SEC Rule 23c-1

Overview and Regulatory Purpose

Closed-end fund shares are issued at initial public offering and traded thereafter at market-determined prices on national securities exchanges — prices that are set by the interaction of supply and demand in the secondary market rather than by the fund's NAV. Unlike open-end mutual funds, whose shares are redeemable at NAV on demand under Rule 22c-1's forward pricing framework, closed-end fund shares have no built-in redemption mechanism whose existence would anchor the secondary market price close to NAV. As a result, most publicly listed closed-end fund shares trade at persistent discounts to NAV — typically reflecting investors' assessment of the fund's management quality, the liquidity and marketability of the fund's portfolio, the anticipated durability of the fund's distribution rate, and the general market sentiment about the closed-end fund structure as a vehicle for accessing the asset class the fund represents.

The persistent secondary market discount creates two related investor protection concerns that Rule 23c-1 addresses through its framework for share repurchases. First, a closed-end fund's ability to repurchase its own shares at prices below NAV benefits the shareholders who remain invested — every share repurchased at a 10% discount to NAV accretively increases the NAV per share of the remaining shares, since the fund is effectively acquiring $1.10 of portfolio value for every dollar spent on share repurchases. Second, a closed-end fund's ability to repurchase shares provides investors seeking liquidity with a market exit mechanism beyond the pure secondary market — the fund's active presence as a buyer in the secondary market improves market liquidity and reduces the effective discount at which investors can exit.

Section 23(c) of the Investment Company Act prohibits registered closed-end companies from purchasing securities of which they are the issuer except in compliance with Commission rules. Rule 23c-1 implements this Section 23(c) requirement by specifying the conditions under which closed-end fund share repurchases are permissible — conditions designed to protect the interests of both existing shareholders and the sellers whose shares are being repurchased.

Statutory Authority and Rulemaking History

Rule 23c-1 derives its statutory authority from Section 23(c) of the Investment Company Act of 1940, which specifically governs closed-end fund share repurchases by prohibiting them except in compliance with Commission rules and regulations, and from Section 38(a)'s general rulemaking authority.

Section 23(c)'s targeted prohibition on closed-end fund share repurchases — permitting them only under Commission-prescribed conditions — reflects the Investment Company Act's recognition that share repurchases by closed-end funds present distinct investor protection considerations that require specific regulatory treatment rather than merely reliance on general securities law principles.

Rule 23c-1 was originally adopted December 15, 1942 — Investment Company Act Release No. IC-23, published at 7 FR 10424 — as one of the earliest rules implementing the Investment Company Act's specific closed-end fund governance provisions. The rule was last formally amended November 17, 2003 — 68 FR 64975 — in a technical amendment that updated the rule's cross-references and provisions relating to tender offers in conformity with the Exchange Act's tender offer rules. No changes have been made to Rule 23c-1's operative provisions up to the present time.

Key Provisions and Operative Requirements

Rule 23c-1(a) establishes the conditions for open-market share repurchases. A registered closed-end company may purchase for cash a security of which it is the issuer — any class of its outstanding equity securities — subject to six specific protective conditions.

The first condition addresses cumulative dividend arrears. If the security to be purchased is a stock entitled to cumulative dividends, such dividends must not be in arrears at the time of the repurchase. This condition prevents a closed-end fund from repurchasing shares of any class while dividends on that class are unpaid and accumulating — a circumstance that would represent a prioritisation of share buyback activity over the fund's obligations to shareholders entitled to accumulated dividend payments.

The second condition addresses income distribution for non-cumulative dividend stock. If the security is a stock not entitled to cumulative dividends, at least 90% of the net income of the issuer for the last preceding fiscal year — determined in accordance with good accounting practice and not including realised gains or losses from securities sales — must have been distributed to shareholders during that fiscal year or within 60 days after its close. This 90% income distribution condition is designed to prevent closed-end funds from retaining income that should be distributed to shareholders and then using retained funds to finance share repurchases that might not serve shareholders' interests as effectively as the direct income distributions would.

The third condition addresses senior security asset coverage. Where the security to be repurchased is junior to any class of outstanding senior debt obligation — excluding bank notes and other private indebtedness not involving a public offering — all securities of such senior debt class must have asset coverage of at least 300% immediately after the repurchase. Where the security is junior to any class of outstanding senior stock, all securities of such senior stock class must have asset coverage of at least 200% immediately after the repurchase, and the senior stock class must not be in arrears as to dividends. These asset coverage conditions directly address the leverage risk that Section 18 of the Investment Company Act governs for closed-end funds — ensuring that share repurchases do not reduce the fund's asset base to a level that jeopardises the adequate coverage of senior securities, whose holders have priority claims on the fund's assets that must be maintained at statutory minimum levels.

The fourth condition addresses affiliated person transactions. The seller of the security must not be, to the knowledge of the issuer, an affiliated person of the issuer. This condition prevents the closed-end fund from using share repurchases as a mechanism for accommodating affiliated persons who wish to exit their investment — a transaction that could be structured to benefit the affiliated seller at the expense of remaining shareholders, for example by the fund repurchasing shares at prices favourable to the affiliated seller during a period when the fund is simultaneously conducting open-market repurchases at lower prices for non-affiliated sellers.

The fifth condition requires a written confirmation of the purchase — payment of the purchase price must be accompanied or preceded by a written confirmation of the purchase transaction. This documentation requirement ensures that each repurchase is evidenced by a contemporaneous written record that enables verification of the transaction's terms, timing, and price.

The sixth condition addresses the maximum purchase price. The purchase must be made at a price not above the market value, if any, or the asset value per share of such security. For securities with an active secondary market — the typical case for shares of publicly listed closed-end funds trading on national securities exchanges — the market value constraint limits the fund to purchasing at or below the prevailing market price, preventing the fund from using share repurchases to prop up a declining share price by purchasing above the market. For securities without a readily available market quotation, the asset value per share serves as the maximum price ceiling — ensuring that unlisted closed-end fund repurchases occur at or below NAV per share.

Rule 23c-1(b) addresses repurchases through securities dealers. The fund may purchase its securities through a dealer acting as principal, at the current market price less a commission equivalent not in excess of the usual and customary broker's commission. This dealer principal transaction accommodation recognises that closed-end fund share repurchases may be executed through dealer market-making operations in which the dealer acquires shares as principal rather than acting as agent, permitting such transactions provided the effective price paid by the fund — the dealer's purchase price from the seller plus the dealer's markup — does not exceed the dealer's purchase price plus a reasonable commission equivalent.

Rule 23c-1(c) governs tender offers by registered closed-end companies for their own securities, requiring compliance with the applicable provisions of the Exchange Act's tender offer framework — including Rules 13e-4, 14d-1 through 14d-11, and 14e-1 through 14e-3 — and providing that the closed-end fund conducting a tender offer is subject to those rules in the same manner as any other issuer conducting a self-tender. This Exchange Act cross-reference ensures that closed-end fund tender offers are subject to the same investor protection framework — including the minimum offering period, proration requirements, and anti-manipulation provisions — that govern issuer tender offers by operating companies.

Rule 23c-1(d) confirms that the rule relates exclusively to the requirements of Section 23(c) of the Act, and that its provisions shall not be construed to authorise any action that contravenes any other applicable law, statutory or otherwise, or the provisions of any indenture or other instrument pursuant to which the fund's securities were issued. This limiting provision preserves the applicability of other legal requirements — including the Exchange Act's market manipulation prohibitions under Rule 10b-5, the closed-end fund's debt indenture provisions that may restrict share repurchases, and applicable state corporate law — to closed-end fund share repurchase activity conducted in reliance on Rule 23c-1.

Scope of Application

Rule 23c-1 applies to all registered closed-end management investment companies — publicly listed closed-end funds trading on national securities exchanges, unlisted closed-end funds, interval funds conducting open-market share repurchases supplemental to their Rule 23c-3 periodic repurchase obligations, and BDCs registered under the Investment Company Act. The rule's application to all categories of registered closed-end company reflects Section 23(c)'s universal prohibition on closed-end fund share repurchases except in accordance with Commission rules, without distinction between listed and unlisted funds or between traditional closed-end funds and the newer interval fund and BDC categories.

The distinction between Rule 23c-1's open-market repurchase framework and Rule 23c-3's interval fund periodic repurchase offer framework is structurally and commercially significant. Rule 23c-1 enables open-market purchases of fund shares at prevailing market prices — typically at discounts to NAV — without any obligation to conduct repurchases at regular intervals, in specified minimum amounts, or at NAV. Rule 23c-3, by contrast, requires interval funds to make periodic repurchase offers at NAV, in specified percentages of outstanding shares, at prescribed intervals. A closed-end fund relying exclusively on Rule 23c-1's framework can conduct share repurchases opportunistically — when the discount to NAV is large enough to make repurchases accretive to remaining shareholders — without committing to any recurring repurchase obligation.

Relationship to Related Rules and Regulations

Rule 23c-1's relationship with Rule 23c-3 is the most structurally significant in the closed-end fund share repurchase context. The two rules address different categories of closed-end fund share liquidity mechanism — Rule 23c-1 enabling conventional open-market repurchases and issuer tender offers, and Rule 23c-3 enabling the interval fund's distinctive periodic NAV-based repurchase structure. A closed-end fund that has adopted Rule 23c-3's interval fund structure may supplement its Rule 23c-3 periodic repurchase obligations with additional open-market repurchases under Rule 23c-1 — for example, repurchasing shares in the open market between scheduled quarterly tender offers to reduce any secondary market discount that develops between repurchase windows. Many interval funds and traditional closed-end funds use both mechanisms concurrently, managing discount to NAV through the combination of open-market purchases under Rule 23c-1 and formal repurchase offers under Rule 23c-3.

Rule 23c-1's asset coverage conditions — requiring 300% coverage for outstanding debt and 200% coverage for senior stock after each repurchase — connect directly to Section 18's senior security framework applicable to closed-end funds, which establishes the Investment Company Act's leverage limitations for closed-end fund structures. The asset coverage tests in Rule 23c-1's conditions parallel the Section 18 coverage tests that determine whether a closed-end fund may issue additional senior securities — both frameworks use the same 300% debt coverage and 200% senior stock coverage thresholds to protect the priority claims of senior security holders against dilution or impairment.

Rule 10b-5's general antifraud prohibition applies to Rule 23c-1 share repurchases — a closed-end fund that repurchases its own shares while in possession of material non-public information about the fund's portfolio or financial condition may violate Rule 10b-5's antifraud standards independent of its compliance with Rule 23c-1's specific conditions. The Rule 10b5-1 safe harbour for trading plans — under which issuers may establish pre-arranged share repurchase programmes that operate automatically without discretionary trading decisions by fund management — is relevant to closed-end fund share repurchase programmes that seek to avoid Rule 10b-5 concerns through the adoption of systematic, non-discretionary repurchase plans.

Rule 38a-1's compliance programme framework requires that registered closed-end fund compliance programmes specifically address Rule 23c-1 compliance — including the procedures for monitoring satisfaction of the dividend arrears, income distribution, asset coverage, affiliated person, and price conditions before each open-market repurchase, and the processes for ensuring that tender offer repurchases comply with the applicable Exchange Act tender offer rules.

Amendment History and Regulatory Evolution

Rule 23c-1's operative framework has been substantively stable since its original 1942 adoption — the rule's core conditions for permissible share repurchases have remained in essentially their current form for over eight decades, reflecting the durability of the investor protection principles they embody. The November 2003 amendment's updating of the rule's tender offer provisions to conform with the then-current Exchange Act tender offer regulatory framework was the most significant formal change to the rule in the modern era.

The practical landscape within which Rule 23c-1 operates has evolved significantly over the decades since the rule's adoption through the growth of the closed-end fund market, the proliferation of discount management programmes as a competitive and investor relations concern for publicly listed closed-end funds, and the emergence of activist investor campaigns targeting closed-end funds trading at persistent discounts with proposals to convert to open-end structures, liquidate, or conduct accelerated share buybacks. These market dynamics have made Rule 23c-1's discount management function more commercially prominent and more complex than the rule's simple conditions might suggest, driving substantial industry legal analysis of the conditions under which aggressive open-market repurchase programmes can be conducted without violating the rule's affiliated person, price, or asset coverage conditions.

Enforcement Context and SEC Action Patterns

Rule 23c-1 enforcement concentrates on failures of the rule's specific protective conditions — particularly the affiliated person condition, where purchases from affiliated persons without knowledge can prove difficult to establish in examination, and the asset coverage conditions, where complex fund capital structures may make real-time coverage calculation operationally demanding during active repurchase programmes. The Commission's examination programme reviews closed-end fund share repurchase activity as part of its assessment of closed-end fund governance and affiliated transaction compliance.

The Commission's exchange-coordinated oversight of closed-end fund repurchase programmes — conducted through the national securities exchanges' market surveillance functions and the Commission's own trading surveillance — monitors for potential Rule 10b-5 concerns alongside Rule 23c-1 compliance, given the potential for material information about fund portfolios to influence the timing and pricing of fund share repurchase decisions.

Examination Relevance and Key Takeaways

Rule 23c-1 is examined at the Series 65 level as the open-market share repurchase framework for registered closed-end funds — addressing the investor protection conditions applicable to closed-end fund discount management through share buyback programmes. The six conditions for permissible share repurchases — dividend currency, income distribution, asset coverage minimums, affiliated person exclusion, written confirmation, and maximum price — are the primary examination content. The distinction between Rule 23c-1's open-market repurchase framework and Rule 23c-3's interval fund periodic repurchase structure is examined as the key contrast between the two closed-end fund share repurchase regulatory frameworks.

The key points to retain are these. Rule 23c-1 permits registered closed-end companies to repurchase their own shares for cash on the open market or through dealer transactions, subject to six conditions: cumulative dividends not in arrears; 90% income distribution for non-cumulative dividend stock; 300% asset coverage for debt and 200% for senior stock immediately after repurchase; no purchases from affiliated persons known to the issuer; written confirmation of each purchase; and purchase price not above market value or NAV per share. Tender offers by closed-end funds for their own securities must comply with the applicable Exchange Act tender offer rules.

The rule enables closed-end fund discount management programmes through accretive share buybacks at prices below NAV. Rule 23c-1's open-market repurchase framework operates alongside Rule 23c-3's interval fund periodic repurchase structure, with many funds using both mechanisms concurrently. Rule 23c-1 was adopted December 1942 and last amended November 17, 2003. No changes have been made to its operative provisions up to the present time.