SEC Form N-18f-1

What Is SEC Form N-18f-1?

SEC Form N-18f-1 is a notification form that must be filed with the Securities and Exchange Commission (SEC) assuming that a fund company wishes to exploit benefits granted under SEC Rule 18f-1. Rule 18f-1 permits investment funds to limit their redemptions in kind, which is an exemption from Rule 18f of the Investment Company Act of 1940. Redemption in kind alludes to honoring redemptions with assets other than cash.

A registered, open-ended investment fund that has the privilege to recover securities in kind of which it is the issuer is eligible to file SEC Form N-18f-1, stating that it will pay redemptions in cash to shareholders pursuant to SEC Rule 18f-1.

Understanding SEC Form N-18f-1

Registered, open-ended investment funds have a different redemption process than [closed-ended](/shut endinvestment) investment funds when shareholders choose to recover their shares. For open-ended funds, shares are sold back to the fund straightforwardly. The fund must conform to this redemption by buying back the shares and paying the shareholder the cash value of the shares within seven days.

When an investment fund would prefer not to pay redeeming investors in cash, they might have the option to pay them in kind; meaning in any asset other than cash. SEC Rule 18f-1 permits funds to recover in kind only for shareholders that hold the lower of $250,000 of the fund's value or 1% of its assets; the rest must be paid in cash. SEC Form N-18f-1 is the notification of a fund utilizing Rule 18f-1.

Form 18f-1 is a workaround to SEC Rule 18f of the Investment Company Act of 1940. Rule 18f prevents funds from treating one class of owner differently than another class of owner, in this case, small shareholders versus large shareholders.

Redemptions in Kind

There might be certain times where a fund would prefer not to pay out cash in seven days; principally due to liquidity concerns. This could be during periods of market unrest where the fund is experiencing significant cash outpourings versus cash inflows (more redemptions that new investors coming in with additional investment capital). It could likewise want to abstain from redeeming shares at distressed prices, paying out cash at a loss, which would impact remaining investors.

In an ideal scenario, an investment fund would get more money from new investors than having to pay out departing investors; it can utilize the new money to pay the investors that are leaving instead of having to sell assets to generate cash to pay those investors, which could negatively impact the fund's performance.

In these scenarios, an open-ended fund can pay the redeeming investors in kind, or at least, in assets other than cash. This is typically done on a pro-rata basis, most frequently as payments in the form of the shares of the underlying companies in the fund.

For instance, assuming that an investment fund followed the Dow Jones Industrial Average (DJIA), it could reclaim in kind to an investor by giving them shares in a portion of the companies that make up the DJIA, like Visa, Intel, or Nike. The investor would then take these shares and put them in their own brokerage account and handle them as they wish; either holding on to them or selling them.

Rule 18f-1 ensures that certain shareholders receive cash while allowing other, larger investors to receive redemptions in kind.

Disadvantages of Redemptions in Kind

Most funds will state in their prospectus that they reserve the privilege to meet redemptions with assets other than cash, so redemptions in kind don't shock the investor. Moreover, redemptions in kind are typically made with institutional investors as opposed to retail investors, as institutional investors may not need the cash and find a payment in shares of companies to be acceptable. Retail investors are smaller and don't have the very large-sized wallet that institutional investors do.

One of the main disadvantages to receiving redemptions in kind is the tax burden. On the off chance that an investment fund has held onto certain stocks for years, even many years, and those have valued in value, and they pass the stocks onto a redeeming investor, they stay away from the capital gains tax burden on those shares, while the redeeming investor would be adhered having to pay the capital gains tax assuming they chose to sell their shares.

Features

• SEC Form N-18f-1 is a notification form filed with the SEC notifying it that the fund will reclaim in cash in view of the requirements spread out in Rule 18f-1.
• Redemptions in kind allude to redeeming shareholders with assets other than cash.
• Registered, open-ended investment funds are permitted to make redemptions in kind.
• SEC Rule 18f does now permit treating one class of owner different than another class of owner; meaning that a few shareholders will receive cash while others will only receive redemptions in kind.
• SEC Rule 18f-1 permits an exemption to Rule 18f, allowing funds to recover shareholders in cash in view of certain requirements.