[Federal Register Volume 83, Number 236 (Monday, December 10, 2018)]
[Notices]
[Pages 63546-63549]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-26668]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 33315; 812-14900]
Stone Ridge Trust II, et al.
December 4, 2018.
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 early withdrawal charges and asset-
based distribution fees and/or service fees with respect to certain
classes.
Applicants: Stone Ridge Trust II, Stone Ridge Trust III, Stone Ridge
Trust IV and Stone Ridge Trust V (collectively, the ``Initial Funds'')
and Stone Ridge Asset Management LLC (the ``Adviser'' and together with
the Initial Funds, the ``Applicants'').
Filing Dates: The application was filed on April 27, 2018, and amended
on August 31, 2018.
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 December 31, 2018, 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: 510 Madison Avenue,
21st Floor, New York, New York 10022.
FOR FURTHER INFORMATION CONTACT: Kyle R. Ahlgren, Senior Counsel, at
(202) 551-6857, or Aaron Gilbride, Branch Chief, at (202) 551-6821
(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. Each of the Initial Funds is a Delaware statutory trust that is
registered under the Act as a closed-end management investment company
and operated as an interval fund pursuant to rule 23c-3 under the Act.
The investment objective of Stone Ridge Trust II and Stone Ridge Trust
IV is to achieve long-term capital appreciation. Stone Ridge Trust II
pursues its investment objective primarily by investing in reinsurance-
related securities, while Stone Ridge Trust IV, upon commencement of
operations, will pursue its investment objective by investing all or
substantially all of its assets in the Stone Ridge Reinsurance Interval
Fund, which also invests in reinsurance-related securities. The
investment objective of Stone Ridge Trust III is to achieve capital
[[Page 63547]]
appreciation, which it pursues primarily by receiving premiums in
connection with its derivatives contracts. The investment objective of
Stone Ridge Trust V is to achieve total return and current income,
which it pursues primarily by buying and selling alternative lending-
related securities that generate interest or other streams of payments.
2. The Adviser is a Delaware limited liability company and is an
investment adviser registered with the Commission under the Investment
Advisers Act of 1940. The Adviser serves as investment adviser to the
Initial Funds.
3. Applicants seek an order to permit the Funds (as defined below)
to issue multiple classes of shares, each having its own fee and
expense structure and to impose early withdrawal charges (``EWCs'') and
asset-based distribution and/or service fees with respect to certain
classes.
4. Applicants request that the order also apply to any
continuously-offered registered closed-end management investment
company that has been previously organized or that may be organized 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, as amended (the
``Exchange Act'') (each, a ``Future Fund'' and together with the
Initial Funds, 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\ Applicants represent that any of the Funds relying on this
relief in the future will do so in a manner consistent with the
terms and conditions of the application. Applicants further
represent that each entity presently intending to rely on the
requested relief is listed as an Applicant.
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5. Each Initial Fund, except Stone Ridge Trust IV, is currently
offering its common shares of beneficial interest (``Initial Class
Shares'') on a continuous basis. 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,
and the Funds do not expect there to be a secondary trading market for
their shares.
6. If the requested relief is granted, each Initial Fund intends to
file an amendment to its registration statement to continuously offer
at least one additional class of shares (``New Class Shares''). Each of
the Initial Class Shares and the New Class Shares will have its own fee
and expense structure. Because of the different distribution and/or
service fees, services, and any other class expenses that may be
attributable to each class of shares, the net income attributable to,
and the dividends payable on, each class of shares may differ from each
other.
7. Applicants state that, from time to time, the Funds may create
additional classes of shares, the terms of which may differ from their
other share classes in the following respects: (i) The amount of fees
permitted by different distribution plans and/or different service fee
arrangements; (ii) voting rights with respect to a distribution and/or
service plan of a class; (iii) different class designations; (iv) the
impact of any class expenses directly attributable to a particular
class of shares allocated on a class basis as described in the
application; (v) any differences in dividends and net asset value
resulting from differences in fees under a distribution plan and/or
service fee arrangement or in class expenses; (vi) any EWC or other
sales load structure; and (vii) exchange or conversion privileges of
the classes as permitted under the Act.
8. Applicants state that each Initial Fund has adopted a
fundamental policy to repurchase a specified percentage of its shares
(no less than 5% and no more than 25%) at net asset value on a periodic
basis. Such repurchase offers will be conducted pursuant to rule 23c-3
under the Act. Each of the other Funds will likewise adopt fundamental
investment policies and make periodic repurchase offers to its
shareholders in compliance with rule 23c-3 or will 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 will be made
to all holders of shares of each such Fund as of the selected record
date.
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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, as
amended.
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9. Applicants represent that any asset-based service and/or
distribution fees for each class of shares of the Funds will comply
with the provisions of FINRA Rule 2341 (formerly NASD rule 2380(d))
(the ``FINRA Sales Charge Rule'').\4\ Applicants also represent that
each Fund will include in its prospectus disclosure the fees, expenses
and other characteristics of each class of shares offered for sale by
the prospectus, as is required for open-end multi-class funds under
Form N-1A.\5\ As is required for open-end funds, each Fund will
disclose fund expenses borne by shareholders during the reporting
period in shareholder reports, and describe in their prospectuses any
arrangements that result in breakpoints in, or elimination of, sales
loads.\6\ In addition, applicants will comply with applicable enhanced
fee disclosure requirements for fund of funds, including registered
funds of hedge funds.\7\
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\4\ Any reference in the application to the FINRA Sales Charge
Rule includes any successor or replacement to the FINRA Sales Charge
Rule.
\5\ In all respects other than class by class disclosure, each
Fund will comply with the requirements of Form N-2.
\6\ See Shareholder Reports and Quarterly Portfolio Disclosure
of Registered Management Investment Companies, Investment Company
Act Release No. 26372 (Feb. 27, 2004) (adopting release) (requiring
open-end investment companies to disclose fund expenses in
shareholder reports); and Disclosure of Breakpoint Discounts by
Mutual Funds, Investment Company Act Release No. 26464 (June 7,
2004) (adopting release) (requiring open-end investment companies to
provide prospectus disclosure of certain sales load information).
\7\ 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. Each Fund will allocate all expenses incurred by it among the
various classes of shares based on the net assets of that Fund
attributable to each such class, except that the net asset value and
expenses of each class will reflect the expenses associated with the
distribution and/or service plan of that class (if any), service fees
attributable to that class (if any), including transfer agency fees,
and any other incremental expenses of that class. Expenses of a Fund
allocated to a particular class of shares will be borne on a pro rata
basis by each outstanding share of that class. Applicants state that
each Fund will
[[Page 63548]]
comply with the provisions of rule 18f-3 under the Act as if it were an
open-end investment company.
12. 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 grant waivers of the EWCs on repurchases in connection
with certain categories of shareholders or transactions 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.
13. Each Fund that operates or will operate 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 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, the ``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 provides that a closed-end
investment company may not issue or sell a senior security that is a
stock unless certain requirements are met. Applicants acknowledge 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
closed-end investment company may not issue or sell any senior security
if, immediately thereafter, the company has outstanding more than one
class of senior security. Applicants acknowledge that the creation of
multiple classes of shares of the Funds may be prohibited by section
18(c), as a class may have priority over another class as to payment of
dividends because shareholders of different classes would pay different
fees and expenses.
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 acknowledge 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/or services and voting rights 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 concerns underlying section 18 of the Act to any greater
degree than open-end investment companies' multiple class structures.
Applicants state that each Fund will comply with the provisions of rule
18f-3 as if it were an open-end investment company.
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 a registered closed-end
investment company (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.
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. Applicants state
that the Initial Funds do not currently charge a repurchase fee, but a
Fund may impose an early repurchase fee at a rate of no greater than 2
percent of the aggregate net asset value of a shareholder's shares
repurchased by the Fund (an ``Early Repurchase Fee'') if the interval
between the date of purchase of the shares and the valuation date with
respect to the repurchase of those shares is less than one year.
Applicants represent that any Early Repurchase Fee imposed by a Fund
will apply equally to all New Class Shares and to all classes of shares
of such Fund, consistent with section 18 of the Act and rule 18f-3
thereunder.
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
[[Page 63549]]
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 funds. Applicants further
represent that each Fund will disclose EWCs in accordance with the
requirements of Form N-1A concerning CDSLs as if the Fund were an open-
end investment company.
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 represent that the
Funds will comply with rules 12b-1 and 17d-3 as if those rules applied
to closed-end investment companies.
3. For the reasons stated above, applicants submit that the
exemptions requested 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
FINRA 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.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-26668 Filed 12-7-18; 8:45 am]
BILLING CODE 8011-01-P