Correspondence 0001535778-24-000109 from MSC INCOME FUND, INC. (MSIF)
MSC INCOME FUND, INC.
Date: Aug. 12, 2024 · CIK: 0001535778 · Accession: 0001535778-24-000109
AI Filing Summary & Sentiment
File numbers found in text: 814-00939
Letter
VIA EDGAR United States Securities and Exchange Commission Division of Investment Management 100 F Street N.E. Washington, D.C. 20549 Attn: Anu Dubey RE: MSC Income Fund, Inc. — Preliminary Proxy Statement on Schedule 14A (File No. 814-00939), filed on July 24, 2024 (the “Preliminary Proxy Statement”)
Dear Ms. Dubey:
On behalf of MSC Income Fund, Inc. (the “Company”), set forth below are the Company’s responses to the verbal comments provided by the Staff of the Division of Investment Management (the “Staff”) of the U.S. Securities and Exchange Commission (the “SEC”) to the Company’s legal counsel on August 1, 2024 with respect to the Preliminary Proxy Statement. The Staff’s comments are set forth below and are followed by the Company’s responses. Where indicated, the Company intends to include revised disclosure in the Definitive Proxy Statement on Schedule 14A to be filed by the Company with the SEC. Unless otherwise noted, references to page numbers herein refer to the page numbers of the Preliminary Proxy Statement. Capitalized terms used in this letter and not otherwise defined shall have the meanings specified in the Preliminary Proxy Statement.
1.Comment: The Staff refers to the cover page of the Notice of Special Meeting of Stockholders. Please note that preliminary proxy statements should be clearly marked as “Preliminary Copies.” See Rule 14a-6(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Response: The Company acknowledges the Staff’s comment.
2.Comment: Please confirm to the Staff in your response letter that Section 13 of Article II of the Company’s bylaws, which states that “Title 3, Subtitle 7 of the Maryland General Corporation Law, or any successor statute (the ‘MGCL’), shall not apply to any acquisition by any person of shares of stock of the Corporation” has not been repealed or revised.
Response: The Company confirms to the Staff, on a supplemental basis, that the Company’s Board of Directors (the “Board”) has not amended the Company’s bylaws to repeal the current exemption from the Maryland Control Share Acquisition Act.
3.Comment: The Staff refers to the following sentence starting on page 1 of the Preliminary Proxy Statement under the heading “General Information”:
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Although the Board has authorized our management to consider, explore and prepare for a potential Listing, which may be accompanied by a follow-on public offering of the Shares, and is recommending certain corporate actions requiring your vote that will better position us to pursue a Listing, there is no guarantee that a Listing will occur if the Board determines, in its sole discretion, that it is not in our or our stockholders’ best interests, including, without limitation, if market conditions at the time make it undesirable to effectuate a Listing or any accompanying follow-on public offering of the Shares.
Please address and disclose the Board’s consideration of, and factors the Board considered in seeking stockholder approval for, these proposals now given that this disclosure indicates that a Listing is not certain.
Response: The Company has revised the disclosure accordingly under the heading “Listing Charter Amendment Proposals (Items 1(i)-1(ii)) – Background”. See page 11 of the marked draft of the Preliminary Proxy Statement submitted to the Staff supplementally in connection with the filing of this response letter.
4.Comment: The Staff refers to the sentence “At the Special Meeting, there are no non-routine proposal to be presented for a vote” under the heading “Broker Non-Votes” on pages 3 and 4 of the Preliminary Proxy Statement. Please revise to say there are no “routine” proposals.
Response: The Company has revised the disclosure accordingly. See page 4 of the marked draft of the Preliminary Proxy Statement submitted to the Staff supplementally in connection with the filing of this response letter.
5.Comment: The Staff refers to the table on pages 4–6 of the Preliminary Proxy Statement under the heading “Proposals to Be Voted on; Vote Required; and How Votes Are Counted”.
a.With respect to the sentence “Even if approved by the Company’s stockholders, the Listing Charter Amendments will not be implemented unless and until a Listing occurs”, disclose the consequence of this point (i.e., that the existing charter will continue to be the Company’s charter).
b.With respect to the sentence “Each of the Listing Charter Amendment Proposals are independent of one another”, add disclosure to clarify what being “independent of one another” means.
c.With respect to the sentence “Even if approved by the Company’s stockholders, the Advisory Agreement Amendment Proposal will not be implemented unless and until a Listing occurs”, disclose the consequence of this point (i.e., that the currently effective investment advisory agreement will continue to be the Company’s investment advisory agreement).
Response: The Company has revised the disclosure accordingly. See pages 4-7 of the marked draft of the Preliminary Proxy Statement submitted to the Staff supplementally in connection with the filing of this response letter.
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6.Comment: The Staff refers to the disclosure under the heading “Solicitation of Proxies and Expenses” on page 6 of the Preliminary Proxy Statement. If any parent of the registrant’s investment adviser is a corporation, disclose the percentage of the investment adviser owned by the parent. See Instruction 1 to Item 22(c)(3) of Schedule 14A.
Response: The Company has revised the disclosure accordingly. See pages 7-8 of the marked draft of the Preliminary Proxy Statement submitted to the Staff supplementally in connection with the filing of this response letter.
7.Comment: The Staff refers to the last sentence of the first paragraph under the heading “Solicitation of Proxies and Expenses” on page 6 of the Preliminary Proxy Statement. If the Company is incorporating the information in the definitive proxy statement of Main Street Capital Corporation into the Company’s proxy statement, please do so in accordance with Instructions 1 and 2 to Schedule 14A and add a hyperlink to Main Street Capital Corporation’s definitive proxy statement.
Response: The Company has revised the disclosure accordingly. See pages 7-8 of the marked draft of the Preliminary Proxy Statement submitted to the Staff supplementally in connection with the filing of this response letter.
8.Comment: The Staff refers to the heading “Update to Charter to Limit Transferability of Shares” on page 9 of the Preliminary Proxy Statement. Please supplementally provide the Staff with other examples of business development companies that have established similar transfer restrictions through amendments to their organizational documents.
Response: The Company respectfully refers the Staff to the below business development companies that have established transfer restrictions on their shares through amendments to their organizational documents:
•CĪON Investment Corporation (“CIC”), whose stockholders voted on September 7, 2021, to approve a proposal to amend its charter, effective upon listing of CIC’s shares of common stock on a national securities exchange, to include a provision limiting transferability of CIC’s shares of common stock for certain periods of time following such listing;
•Goldman Sachs BDC, Inc. (“GSBD”), whose stockholders voted on October 2, 2020, to approve an amended and restated charter, which restricted stockholders that acquired shares of GSBD common stock pursuant to a merger agreement by and among GSBD, Goldman Sachs Middle Market Lending Corp., Evergreen Merger Sub Inc. and Goldman Sachs Asset Management, L.P., from transferring such shares for certain periods of time;
•Crescent Capital BDC, Inc. (“Crescent Capital BDC”), whose stockholders voted on January 29, 2020 to approve a reincorporation transaction (the “Reincorporation Transaction”) in connection with Crescent Capital BDC’s merger (the “Merger”) with Alcentra Capital Corporation that resulted in the charter of Crescent Capital BDC subsequent to the Reincorporation Transaction including a provision limiting the transferability of Crescent Capital BDC’s shares of common stock acquired by a stockholder attendant to the Merger for certain periods of time following the Merger; and
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•Blue Owl Capital Corporation (f/k/a Owl Rock Capital Corporation) (“Blue Owl”) whose stockholders voted on April 29, 2019 to approve a proposal to amend its charter to include a provision limiting the transferability of Blue Owl’s shares of common stock for certain periods of time following a listing of Blue Owl’s shares of common stock on a national securities exchange.
9.Comment: The Staff refers to the disclosure under the heading “Principal Change – Limitation on the Transferability of the Company’s Shares following the Listing” starting on page 10 of the Preliminary Proxy Statement. Please clarify the disclosure regarding the transfer restrictions on shares acquired by stockholders prior to a Listing to specify whether these limits apply per stockholder or on an aggregate basis.
Response: The Company has revised the disclosure to clarify that the transfer restrictions will equally affect all stockholders’ ability to transfer Shares following a Listing with respect to Shares acquired prior to a Listing. See page 14 of the marked draft of the Preliminary Proxy Statement submitted to the Staff supplementally in connection with the filing of this response letter.
10.Comment: The Staff refers to the section titled “Principal Change – Limitation on the Transferability of the Company’s Shares following the Listing” starting on page 10 of the Preliminary Proxy Statement and issues the below comments. Please provide the Staff with supplemental responses to each.
a.Did the Company consider imposing these restrictions on transfer via individual agreements with investors instead of a charter amendment?
Response: The Company advises the Staff, on a supplemental basis, that the Company considered imposing these restrictions on transfer via individual agreements. However, in light of the fact that the Company has more than 14,000 record holders for its Shares, imposing the transfer restrictions via individual agreements is impracticable and is likely to unduly delay the Company’s preparations for a potential Listing.
b.Explain to the Staff the permissibility of share transfer restrictions in the Company’s charter under state law.
Response: The Company advises the Staff, on a supplemental basis, that a Maryland corporation may include in its charter any “preferences, rights, restrictions, including restrictions on transferability, and qualifications not inconsistent with law.” MGCL § 2-105(a)(9). As to transfer restrictions specifically, the MGCL provides that a Maryland corporation may include in its charter “restrictions on transferability or ownership for any purpose.” Id. § 2-105(a)(12). Finally, “[a]ny of the … restrictions … may be made dependent upon facts ascertainable outside the charter and may vary among the holders thereof, provided that the manner in which such facts or variations shall operate upon … restrictions … is clearly and expressly set forth in the charter.” MGCL § 2-105(a)(12). While the Charter does not presently include such restrictions, a Maryland corporation may amend its charter pursuant to Subtitle 600 of Article 2 of the MGCL to, among other things, accomplish anything that could be lawfully contained in the articles of incorporation at the time of amendment. MGCL § 2-602(a)(1). This includes amendments to change the “restrictions” imposed upon “any of its issued or unissued stock.” MGCL § 2-602(b)(9). An amendment imposing restrictions on transfer must be declared advisable by the Board of Directors and recommended to the stockholders of the Company, then approved by the vote of the
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holders of a majority of the shares entitled to vote thereon. See Id. § 2-604(b). The Company has sought and obtained the advice of Maryland counsel on this topic and notes that several other closed-end funds have utilized similar transfer restrictions to protect the stock price of the Company following a listing, public offering or other transaction.
c.Please explain to the Staff (i) how the Company decided that the time periods in the three bullets at the top of page 11 were appropriate, (ii) how the Company will determine which investors/shares are subject to the 180-, 270- or 365-day restrictions, and (iii) whether all pre-Listing investors will be subject to these restrictions.
Response: With respect to clauses (ii) and (iii) above, the Company advises the Staff, on a supplemental basis, that all Shares acquired by any stockholder prior to a Listing would be subject to the referenced restrictions on transfer. With respect to clause (i), the Company was aware of precedent transactions in the business development company space and believes that such a tiered release appropriately balances the benefits of providing liquidity to the Company’s existing stockholders with the considerations set forth in the Preliminary Proxy Statement under the heading “Principal Change – Limitation on the Transferability of the Company’s Shares following the Listing”.
d.Explain to the Staff why the lock-up agreement as an element of the Charter that subjects different stockholders to different holding periods would not create a “senior security” under the Investment Company Act of 1940, as amended (the “1940 Act”).
Response: Section 18(g) of the 1940 Act defines a “senior security” to mean “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 other than stock” (emphasis added).
The proposed transfer restrictions set forth in Listing Charter Amendment Proposal 1 do not, and will not, grant any stockholder a priority over any other stockholder as to the distribution of assets or the payment of dividends, and as a result, the defining elements of a “senior security,” as set forth in the 1940 Act, are not present.
The proposing release for Rule 18f-3 under the 1940 Act provides additional guidance on what constitutes a senior security that is a stock. That release explains that in a multiple class mutual fund, different expense levels (caused primarily by differing distribution expenses) differentiate one class from another. A class with lower expenses will have a greater net asset value (“NAV”) or higher dividend per share than other classes. A class with a higher NAV has a priority as to the distribution of assets. Similarly, a class receiving a higher dividend has a priority over classes with lower dividends. Therefore, the class with lower expenses is a senior security.1
Similarly, the Staff has found Section 18(g) of the 1940 Act to be implicated in arrangements where certain investors were required to reinvest distributions while other investors had the option to received cash distributions.2 In other words, the SEC and the Staff have found a senior security exists with respect to stock when some characteristic of the stock confers upon it a prior claim on a fund’s assets, earnings or both. These characteristics are not presented by the proposed transfer
1 See Investment Company Act Release No. 19955 (Dec. 15, 1993) at n. 17 and accompanying text (proposing Rule 18f-3, creating an exemption from Section 18 for funds issuing multiple
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CORRESP 1 filename1.htm Document 1900 K Street, NW Washington, DC 20006-1110 +1 202 261 3300 Main +1 202 261 3333 Fax www.dechert.com HARRY S. PANGAS harry.pangas@dechert.com +1 202 261 3466 Direct +1 202 261 3333 Fax August 12, 2024 VIA EDGAR United States Securities and Exchange Commission Division of Investment Management 100 F Street N.E. Washington, D.C. 20549 Attn: Anu Dubey RE: MSC Income Fund, Inc. — Preliminary Proxy Statement on Schedule 14A (File No. 814-00939), filed on July 24, 2024 (the “Preliminary Proxy Statement”) Dear Ms. Dubey: On behalf of MSC Income Fund, Inc. (the “Company”), set forth below are the Company’s responses to the verbal comments provided by the Staff of the Division of Investment Management (the “Staff”) of the U.S. Securities and Exchange Commission (the “SEC”) to the Company’s legal counsel on August 1, 2024 with respect to the Preliminary Proxy Statement. The Staff’s comments are set forth below and are followed by the Company’s responses. Where indicated, the Company intends to include revised disclosure in the Definitive Proxy Statement on Schedule 14A to be filed by the Company with the SEC. Unless otherwise noted, references to page numbers herein refer to the page numbers of the Preliminary Proxy Statement. Capitalized terms used in this letter and not otherwise defined shall have the meanings specified in the Preliminary Proxy Statement. 1.Comment: The Staff refers to the cover page of the Notice of Special Meeting of Stockholders. Please note that preliminary proxy statements should be clearly marked as “Preliminary Copies.” See Rule 14a-6(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Response: The Company acknowledges the Staff’s comment. 2.Comment: Please confirm to the Staff in your response letter that Section 13 of Article II of the Company’s bylaws, which states that “Title 3, Subtitle 7 of the Maryland General Corporation Law, or any successor statute (the ‘MGCL’), shall not apply to any acquisition by any person of shares of stock of the Corporation” has not been repealed or revised. Response: The Company confirms to the Staff, on a supplemental basis, that the Company’s Board of Directors (the “Board”) has not amended the Company’s bylaws to repeal the current exemption from the Maryland Control Share Acquisition Act. 3.Comment: The Staff refers to the following sentence starting on page 1 of the Preliminary Proxy Statement under the heading “General Information”: August 12, 2024 Page 2 Although the Board has authorized our management to consider, explore and prepare for a potential Listing, which may be accompanied by a follow-on public offering of the Shares, and is recommending certain corporate actions requiring your vote that will better position us to pursue a Listing, there is no guarantee that a Listing will occur if the Board determines, in its sole discretion, that it is not in our or our stockholders’ best interests, including, without limitation, if market conditions at the time make it undesirable to effectuate a Listing or any accompanying follow-on public offering of the Shares. Please address and disclose the Board’s consideration of, and factors the Board considered in seeking stockholder approval for, these proposals now given that this disclosure indicates that a Listing is not certain. Response: The Company has revised the disclosure accordingly under the heading “Listing Charter Amendment Proposals (Items 1(i)-1(ii)) – Background”. See page 11 of the marked draft of the Preliminary Proxy Statement submitted to the Staff supplementally in connection with the filing of this response letter. 4.Comment: The Staff refers to the sentence “At the Special Meeting, there are no non-routine proposal to be presented for a vote” under the heading “Broker Non-Votes” on pages 3 and 4 of the Preliminary Proxy Statement. Please revise to say there are no “routine” proposals. Response: The Company has revised the disclosure accordingly. See page 4 of the marked draft of the Preliminary Proxy Statement submitted to the Staff supplementally in connection with the filing of this response letter. 5.Comment: The Staff refers to the table on pages 4–6 of the Preliminary Proxy Statement under the heading “Proposals to Be Voted on; Vote Required; and How Votes Are Counted”. a.With respect to the sentence “Even if approved by the Company’s stockholders, the Listing Charter Amendments will not be implemented unless and until a Listing occurs”, disclose the consequence of this point (i.e., that the existing charter will continue to be the Company’s charter). b.With respect to the sentence “Each of the Listing Charter Amendment Proposals are independent of one another”, add disclosure to clarify what being “independent of one another” means. c.With respect to the sentence “Even if approved by the Company’s stockholders, the Advisory Agreement Amendment Proposal will not be implemented unless and until a Listing occurs”, disclose the consequence of this point (i.e., that the currently effective investment advisory agreement will continue to be the Company’s investment advisory agreement). Response: The Company has revised the disclosure accordingly. See pages 4-7 of the marked draft of the Preliminary Proxy Statement submitted to the Staff supplementally in connection with the filing of this response letter. August 12, 2024 Page 3 6.Comment: The Staff refers to the disclosure under the heading “Solicitation of Proxies and Expenses” on page 6 of the Preliminary Proxy Statement. If any parent of the registrant’s investment adviser is a corporation, disclose the percentage of the investment adviser owned by the parent. See Instruction 1 to Item 22(c)(3) of Schedule 14A. Response: The Company has revised the disclosure accordingly. See pages 7-8 of the marked draft of the Preliminary Proxy Statement submitted to the Staff supplementally in connection with the filing of this response letter. 7.Comment: The Staff refers to the last sentence of the first paragraph under the heading “Solicitation of Proxies and Expenses” on page 6 of the Preliminary Proxy Statement. If the Company is incorporating the information in the definitive proxy statement of Main Street Capital Corporation into the Company’s proxy statement, please do so in accordance with Instructions 1 and 2 to Schedule 14A and add a hyperlink to Main Street Capital Corporation’s definitive proxy statement. Response: The Company has revised the disclosure accordingly. See pages 7-8 of the marked draft of the Preliminary Proxy Statement submitted to the Staff supplementally in connection with the filing of this response letter. 8.Comment: The Staff refers to the heading “Update to Charter to Limit Transferability of Shares” on page 9 of the Preliminary Proxy Statement. Please supplementally provide the Staff with other examples of business development companies that have established similar transfer restrictions through amendments to their organizational documents. Response: The Company respectfully refers the Staff to the below business development companies that have established transfer restrictions on their shares through amendments to their organizational documents: •CĪON Investment Corporation (“CIC”), whose stockholders voted on September 7, 2021, to approve a proposal to amend its charter, effective upon listing of CIC’s shares of common stock on a national securities exchange, to include a provision limiting transferability of CIC’s shares of common stock for certain periods of time following such listing; •Goldman Sachs BDC, Inc. (“GSBD”), whose stockholders voted on October 2, 2020, to approve an amended and restated charter, which restricted stockholders that acquired shares of GSBD common stock pursuant to a merger agreement by and among GSBD, Goldman Sachs Middle Market Lending Corp., Evergreen Merger Sub Inc. and Goldman Sachs Asset Management, L.P., from transferring such shares for certain periods of time; •Crescent Capital BDC, Inc. (“Crescent Capital BDC”), whose stockholders voted on January 29, 2020 to approve a reincorporation transaction (the “Reincorporation Transaction”) in connection with Crescent Capital BDC’s merger (the “Merger”) with Alcentra Capital Corporation that resulted in the charter of Crescent Capital BDC subsequent to the Reincorporation Transaction including a provision limiting the transferability of Crescent Capital BDC’s shares of common stock acquired by a stockholder attendant to the Merger for certain periods of time following the Merger; and August 12, 2024 Page 4 •Blue Owl Capital Corporation (f/k/a Owl Rock Capital Corporation) (“Blue Owl”) whose stockholders voted on April 29, 2019 to approve a proposal to amend its charter to include a provision limiting the transferability of Blue Owl’s shares of common stock for certain periods of time following a listing of Blue Owl’s shares of common stock on a national securities exchange. 9.Comment: The Staff refers to the disclosure under the heading “Principal Change – Limitation on the Transferability of the Company’s Shares following the Listing” starting on page 10 of the Preliminary Proxy Statement. Please clarify the disclosure regarding the transfer restrictions on shares acquired by stockholders prior to a Listing to specify whether these limits apply per stockholder or on an aggregate basis. Response: The Company has revised the disclosure to clarify that the transfer restrictions will equally affect all stockholders’ ability to transfer Shares following a Listing with respect to Shares acquired prior to a Listing. See page 14 of the marked draft of the Preliminary Proxy Statement submitted to the Staff supplementally in connection with the filing of this response letter. 10.Comment: The Staff refers to the section titled “Principal Change – Limitation on the Transferability of the Company’s Shares following the Listing” starting on page 10 of the Preliminary Proxy Statement and issues the below comments. Please provide the Staff with supplemental responses to each. a.Did the Company consider imposing these restrictions on transfer via individual agreements with investors instead of a charter amendment? Response: The Company advises the Staff, on a supplemental basis, that the Company considered imposing these restrictions on transfer via individual agreements. However, in light of the fact that the Company has more than 14,000 record holders for its Shares, imposing the transfer restrictions via individual agreements is impracticable and is likely to unduly delay the Company’s preparations for a potential Listing. b.Explain to the Staff the permissibility of share transfer restrictions in the Company’s charter under state law. Response: The Company advises the Staff, on a supplemental basis, that a Maryland corporation may include in its charter any “preferences, rights, restrictions, including restrictions on transferability, and qualifications not inconsistent with law.” MGCL § 2-105(a)(9). As to transfer restrictions specifically, the MGCL provides that a Maryland corporation may include in its charter “restrictions on transferability or ownership for any purpose.” Id. § 2-105(a)(12). Finally, “[a]ny of the … restrictions … may be made dependent upon facts ascertainable outside the charter and may vary among the holders thereof, provided that the manner in which such facts or variations shall operate upon … restrictions … is clearly and expressly set forth in the charter.” MGCL § 2-105(a)(12). While the Charter does not presently include such restrictions, a Maryland corporation may amend its charter pursuant to Subtitle 600 of Article 2 of the MGCL to, among other things, accomplish anything that could be lawfully contained in the articles of incorporation at the time of amendment. MGCL § 2-602(a)(1). This includes amendments to change the “restrictions” imposed upon “any of its issued or unissued stock.” MGCL § 2-602(b)(9). An amendment imposing restrictions on transfer must be declared advisable by the Board of Directors and recommended to the stockholders of the Company, then approved by the vote of the August 12, 2024 Page 5 holders of a majority of the shares entitled to vote thereon. See Id. § 2-604(b). The Company has sought and obtained the advice of Maryland counsel on this topic and notes that several other closed-end funds have utilized similar transfer restrictions to protect the stock price of the Company following a listing, public offering or other transaction. c.Please explain to the Staff (i) how the Company decided that the time periods in the three bullets at the top of page 11 were appropriate, (ii) how the Company will determine which investors/shares are subject to the 180-, 270- or 365-day restrictions, and (iii) whether all pre-Listing investors will be subject to these restrictions. Response: With respect to clauses (ii) and (iii) above, the Company advises the Staff, on a supplemental basis, that all Shares acquired by any stockholder prior to a Listing would be subject to the referenced restrictions on transfer. With respect to clause (i), the Company was aware of precedent transactions in the business development company space and believes that such a tiered release appropriately balances the benefits of providing liquidity to the Company’s existing stockholders with the considerations set forth in the Preliminary Proxy Statement under the heading “Principal Change – Limitation on the Transferability of the Company’s Shares following the Listing”. d.Explain to the Staff why the lock-up agreement as an element of the Charter that subjects different stockholders to different holding periods would not create a “senior security” under the Investment Company Act of 1940, as amended (the “1940 Act”). Response: Section 18(g) of the 1940 Act defines a “senior security” to mean “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 other than stock” (emphasis added). The proposed transfer restrictions set forth in Listing Charter Amendment Proposal 1 do not, and will not, grant any stockholder a priority over any other stockholder as to the distribution of assets or the payment of dividends, and as a result, the defining elements of a “senior security,” as set forth in the 1940 Act, are not present. The proposing release for Rule 18f-3 under the 1940 Act provides additional guidance on what constitutes a senior security that is a stock. That release explains that in a multiple class mutual fund, different expense levels (caused primarily by differing distribution expenses) differentiate one class from another. A class with lower expenses will have a greater net asset value (“NAV”) or higher dividend per share than other classes. A class with a higher NAV has a priority as to the distribution of assets. Similarly, a class receiving a higher dividend has a priority over classes with lower dividends. Therefore, the class with lower expenses is a senior security.1 Similarly, the Staff has found Section 18(g) of the 1940 Act to be implicated in arrangements where certain investors were required to reinvest distributions while other investors had the option to received cash distributions.2 In other words, the SEC and the Staff have found a senior security exists with respect to stock when some characteristic of the stock confers upon it a prior claim on a fund’s assets, earnings or both. These characteristics are not presented by the proposed transfer 1 See Investment Company Act Release No. 19955 (Dec. 15, 1993) at n. 17 and accompanying text (proposing Rule 18f-3, creating an exemption from Section 18 for funds issuing multiple