§ 80a-18. — Capital structure of investment companies.
[Laws in effect as of January 24, 2002]
[Document not affected by Public Laws enacted between
January 24, 2002 and December 19, 2002]
[CITE: 15USC80a-18]
TITLE 15--COMMERCE AND TRADE
CHAPTER 2D--INVESTMENT COMPANIES AND ADVISERS
SUBCHAPTER I--INVESTMENT COMPANIES
Sec. 80a-18. Capital structure of investment companies
(a) Qualifications on issuance of senior securities
It shall be unlawful for any registered closed-end company to issue
any class of senior security, or to sell any such security of which it
is the issuer, unless--
(1) if such class of senior security represents an
indebtedness--
(A) immediately after such issuance or sale, it will have an
asset coverage of at least 300 per centum;
(B) provision is made to prohibit the declaration of any
dividend (except a dividend payable in stock of the issuer), or
the declaration of any other distribution, upon any class of the
capital stock of such investment company, or the purchase of any
such capital stock, unless, in every such case, such class of
senior securities has at the time of the declaration of any such
dividend or distribution or at the time of any such purchase an
asset coverage of at least 300 per centum after deducting the
amount of such dividend, distribution, or purchase price, as the
case may be, except that dividends may be declared upon any
preferred stock if such senior security representing
indebtedness has an asset coverage of at least 200 per centum at
the time of declaration thereof after deducting the amount of
such dividend; and
(C) provision is made either--
(i) that, if on the last business day of each of twelve
consecutive calendar months such class of senior securities
shall have an asset coverage of less than 100 per centum,
the holders of such securities voting as a class shall be
entitled to elect at least a majority of the members of the
board of directors of such registered company, such voting
right to continue until such class of senior security shall
have an asset coverage of 110 per centum or more on the last
business day of each of three consecutive calendar months,
or
(ii) that, if on the last business day of each of
twenty-four consecutive calendar months such class of senior
securities shall have an asset coverage of less than 100 per
centum, an event of default shall be deemed to have
occurred;
(2) if such class of senior security is a stock--
(A) immediately after such issuance or sale it will have an
asset coverage of at least 200 per centum;
(B) provision is made to prohibit the declaration of any
dividend (except a dividend payable in common stock of the
issuer), or the declaration of any other distribution, upon the
common stock of such investment company, or the purchase of any
such common stock, unless in every such case such class of
senior security has at the time of the declaration of any such
dividend or distribution or at the time of any such purchase an
asset coverage of at least 200 per centum after deducting the
amount of such dividend, distribution or purchase price, as the
case may be;
(C) provision is made to entitle the holders of such senior
securities, voting as a class, to elect at least two directors
at all times, and, subject to the prior rights, if any, of the
holders of any other class of senior securities outstanding, to
elect a majority of the directors if at any time dividends on
such class of securities shall be unpaid in an amount equal to
two full years' dividends on such securities, and to continue to
be so represented until all dividends in arrears shall have been
paid or otherwise provided for;
(D) provision is made requiring approval by the vote of a
majority of such securities, voting as a class, of any plan of
reorganization adversely affecting such securities or of any
action requiring a vote of security holders as in section 80a-
13(a) of this title provided; and
(E) such class of stock shall have complete priority over
any other class as to distribution of assets and payment of
dividends, which dividends shall be cumulative.
(b) Asset coverage in respect of senior securities
The asset coverage in respect of a senior security provided for in
subsection (a) of this section may be determined on the basis of values
calculated as of a time within forty-eight hours (not including Sundays
or holidays) next preceding the time of such determination. The time of
issue or sale shall, in the case of an offering of such securities to
existing stockholders of the issuer, be deemed to be the first date on
which such offering is made, and in all other cases shall be deemed to
be the time as of which a firm commitment to issue or sell and to take
or purchase such securities shall be made.
(c) Prohibitions relating to issuance of senior securities
Notwithstanding the provisions of subsection (a) of this section it
shall be unlawful for any registered closed-end investment company to
issue or sell any senior security representing indebtedness if
immediately thereafter such company will have outstanding more than one
class of senior security representing indebtedness, or to issue or sell
any senior security which is a stock if immediately thereafter such
company will have outstanding more than one class of senior security
which is a stock, except that (1) any such class of indebtedness or
stock may be issued in one or more series: Provided, That no such series
shall have a preference or priority over any other series upon the
distribution of the assets of such registered closed-end company or in
respect of the payment of interest or dividends, and (2) promissory
notes or other evidences of indebtedness issued in consideration of any
loan, extension, or renewal thereof, made by a bank or other person and
privately arranged, and not intended to be publicly distributed, shall
not be deemed to be a separate class of senior securities representing
indebtedness within the meaning of this subsection.
(d) Warrants and rights to subscription
It shall be unlawful for any registered management company to issue
any warrant or right to subscribe to or purchase a security of which
such company is the issuer, except in the form of warrants or rights to
subscribe expiring not later than one hundred and twenty days after
their issuance and issued exclusively and ratably to a class or classes
of such company's security holders; except that any warrant may be
issued in exchange for outstanding warrants in connection with a plan of
reorganization.
(e) Application of section to specific senior securities
The provisions of this section shall not apply to any senior
securities issued or sold by any registered closed-end company--
(1) for the purpose of refunding through payment, purchase,
redemption, retirement, or exchange, any senior security of such
registered investment company except that no senior security
representing indebtedness shall be so issued or sold for the purpose
of refunding any senior security which is a stock; or
(2) pursuant to any plan of reorganization (other than for
refunding as referred to in paragraph (1) of this subsection),
provided--
(A) that such senior securities are issued or sold for the
purpose of substituting or exchanging such senior securities for
outstanding senior securities, and if such senior securities
represent indebtedness they are issued or sold for the purpose
of substituting or exchanging such senior securities for
outstanding senior securities representing indebtedness, of any
registered investment company which is a party to such plan of
reorganization; or
(B) that the total amount of such senior securities so
issued or sold pursuant to such plan does not exceed the total
amount of senior securities of all the companies which are
parties to such plan, and the total amount of senior securities
representing indebtedness so issued or sold pursuant to such
plan does not exceed the total amount of senior securities
representing indebtedness of all such companies, or,
alternatively, the total amount of such senior securities so
issued or sold pursuant to such plan does not have the effect of
increasing the ratio of senior securities representing
indebtedness to the securities representing stock or the ratio
of senior securities representing stock to securities junior
thereto when compared with such ratios as they existed before
such reorganization.
(f) Senior securities securing loans from bank; securities not included
in ``senior security''
(1) It shall be unlawful for any registered open-end company to
issue any class of senior security or to sell any senior security of
which it is the issuer, except that any such registered company shall be
permitted to borrow from any bank: Provided, That immediately after any
such borrowing there is an asset coverage of at least 300 per centum for
all borrowings of such registered company: And provided further, That in
the event that such asset coverage shall at any time fall below 300 per
centum such registered company shall, within three days thereafter (not
including Sundays and holidays) or such longer period as the Commission
may prescribe by rules and regulations, reduce the amount of its
borrowings to an extent that the asset coverage of such borrowings shall
be at least 300 per centum.
(2) ``Senior security'' shall not, in the case of a registered open-
end company, include a class or classes or a number of series of
preferred or special stock each of which is preferred over all other
classes or series in respect of assets specifically allocated to that
class or series: Provided, That (A) such company has outstanding no
class or series of stock which is not so preferred over all other
classes or series, or (B) the only other outstanding class of the
issuer's stock consists of a common stock upon which no dividend (other
than a liquidating dividend) is permitted to be paid and which in the
aggregate represents not more than one-half of 1 per centum of the
issuer's outstanding voting securities. For the purpose of insuring fair
and equitable treatment of the holders of the outstanding voting
securities of each class or series of stock of such company, the
Commission may by rule, regulation, or order direct that any matter
required to be submitted to the holders of the outstanding voting
securities of such company shall not be deemed to have been effectively
acted upon unless approved by the holders of such percentage (not
exceeding a majority) of the outstanding voting securities of each class
or series of stock affected by such matter as shall be prescribed in
such rule, regulation, or order.
(g) ``Senior security'' defined
Unless otherwise provided: ``Senior security'' means any bond,
debenture, note, or similar obligation or instrument constituting a
security and evidencing indebtedness, and any stock of a class having
priority over any other class as to distribution of assets or payment of
dividends; and ``senior security representing indebtedness'' means any
senior security other than stock.
The term ``senior security'', when used in subparagraphs (B) and (C)
of paragraph (1) of subsection (a) of this section, shall not include
any promissory note or other evidence of indebtedness issued in
consideration of any loan, extension, or renewal thereof, made by a bank
or other person and privately arranged, and not intended to be publicly
distributed; nor shall such term, when used in this section, include any
such promissory note or other evidence of indebtedness in any case where
such a loan is for temporary purposes only and in an amount not
exceeding 5 per centum of the value of the total assets of the issuer at
the time when the loan is made. A loan shall be presumed to be for
temporary purposes if it is repaid within sixty days and is not extended
or renewed; otherwise it shall be presumed not to be for temporary
purposes. Any such presumption may be rebutted by evidence.
(h) ``Asset coverage'' defined
``Asset coverage'' of a class of senior security representing an
indebtedness of an issuer means the ratio which the value of the total
assets of such issuer, less all liabilities and indebtedness not
represented by senior securities, bears to the aggregate amount of
senior securities representing indebtedness of such issuer. ``Asset
coverage'' of a class of senior security of an issuer which is a stock
means the ratio which the value of the total assets of such issuer, less
all liabilities and indebtedness not represented by senior securities,
bears to the aggregate amount of senior securities representing
indebtedness of such issuer plus the aggregate of the involuntary
liquidation preference of such class of senior security which is a
stock. The involuntary liquidation preference of a class of senior
security which is a stock shall be deemed to mean the amount to which
such class of senior security would be entitled on involuntary
liquidation of the issuer in preference to a security junior to it.
(i) Future issuance of stock as voting stock; exceptions
Except as provided in subsection (a) of this section, or as
otherwise required by law, every share of stock hereafter issued by a
registered management company (except a common-law trust of the
character described in section 80a-16(c) of this title) shall be a
voting stock and have equal voting rights with every other outstanding
voting stock: Provided, That this subsection shall not apply to shares
issued pursuant to the terms of any warrant or subscription right
outstanding on March 15, 1940, or any firm contract entered into before
March 15, 1940, to purchase such securities from such company nor to
shares issued in accordance with any rules, regulations, or orders which
the Commission may make permitting such issue.
(j) Securities issued by registered face-amount certificate company
Notwithstanding any provision of this subchapter, it shall be
unlawful, after August 22, 1940, for any registered face-amount
certificate company--
(1) to issue, except in accordance with such rules, regulations,
or orders as the Commission may prescribe in the public interest or
as necessary or appropriate for the protection of investors, any
security other than (A) a face-amount certificate; (B) a common
stock having a par value and being without preference as to
dividends or distributions and having at least equal voting rights
with any outstanding security of such company; or (C) short-term
payment or promissory notes or other indebtedness issued in
consideration of any loan, extension, or renewal thereof, made by a
bank or other person and privately arranged and not intended to be
publicly offered;
(2) if such company has outstanding any security, other than
such face-amount certificates, common stock, promissory notes, or
other evidence of indebtedness, to make any distribution or declare
or pay any dividend on any capital security in contravention of such
rules and regulations or orders as the Commission may prescribe in
the public interest or as necessary or appropriate for the
protection of investors or to insure the financial integrity of such
company, to prevent the impairment of the company's ability to meet
its obligations upon its face-amount certificates; or
(3) to issue any of its securities except for cash or securities
including securities of which such company is the issuer.
(k) Application of section to companies operating under Small Business
Investment Act provisions
The provisions of subparagraphs (A) and (B) of paragraph (1) of
subsection (a) of this section shall not apply to investment companies
operating under the Small Business Investment Act of 1958 [15 U.S.C. 661
et seq.], and the provisions of paragraph (2) of said subsection shall
not apply to such companies so long as such class of senior security
shall be held or guaranteed by the Small Business Administration.
(Aug. 22, 1940, ch. 686, title I, Sec. 18, 54 Stat. 817; Pub. L. 85-699,
title III, Sec. 307(c), Aug. 21, 1958, 72 Stat. 694; Pub. L. 91-547,
Sec. 10, Dec. 14, 1970, 84 Stat. 1421; Pub. L. 85-699, title III,
Sec. 317, formerly Sec. 319, Aug. 21, 1958, as added Pub. L. 92-595,
Sec. 2(g), Oct. 27, 1972, 86 Stat. 1316, renumbered Sec. 317, Pub. L.
104-208, div. D, title II, Sec. 208(h)(1)(E), Sept. 30, 1996, 110 Stat.
3009-747; Pub. L. 94-29, Sec. 28(4), June 4, 1975, 89 Stat. 165; Pub. L.
100-181, title VI, Sec. 613, Dec. 4, 1987, 101 Stat. 1261; Pub. L. 105-
353, title III, Sec. 301(c)(4), Nov. 3, 1998, 112 Stat. 3236.)
References in Text
The Small Business Investment Act of 1958, referred to in subsec.
(k), is Pub. L. 85-699, Aug. 21, 1958, 72 Stat. 689, as amended, which
is classified principally to chapter 14B (Sec. 661 et seq.) of this
title. For complete classification of this Act to the Code, see Short
Title note set out under section 661 of this title and Tables.
Amendments
1998--Subsec. (e)(2). Pub. L. 105-353 substituted ``paragraph (1) of
this subsection'' for ``subsection (e)(2) of this section'' in
introductory provisions.
1987--Subsec. (e). Pub. L. 100-181 redesignated pars. (2) and (3) as
(1) and (2), respectively, and struck out former par. (1) which read as
follows: ``pursuant to any firm contract to purchase or sell entered
into prior to March 15, 1940;''.
1975--Subsec. (i). Pub. L. 94-29 substituted ``section 80a-16(c) of
this title'' for ``section 80a-16(b) of this title''.
1972--Subsec. (k). Section 319 of Pub. L. 85-699, as added by Pub.
L. 92-595, inserted provision that subsec. (a)(2) shall not apply to
companies operating under the Small Business Investment Act of 1958, so
long as such class of senior security shall be held or guaranteed by the
Small Business Administration.
1970--Subsec. (f)(2). Pub. L. 91-547 substituted ``That (A)'' and
``or (B) the'' for ``(A) That'' and ``or (B) that the'' and inserted
provision for purpose of insuring fair and equitable treatment of the
holders of the outstanding voting securities of each class or series of
stock of such company, that the Commission may by rule, regulation, or
order direct that any matter required to be submitted to the holders of
the outstanding voting securities of such company shall not be deemed to
have been effectively acted upon unless approved by the holders of such
percentage (not exceeding a majority) of the outstanding voting
securities of each class or series of stock affected by such matter as
shall be prescribed in such rule, regulation, or order.
1958--Subsec. (k). Pub. L. 85-699 added subsec. (k).
Effective Date of 1975 Amendment
Amendment by Pub. L. 94-29 effective June 4, 1975, see section 31(a)
of Pub. L. 94-29, set out as a note under section 78b of this title.
Effective Date of 1970 Amendment
Amendment by Pub. L. 91-547 effective Dec. 14, 1970, see section 30
of Pub. L. 91-547, set out as a note under section 80a-52 of this title.
Transfer of Functions
For transfer of functions of Securities and Exchange Commission,
with certain exceptions, to Chairman of such Commission, see Reorg. Plan
No. 10 of 1950, Secs. 1, 2, eff. May 24, 1950, 15 F.R. 3175, 64 Stat.
1265, set out under section 78d of this title.
Section Referred to in Other Sections
This section is referred to in sections 80a-6, 80a-23, 80a-60 of
this title.
