How to Start a Closed End Fund

Start a closed-end fund for exchange trading.

A closed-end fund is one of the three types of investment companies regulated by the Securities and Exchange Commission (SEC). Mutual funds, knows as open-end funds, are one of the other two and closed-end funds contrast with mutual funds on many characteristics. Unlike an open-end fund, a closed-end fund does not issue more shares after its initial offering, nor does it generally redeem shares. However, a closed-end fund is traded on a secondary market, namely a stock market. Share prices can deviate from the fund's net asset value of the underlying securities it holds, as market forces of supply and demand can lead to a trading discount or premium. A closed-end fund is also actively managed by investment advisers that are separate entities from the fund.


Step 1

Register with the SEC. Closed-end funds are governed under the Investment Company Act of 1940 and the SEC is the primary regulator. By SEC rules, a closed-end fund is further classified as a management company that must be structured as a corporation with a board of directors to oversee fund management. Other investment companies may not require such a formal corporate structure. The SEC's Investment Company Registration and Regulation Package requires a closed-end fund to file two forms with the agency: Form N-8A for notification of registration and Form N-2, a registration statement for closed-end management investment companies.


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Step 2

Prepare an Initial Public Offering (IPO). A closed-end fund issues its shares only once in the form of an IPO, just like a company going public. Investment banks are retained, sometimes in the form of an underwriting syndicate. Four areas of work are expected of investment bankers, according to a study on closed-end-fund IPOs by the Wharton School at the University of Pennsylvania. Terms of the offering are established, including share pricing. IPO documents are filed with the SEC. Share distributions are carried out through underwriters' marketing channels and its brokerage sales force. Finally, underwriters make their commitment to providing price support for trading in the first days.


Step 3

Enlist investment advisers. The investment portfolios of a closed-end fund are managed by investment advisers that are generally separate entities. Investment advisers have discretionary asset management responsibilities and are paid a fee, usually a percentage of the total value of the assets managed. Investment advisers must be SEC-registered if assets managed are more than $25 million. The fund company's board is responsible for appointing an investment adviser as the portfolio manager by signing an advisory contract.



Step 4

Arrange a listing of fund shares on a stock exchange. Like shares of exchange-traded funds, shares of closed-end funds are also listed and traded on a stock exchange. All three major U.S. equity exchanges, the NYSE, AMEX and NASDAQ, offer listing services for closed-end funds. Each exchange has its own listing requirements. Contact the exchange of your choice to have the fund's eligibility reviewed and then submit a listing application accompanied by the required documents and the listing fees.


Shares of closed-end funds in their first-day trading often close below the IPO price, when compared to industrial IPOs, suggesting potential overpricing in closed-end fund IPOs by investment banks for higher fees.



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