CITE

    15 USC Sec. 80a-18                                          01/05/2009

EXPCITE

    TITLE 15 - COMMERCE AND TRADE
    CHAPTER 2D - INVESTMENT COMPANIES AND ADVISERS
    SUBCHAPTER I - INVESTMENT COMPANIES

HEAD

    Sec. 80a-18. Capital structure of investment companies

STATUTE

    (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.

SOURCE

    (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.