Section 18 of the Investment Company Act of 1940 circumscribes the ability of registered closed-end investment companies and registered open-end investment companies to issue or sell "senior securities," which the Act defines in section 18(g). Section 18(a)(1), for example, prohibits a closed-end investment company from issuing any class of senior security or selling any senior security of which it is the issuer, that represents indebtedness, unless immediately after such issuance or sale the investment company will have asset coverage of at least 300%. Section 18(f)(1) prohibits an open-end investment company from issuing any class of senior security, or selling any class of senior security of which it is the issuer, except that the investment company may borrow from a bank provided that immediately after any such borrowing there is asset coverage of at least 300% for all of its borrowings. "Asset coverage" is defined in section 18(h). The Commission and its staff have taken the position that reverse repurchase agreements, firm commitment agreements, standby commitment agreements, short sales, written options, forwards, futures, and certain other derivatives transactions may involve the issuance of a senior security subject to the prohibitions and asset coverage requirements of sections 18(a)(1) and 18(f)(1). The Commission and the staff have indicated, however, that they will not object to investment companies' engaging in such transactions without complying with the asset coverage and other requirements of sections 18(a)(1) and 18(f)(1), provided that the investment companies segregate assets, or otherwise “cover” their obligations under the instruments, consistent with Commission and staff guidance. As an aid to registered investment companies and their counsel, the staff is publishing the following bibliography of relevant authority and precedent relating to registered investment company use of senior securities. 1
Format for entries: A single space is used after any punctuation mark. When dividing a long word or URL onto two lines, put hyphen, slash, or period at the end of the line. Do not add a hyphen to a URL that was not originally there. Never begin a new line with a punctuation mark. Double-space all lines in a bibliography entry. Do not indent the first line of a bibliography entry, indent second and subsequent lines 5 spaces, or 1/2″ ( cm) from the left margin. Please see Chapter 11. Guidelines on How to Write a Bibliography for details.