Friday, December 18, 2015

SEC Okays Fund’s Suspension of Redemptions

By Amy Leisinger, J.D.

The SEC has granted exemptive relief to enable a fund to suspend redemptions in order to conduct an orderly liquidation of the fund while avoiding fire sales of securities. In response to a number of complaints and concerns, the board of directors of Third Avenue Focused Credit Fund, together with the fund’s adviser, determined that its original plan calling for transfer of certain assets to a liquidating trust would be insufficient to protect the fund and its shareholders and requested the relief to ensure a more fair and efficient liquidation process (Third Avenue Trust and Third Avenue Management LLC; Notice of Application and Temporary Order, Release No. IC-31943, December 16, 2015).

Plan of liquidation. Recently, the fund has been subjected to a significant number of redemptions, experiencing a total of $1.1 billion in estimated net outflows for the year and $317 million in estimated net redemptions. After considering the fund’s circumstances and the likelihood that incremental sales at disadvantageous prices would be necessary to satisfy additional redemptions, the fund’s board determined that the fairest solution would be to adopt a plan of liquidation. Under the original plan, the fund would place remaining noncash assets in a liquidating trust and distribute available cash. However, upon announcement of the plan, the Commission staff and numerous shareholders expressed concerns, and the board decided to change its approach. Under the modified plan, the liquidating trust will transfer the assets back to the fund, and the fund will suspend redemptions and provide full portfolio transparency and updates on the liquidation to shareholders and the SEC, while continuing to make periodic distributions of excess cash.

Exemptive relief. In connection with the modified plan, the applicants requested a temporary order to permit the fund to suspend the right of redemption of its outstanding redeemable securities. While generally prohibiting funds from suspending this right or postponing satisfaction upon redemption for certain periods of time, Investment Company Act Section 22 provides the Commission with authority to override the restriction for the protection of shareholders. Under current circumstances, the applicants explained, institutional investors in the fund are well-positioned to take advantage of any redemption opportunity to the detriment of smaller retail investors. If the fund is unable to suspend redemptions, these remaining investors would suffer the consequences of a rapidly declining net asset value and diminished liquidity of the fund’s portfolio. The requested relief would allow for an orderly liquidation of fund’s portfolio securities and ensure that shareholders can realize a fair value for their investments, the applicants stated.

Based on the applicants’ pledge to invest the fund’s proceeds of cash dispositions solely in lower-risk, short term securities, to keep and make available information on the status of the liquidation and distributions, and to avoid engaging in any activities other than those necessary to protect shareholders and wind-up its affairs, the Commission permitted the temporary suspension of the right of redemption.

Distributions. According to a Third Avenue statement, all shareholders received an initial cash distribution on December 16, 2015, and the fund will continue to make liquidating cash distributions at least quarterly.

Interested persons may request a Commission hearing on the matter before January 7, 2016.

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