rmr_corresp.htm
[SASMF
Letterhead]
September
24,
2008
VIA EDGAR AND
FEDEX
H.
R. Hallock, Jr.
Division
of Investment Management
Securities
and Exchange Commission
100
F Street, N.E.
Washington,
D.C. 20549-4720
|
|
|
RE:
|
Comments Regarding RMR
Fund Mergers
|
Dear
Mr. Hallock:
This
letter is in response to the questions you raised in telephone calls on
September 18, 2008 and September 19, 2008 in connection with the staff ( the
"Staff") of the Securities and Exchange Commission's (the "Commission") review
of the Registration Statement on Form N-2 (File No. 811-22234) filed by RMR Real
Estate Income Fund ("New RMR") pursuant to Section 8(b) of the Investment
Company Act of 1940, as amended (the "1940 Act"), and the Proxy/Prospectus on
Form N-14 (File No. 333-153201) filed by New RMR, RMR Hospitality and Real
Estate Fund ("RHR") and RMR F.I.R.E. Fund ("RFR").
As
a threshold matter, this transaction involves two separate but related
elements. One element is the registration under the 1940 Act of New
RMR, a new closed-end management investment company. The other
element is the combination (the "Combination") of each of RHR, RFR and RMR Real
Estate Fund ("Old RMR," and collectively with RHR and RFR, the "Acquired
Funds"), each a fully operational, exchange listed closed-end management
investment company, with New RMR. The Combination would be
implemented through New RMR's acquisition, in separate transactions, of the
assets and liabilities of each Acquired Fund in exchange for newly issued shares
of New RMR, which in turn would be distributed to the shareholders of the
Acquired Funds. Upon completion of the Combination, the three
Acquired Funds would be combined into one new fund, New
H.
R. Hallock, Jr.
September
24, 2008
Page
2
RMR,
and shareholders of the Acquired Funds would all becomes shareholders of New
RMR. The three Acquired Funds would then be dissolved.
Filings on Form N-2 and Form
N-14
You
have asked us to explain the filing process we used for New RMR.
Section
8(a) of the 1940 Act requires investment companies to file a notification of
registration in such form as the Commission shall prescribe. The
Commission has designated Form N-8A as the proper form for filing a notification
of registration under Section 8(a) of the 1940 Act. Additionally,
Section 8(b) of the 1940 Act, and Rule 8b-10 thereunder, require investment
companies to file a registration statement in accordance with the form
prescribed therefor by the Commission. The only form for closed-end
management investment companies prescribed by the Commission for this purpose is
Form N-2.1 Thus,
to effect the required registration as a closed-end management investment
company under the 1940 Act, New RMR must file a Form N-8A and a Form
N-2.
The
shares to be issued by New RMR in connection with the Combinations will be
considered issued in a public offering and that offering must be registered
under the Securities Act of 1933, as amended (the "1933 Act"). The
Commission has promulgated Form N-14 for use in registering, under the 1933 Act,
securities issued in transactions described in General Instruction A to Form
N-14. The Combinations of each of RHR and RFR with New RMR are within
subparagraph (1) of General Instruction A. The Combination of Old RMR
with New RMR is within subparagraph (2) of General Instruction A.
In
connection with their Combinations with New RMR, RHR and RFR must also solicit
proxies from their shareholders to approve such
Combinations. Pursuant to Rule 14a-3(a) under the Securities Exchange
Act of 1934, as amended (the "1934 Act"), RHR and RFR must furnish their
shareholders with a proxy statement containing the information specified in
Schedule 14A, or a proxy statement included in a registration statement filed
under the 1933 Act on Form N-14.
Because
the consideration being offered to RHR and RFR shareholders in RHR's and RFR's
Combinations with New RMR consists of securities registered under the 1933 Act,
Instruction 1 to Schedule 14A, Item 14, requires RHR and RFR to furnish the
information specified by Form N-14. Said differently, the proxies for
the Combinations must contain the information required by Form
N-14.
1
|
See Form N-2,
General Instruction A.
|
H.
R. Hallock, Jr.
September
24, 2008
Page
3
Because
the Commission has not prescribed Form N-14 as a registration statement under
Section 8(b) of the 1940 Act, 2 New RMR must file (1) a Form N-2 to
register under the 1940 Act, and (2) a Form N-14 to register the public offering
of its shares issued in connection with the Combinations under the 1933 Act and
furnish a proper proxy statement to RHR and RFR shareholders under the 1934
Act.
The
disclosure required by Form N-14 includes nearly all of the information required
under Form N-2, and thus Form N-14 functionally requires New RMR to disclose of
all of the information New RMR would otherwise have to disclose on Form N-2
pursuant to Section 8(b) of the 1940 Act. In light of this, we have
elected to use the same content we prepared for New RMR's Form N-14 in New RMR's
Form N-2. As a result, the same core disclosure package serves three
separate functions: (1) registration under the 1933 Act pursuant to Form N-14,
(2) proxy disclosure under the 1934 Act pursuant to Form N-14 and (3)
registration under the 1940 Act pursuant to Form N-2. The disclosure
is compliant with both Form N-14 and Form N-2 and we included a cross-reference
sheet with New RMR's Form N-2 identifying the location of each Form N-2 item in
its registration statement.
The
inclusion of information responsive to Form N-14-specific items (i.e.,
information that is not duplicative of what Form N-2 requires) may be included
in New RMR's Form N-2 registration statement so long as it is not incomplete,
inaccurate, or misleading and does not, because of its nature, quantity, or
manner of presentation, obscure or impede understanding of the information Form
N-2 requires.3 We believe the information included
in New RMR's Form N-2 registration statement that is not required by Form N-2
satisfies this requirement. Moreover, the information required by Form N-2
need not be in any particular order (with the exception that Items 1,2,3, and 4
must appear in order in the prospectus and not be preceded or separated by any
other information) and should be organized to make it easy to understand the
organization and operation of the registrant.4
The presentation of New RMR's Form N-2 satisfies this requirement as
well.
Apart
from the legal considerations discussed above, we also believe this approach is
appropriate because it:
2
|
Compare Form
N-14, General Instruction A, with Form N-2,
General Instruction A.
|
3
|
See General
Instruction 2 for Parts A and B of Form N-2.
|
|
|
4 |
See General Instruction 1 for
Parts A and B of Form N-2. |
H.
R. Hallock, Jr.
September
24, 2008
Page
4
·
|
avoids
unnecessary duplication of effort for both the Staff and New RMR by using
identical disclosure content and formatting to satisfy the vast majority
of the requirements of two different registration regimes;
and
|
|
|
·
|
avoids
the risk that two versions of essentially the same disclosure will give
rise to interpretive ambiguities and result in confusion or
litigation.
|
Shareholder Voting
Requirements for the Acquired Funds
You
have also asked us to explain why Old RMR's Combination with New RMR does not
require a shareholder vote, whereas each of RHR's and RFR's respective
Combinations with New RMR do require a shareholder vote.
1940 Act
Subsection
(a)(3) of Rule 17a-8 under the 1940 Act requires a "majority of the outstanding"
voting securities (as defined in Section 2(a)(42) of the 1940 Act) of any
Merging Company that is not a Surviving Company (each as defined in Rule 17a-8)
to approve the Combinations unless:
·
|
no
policy of the Merging Company that under Section 13 of the 1940 Act
("Section 13 Policies") could not be changed without a vote of a majority
of its outstanding voting securities, is materially different from a
Section 13 Policy of the Surviving Company;5
|
5
|
Section
13 of 1940 Act requires a "majority of the outstanding" voting securities
of an investment company to approve the following
actions:
|
(1)
change from an open-end to a closed-end company (or vice-versa), or change from
a diversified to a non-diversified company.
(2)
borrow money, issue senior securities, underwrite securities issued by other
persons, purchase or sell real estate or commodities or make loans to other
persons, except in each case in accordance with the recitals of policy contained
in its registration statement in respect thereto.
(3)
deviate from its policy in respect of concentration of investments in any
particular industry or group of industries as recited in its registration
statement, deviate from any investment policy which is changeable only if
authorized by shareholder vote, or deviate from any policy recited in its
registration statement pursuant to section 8(b)(3) of the 1940 Act (i.e., other
fundamental policies).
(4)
change the nature of its business so as to cease to be an investment
company.
H.
R. Hallock, Jr.
September
24, 2008
Page
5
·
|
no
advisory contract between the Merging Company and any investment adviser
thereof is materially different from an advisory contract between the
Surviving Company and any investment adviser thereof, except for the
identity of the investment companies as a party to the
contract;
|
|
|
·
|
directors
of the Merging Company who are not interested persons of the Merging
Company and who were elected by its shareholders, will comprise a majority
of the directors of the Surviving Company who are not interested persons
of the Surviving Company; and
|
|
|
·
|
any
distribution fees (as a percentage of the fund's average net assets)
authorized to be paid by the Surviving Company pursuant to a plan adopted
in accordance with Rule 12b-1 are not greater than the distribution fees
(as a percentage of the fund's average net assets) authorized to be paid
by the Merging Company pursuant to such a plan.6
|
Here,
each Acquired Fund is a "Merging Company" and New RMR is the "Surviving
Company." Therefore, Rule 17a-8 does not require an Acquired Fund's
shareholders to vote on its Combination with New RMR if all four of the above
conditions are met. When the Commission added subsection (a)(3) to
Rule 17a-8 in 2002, it expressly contemplated the fact that some mergers
pursuant to Rule 17a-8 would be effectuated without a vote of the Merging
Company's shareholders.7 In
particular, the Commission originally proposed to require shareholders of a
Merging Company to approve the merger in all cases; however, commenters
persuaded the Commission that it should only require a Merging Company's
shareholders to approve the merger, independent of state law requirements, in
situations where the merger would result in a change that, in a context other
than a merger, would require a shareholder vote under the 1940 Act.8 The
Commission stated, "We believe such an approach has merit because it would
preserve important values embodied in the [1940 Act] while reducing the need for
a fund to incur the
6
|
No
Acquired Fund has a 12b-1 Plan and New RMR will not have a 12b-1
Plan.
|
7
|
See Investment
Company Mergers, 1940 Act Rel. No. 25666 (Jul. 18, 2002)
("IC-25666").
|
8
|
See id.; see also Investment
Company Mergers, 1940 Act Rel. No. 25259 (Nov. 8,
2001).
|
H.
R. Hallock, Jr.
September
24, 2008
Page
6
expense
of soliciting proxies when the merger may not raise significant issues for
shareholders."9
Old
RMR's Combination with New RMR meets each of the conditions of Rule 17a-8(a)(3)
that allow a Merging Company to consummate a merger without obtaining a
shareholder vote. No Section 13 Policy of New RMR is materially
different from a Section 13 Policy of Old RMR, New RMR's investment advisory
contract with RMR Advisors, Inc. (the "Advisor") will not be materially
different from Old RMR's investment advisory contract with the Advisor, and New
RMR's Board of Trustees will consist of the same Trustees as Old RMR's Board of
Trustees, including the disinterested Trustees who were previously elected by
Old RMR's shareholders. Accordingly, no shareholder vote is required
under the 1940 Act.
In
contrast, RHR's and RFR's respective Combinations with New RMR arguably do not
meet all of the conditions of Rule 17a-8(a)(3). Although RHR's and
RFR's investment objectives are substantially similar to New RMR's investment
objectives, each of RHR's and RFR's investment objectives are different enough
from New RMR's investment objectives that we have determined, out of an
abundance of caution, that shareholder approval of RHR's and RFR's respective
Combinations with New RMR may be required under Rule 17a-8 due to the potential
that RHR's and RFR's Section 13 Policies may be "materially different" from New
RMR's Section 13 Policies.
Lastly,
pursuant to Section 18(a)(2) of the 1940 Act, each Acquired Fund's bylaws
contain provisions requiring a class vote of each Acquired Fund's preferred
shareholders in certain circumstances. In particular, preferred
shareholders of an Acquired Fund are entitled to a class vote if (1) the
Acquired Fund's Combination with New RMR were to "adversely affect" the
preferred shares or (2) the Acquired Fund's Combination with New RMR would
require a vote pursuant to Section 13(a) of the 1940 Act. The
Combinations of each Acquired Fund with New RMR would not appear to "adversely
affect" any Acquired Fund's preferred shares.10 Furthermore, as explained
above, Old RMR's Combination with New RMR does not require a vote of
shareholders pursuant to Section 13(a) of the 1940 Act. Accordingly,
Old RMR's preferred shareholders are not entitled to a class vote on Old RMR's
Combination with New RMR. On the other hand, the respective
10
|
After
the consummation of each Acquired Fund's merger with New RMR, preferred
shareholders of each Acquired Fund will continue to hold a preferred
equity security with a liquidation preference of $25,000, a regular
distribution rate set at periodic auctions and terms that are otherwise
substantively
identical.
|
H.
R. Hallock, Jr.
September
24, 2008
Page
7
Combinations
of each of RHR and RFR with New RMR arguably do require a vote of shareholders
pursuant to Section 13(a) of the 1940 Act (via Rule 17a-8(a)(3)), and so each of
RHR's and RFR's preferred shareholders would also be entitled to a class vote on
each of RHR's and RFR's Combination with New RMR.
No Other Voting
Requirement
There
is no other shareholder voting requirement applicable to Old
RMR. Massachusetts law does not expressly provide for shareholder
voting requirements for Massachusetts business trusts, but rather leaves this
issue to each individual Massachusetts business trust's declaration of
trust. Old RMR's Declaration of Trust does not require a vote of
shareholders in the case of a sale of all or substantially all of its assets, or
its liquidation or termination, when at least 75% of Old RMR's Trustees have
approved such actions, unless shareholder approval is otherwise required by
applicable law. Finally, the rules of the American Stock Exchange, as
applicable here, only require a shareholder vote in the event that a listed
company issues common shares in an acquisition that could result in an increase
of 20% or more in the listed company's outstanding common shares, which is not
the case for old RMR.
Section 17(d) and Rule 17d-1
Implications of the Compensatory Payments
In
connection with each of RHR's and RFR's Combination with New RMR, RHR and RFR
will each lose a portion of the benefit of its contractual fee waiver with RMR
Advisors, Inc., the investment adviser to each of RHR and RFR. This
is because New RMR's contractual advisory fee waiver with the Advisor expires on
December 18, 2008 (which likely will be prior to completion of the
Combinations), whereas RHR's and RFR's contractual advisory fee waivers with the
Advisor expire on April 27, 2009 and November 22, 2009,
respectively. To compensate RHR and RFR for the reduction in the
duration of their contractual advisory fee waivers, the Advisor has agreed to
pay RHR and RFR the net present value of their respective fee waivers as of the
closing date of each of RHR's and RFR's Combination with New RMR (the
"Compensatory Payments"). You have asked us to address whether the
Compensatory Payments raise any issues under Section 17(d) or Rule 17d-1 of the
1940 Act.
Rule
17d-1 prohibits registered investment companies and their affiliates, such as
the Advisor, from entering into any joint enterprise or other joint arrangement
without an exemptive order from the Commission. The Compensatory
Payments are not a joint enterprise or other joint arrangement, either
individually or collectively. Each of RHR's and RFR's respective
Compensatory Payments are the product of an arm's-length contract negotiation
between the Advisor, on the one
H.
R. Hallock, Jr.
September
24, 2008
Page
8
hand,
and each fund, on the other hand, and do not in any way implicate the conflict
of interest abuses that Section 17(d) was intended to
prevent.
Indeed,
the disinterested Trustees are requiring that the Advisor take action to
mitigate the loss of fee waivers in connection with the
Combinations. The result of this requirement was an arm's-length
negotiation between each of RHR and RFR, on the one hand, and the Advisor, on
the other hand, the result of which was the Compensatory
Payments. This process bespeaks of an independent Board of Trustees
negotiating with its fund's investment adviser on behalf of shareholders and
extracting a concession from the Advisor.
This
position is consistent with the treatment of merger-related expenses under Rule
17d-1. Rule 17d-1(d)(8) allows an investment adviser to bear expenses
in connection with an investment company "merger" without obtaining exemptive
relief from the Commission. The Commission adopted subsection (d)(8)
of Rule 17d-1 as part of the same package of regulatory relief as Rule
17a-8.11 The Commission recognized that,
"[i]n the course of a merger involving an investment company, its investment
adviser may secure certain incremental financial benefits such as potentially
greater fees,"12
and that the investment adviser, "in turn, may propose to bear expenses
associated with the transaction, either directly or by reimbursing the
participating investment companies."13 Here, the Combinations of RHR and
RFR with New RMR will result in the Advisor securing a larger investment
advisory fee with respect to the assets formally attributable to each of RHR and
RFR since the duration of the contractual advisory fee waiver otherwise
applicable to such assets will be reduced. To compensate each of RHR
and RFR, the Advisor has agreed to reimburse each of RHR and RFR for this
expense of their respective Combinations with New RMR via the Compensatory
Payments. The Compensatory Payments thus fall squarely within the
types of "expenses" the Commission contemplated in adopting subsection (d)(8) of
Rule 17d-1.
We look
forward to continuing to work with you on this matter. If you have
any further questions, please do not hesitate to call me at
617-573-4814.
11
|
See Mergers and
Consolidations Involving Registered Investment Companies, 1940 Act Rel.
No. 11053 (Feb. 19, 1980).
|
12
|
Mergers
and Consolidations Involving Registered Investment Companies, 1940 Act
Rel. No. 10886 (Oct. 2, 1979).
|
H.
R. Hallock, Jr.
September
24, 2008
Page
9
|
Sincerely,
|
|
/s/ Thomas A.
DeCapo
|
|
Thomas
A. DeCapo
|
|
cc:
|
Frank
J. Donaty, Assistant Director
|
|
|
Jeremiah
J. DeMichaelis, Branch Chief
|