. Nos. 
26198 (Oct. 1, 2003) (proposing release) and 27399 (Jun. 20, 2006) 
(adopting release). See also Rules 12d1-1, et seq. of the Act.
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    10. Each Fund will comply with any requirements that the Commission 
or FINRA may adopt regarding disclosure at the point of sale and in 
transaction confirmations about the costs and conflicts of interest 
arising out of the distribution of open-end investment company shares, 
and regarding prospectus disclosure of sales loads and revenue sharing 
arrangements, as if those requirements applied to each Fund. In 
addition, each Fund will contractually require that any distributor of 
the Fund's shares comply with such requirements in connection with the 
distribution of such Fund's shares.
    11. Applicants state that each Fund may impose an EWC on shares 
submitted for repurchase that have been held less than a specified 
period and may waive the EWC for certain categories of shareholders or 
transactions to be established from time to time. Applicants state that 
each Fund will apply the EWC (and any waivers, scheduled variations or 
eliminations of the EWC) uniformly to all shareholders in a given class 
and consistently with the requirements of rule 22d-1 under the Act as 
if the Funds were open-end investment companies.
    12. Each Fund operating as an interval fund pursuant to rule 23c-3 
under the Act may offer its shareholders an exchange feature under 
which the shareholders of the Fund may, in connection with the such 
Fund's periodic repurchase offers, exchange their shares of the Fund 
for shares of the same class of (i) registered open-end investment 
companies or (ii) other registered closed-end investment companies that 
comply with rule 23c-3 under the Act and continuously offer their 
shares at net asset value, that are in the Fund's group of investment 
companies (collectively, ``Other Funds''). Shares of a Fund operating 
pursuant to rule 23c-3 that are exchanged for shares of Other Funds 
will be included as part of the amount of the repurchase offer amount 
for such Fund as specified in rule 23c-3 under the Act. Any exchange 
option will comply with rule 11a-3 under the Act, as if the Fund were 
an open-end investment company subject to rule 11a-3. In complying with 
rule 11a-3, each Fund will treat an EWC as if it were a contingent 
deferred sales load (``CDSL'').

Applicants' Legal Analysis

Multiple Classes of Shares

    1. Section 18(a)(2) of the Act makes it unlawful for a closed-end 
investment company to issue a senior security that is a stock unless 
certain requirements are met. Applicants state that the creation of 
multiple classes of shares of the Funds may violate section 18(a)(2) 
because the Funds may not meet such requirements with respect to a 
class of shares that may be a senior security.
    2. Section 18(c) of the Act provides, in relevant part, that a 
registered closed-end investment company may not issue or sell any 
senior security that is stock if, immediately thereafter, the company 
has outstanding more than one class of senior security that is stock. 
Section 18(g) of the Act defines ``senior security'' that is stock as 
``any stock of a class having priority over any other class as to 
distribution of assets or payment of dividends''. Applicants state that 
the creation of multiple classes of shares of a Fund proposed herein 
may result in shares of a class having priority over another class as 
to payment of dividends, and being deemed a ``senior security,'' 
because shareholders of different classes may pay different 
distribution fees, different shareholder services fees, and any other 
expense (as described elsewhere in this notice). Accordingly applicants 
state that the creation of multiple classes of shares of a Fund with 
different fees and expenses may be prohibited by section 18(c).
    3. Section 18(i) of the Act provides that each share of stock 
issued by a registered management investment company will be a voting 
stock and have equal voting rights with every other outstanding voting 
stock. Applicants state that multiple classes of shares of the Funds 
may violate section 18(i) of the Act because each class would be 
entitled to exclusive voting rights with respect to matters solely 
related to that class.
    4. Section 6(c) of the Act provides that the Commission may exempt 
any person, security or transaction or any class or classes of persons, 
securities or transactions from any provision of the Act, or from any 
rule or regulation under the Act, if and to the extent 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 request an exemption under 
section 6(c) from sections 18(a)(2), 18(c) and 18(i) to permit the 
Funds to issue multiple classes of shares.
    5. Applicants submit that the proposed allocation of expenses 
relating to distribution and voting rights among multiple classes is 
equitable and will not discriminate against any group or class of 
shareholders. Applicants submit that the proposed arrangements would 
permit a Fund to facilitate the distribution of its securities and 
provide investors with a broader choice of shareholder services. 
Applicants assert that the proposed closed-end investment company 
multiple class structure does not raise the concerns underlying section 
18 of the Act to any greater degree than open-end investment companies' 
multiple class structures that are permitted by rule 18f-3 under the 
Act. Applicants state that each Fund will comply with the provisions of 
rule 18f-3 as if it were an open-end investment company.

[[Page 10776]]

Early Withdrawal Charges

    1. Section 23(c) of the Act provides, in relevant part, that no 
registered closed-end investment company shall purchase securities of 
which it is the issuer, except: (a) On a securities exchange or other 
open market; (b) pursuant 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 Commission may 
permit by rules and regulations or orders for the protection of 
investors.
    2. Rule 23c-3 under the Act permits an interval fund to make 
repurchase offers of between five and twenty-five percent of its 
outstanding shares at net asset value at periodic intervals pursuant to 
a fundamental policy of the interval fund. Rule 23c-3(b)(1) under the 
Act permits an interval fund to deduct from repurchase proceeds only a 
repurchase fee, not to exceed two percent of the proceeds, that is paid 
to the interval fund and is reasonably intended to compensate the fund 
for expenses directly related to the repurchase. A Fund will not impose 
a repurchase fee on investors who purchase and tender their shares.
    3. Section 23(c)(3) provides that the Commission may issue an order 
that would permit a closed-end investment company to repurchase its 
shares in circumstances in which the repurchase is made in a manner or 
on a basis that does not unfairly discriminate against any holders of 
the class or classes of securities to be purchased.
    4. Applicants request relief under section 6(c), discussed above, 
and section 23(c)(3) from rule 23c-3 to the extent necessary for the 
Funds to impose EWCs on shares of the Funds submitted for repurchase 
that have been held for less than a specified period.
    5. Applicants state that the EWCs they intend to impose are 
functionally similar to CDSLs imposed by open-end investment companies 
under rule 6c-10 under the Act. Rule 6c-10 permits open-end investment 
companies to impose CDSLs, subject to certain conditions. Applicants 
note that rule 6c-10 is grounded in policy considerations supporting 
the employment of CDSLs where there are adequate safeguards for the 
investor and state that the same policy considerations support 
imposition of EWCs in the interval fund context. In addition, 
applicants state that EWCs may be necessary for the distributor to 
recover distribution costs. Applicants represent that any EWC imposed 
by the Funds will comply with rule 6c-10 under the Act as if the rule 
were applicable to closed-end investment companies. The Funds will 
disclose EWCs in accordance with the requirements of Form N-1A 
concerning CDSLs.

Asset-Based Distribution and/or Service Fees

    1. Section 17(d) of the Act and rule 17d-1 under the Act prohibit 
an affiliated person of a registered investment company, or an 
affiliated person of such person, acting as principal, from 
participating in or effecting any transaction in connection with any 
joint enterprise or joint arrangement in which the investment company 
participates unless the Commission issues an order permitting the 
transaction. In reviewing applications submitted under section 17(d) 
and rule 17d-1, the Commission considers whether the participation of 
the investment company in a joint enterprise or joint arrangement is 
consistent with the provisions, policies and purposes of the Act, and 
the extent to which the participation is on a basis different from or 
less advantageous than that of other participants.
    2. Rule 17d-3 under the Act provides an exemption from section 
17(d) and rule 17d-1 to permit open-end investment companies to enter 
into distribution arrangements pursuant to rule 12b-1 under the Act. 
Applicants request an order under section 17(d) and rule 17d-1 under 
the Act to the extent necessary to permit the Funds to impose asset-
based distribution and/or service fees. Applicants have agreed to 
comply with rules 12b-1 and 17d-3 as if those rules applied to closed-
end investment companies, which they believe will resolve any concerns 
that might arise in connection with a Fund financing the distribution 
of its shares through asset-based distribution and/or service fees.
    3. For the reasons stated above, applicants submit that the 
exemptions requested under section 6(c) are necessary and appropriate 
in the public interest and are consistent with the protection of 
investors and the purposes fairly intended by the policy and provisions 
of the Act. Applicants further submit that the relief requested 
pursuant to section 23(c)(3) will be consistent with the protection of 
investors and will insure that applicants do not unfairly discriminate 
against any holders of the class of securities to be purchased. 
Finally, applicants state that the Funds' imposition of asset-based 
distribution and/or service fees is consistent with the provisions, 
policies, and purposes of the Act and does not involve participation on 
a basis different from or less advantageous than that of other 
participants.

Applicants' Condition

    Applicants agree that any order granting the requested relief will 
be subject to the following condition:
    Each Fund relying on the order will comply with the provisions of 
rules 6c-10, 12b-1, 17d-3, 18f-3, 22d-1, and, where applicable, 11a-3 
under the Act, as amended from time to time, as if those rules applied 
to closed-end management investment companies, and will comply with the 
Sales Charge Rule, as amended from time to time, as if that rule 
applied to all closed-end management investment companies.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2020-03676 Filed 2-24-20; 8:45 am]
 BILLING CODE 8011-01-P


