Two Interval Funds Get 12b-1 Equivalent
May 17, 1999
Eaton Vance of Boston has been given a green light by the SEC chief accountant's office to install a .70 percent 12b-1 "equivalent" distribution program on two of its four senior prime rate bank loan interval funds. The approval was effective May 1.
Shareholders of the Eaton Vance Prime Rate Reserves and the Eaton Vance Classic Senior Floating-Rate Fund approved the addition of the distribution fee last month.
Eaton Vance, with a total of $37 billion in assets, is only the third adviser to attach a 12b-1 fee to an interval fund. Such a distribution plan allows the fund to continue to provide incentives to intermediaries who sell the fund.
"It's one of the few funds where a 12b-1 is a practical reality," said Don Cassidy, closed-end fund analyst with Lipper of New York. While 12b-1 fees are common to open-end mutual funds, they are prohibited on closed-end funds. But interval funds fall between the two fund types.
An interval fund is a hybrid that possesses some characteristics of a closed-end fund and some features of an open-end fund. First allowed by the SEC in 1992 as a method by which fund advisers could avoid the discount which many closed-end funds succumb to, an interval fund's illiquid portfolio resembles that of a closed-end fund's.
But, unlike a closed-end fund which offers a set amount of shares for purchase at its initial public offering then "closes," additional shares of an interval fund are continuously offered on a daily basis. Furthermore, an interval fund usually allows its shareholders to sell some shares back to the adviser on a quarterly, or in some cases on a monthly, basis. And, unlike those of closed-end funds, shares of interval funds do not trade on a stock exchange in a secondary market.
Overall, shareholders' expenses will not be affected, said Eric Woodbury, vice president at Eaton Vance. At the same time it installed the .70 percent distribution fee, Eaton Vance reduced the management and administration fee of its Master Portfolio by an equivalent .70 percent.
Eaton Vance's four senior bank loan funds are organized under a master/feeder (or hub and spoke) structure in which differently priced funds called "spokes" share a common portfolio of securities. Eaton Vance sponsors two other senior secured bank loan fund spokes which do not have 12b-1 fees. The Eaton Vance Advisers Senior Floating-Rate fund is sold through wrap programs. The other is the new Eaton Vance Institutional Senior Floating-Rate Fund which was introduced May 3 and is targeted at independent financial planners' clients. Eaton Vance also has one traditional closed-end senior prime rate fund, the Eaton Vance Senior Income Fund.
Eaton Vance added the 12b-1-like fee, in part, to ease the accounting burden created by the Financial Accounting Standards Board's (FASB) change in accounting rules for closed-end funds initiated in September 1998, (MFMN 10/28/98) said Bill Steul, vice president and chief financial officer at Eaton Vance. That rule required all closed-end fund advisers to take an immediate charge to their balance sheet for start-up costs including commissions paid to dealers who are given incentives by fund advisers to sell closed-ends funds.
Previously, closed-end fund advisers were allowed to capitalize these "start-up" costs and commissions as assets on their books, then annually write off a percentage of the total over a period of, say five, years. The rule affected closed-end funds whose fiscal years began after December 15, 1998.
Moreover, the FASB ruling was retroactive. It required advisers who had been writing off closed-end fund start-up costs since July 24, 1998 to stop doing so and to take an immediate one-time aggregate accounting charge. The change in accounting rules left some advisers with hefty deductions which are sometimes criticized for distorting true financial results. The change also raised questions as to whether the higher cost to entry to the closed-end fund world would mean advisers might not have the resources to bring new products to market.
But under the FASB rule change, closed-end funds that have both a contingent deferred sales charge and a 12b-1 type plan were exempted from this accounting change. The two Eaton Vance senior income funds already had contingent deferred sales charge plans in effect. The addition of a 12b-1-like distribution plan to Eaton Vance's two funds now allows the adviser to qualify to revert back to the favored amortization accounting method, said Steul. It also means that all of Eaton Vance's funds for which it pays commissions in advance will be treated the same from an accounting point of view.