What type of shareholder protections do closed-end funds offer?
Closed-end funds are governed by the Investment Company Act of 1940, a law that shapes how all publicly offered funds must be structured and operated. All closed-end funds must meet certain operating standards, observe strict antifraud rules, meet diversification requirements, and disclose complete information to investors. In addition, closed-end funds are subject to asset coverage requirements so that for each $1 dollar of debt issued, the fund must have $3 of assets immediately after issuance and at the time of dividend declarations (commonly referred to as 33% leverage). Similarly, for each $1 of preferred stock issued, the fund must have $2 of assets at issuance and dividend declaration dates (commonly referred to as 50% leverage).
