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ROPES & GRAY LLP 2099 PENNSYLVANIA AVE., NW WASHINGTON, DC 20006-6807 WWW.ROPESGRAY.COM | |||||
| March 14, 2017 | Nathan Briggs T:202-626-3909 F:202-383-9308 Nathan.Briggs@ropesgray.com |
VIA EDGAR
Division of Investment Management
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
Attn: Ms. Anu Dubey
| Re: | PIMCO Dynamic Income Fund |
File Nos.333-215573 and811-22673
Dear Ms. Dubey:
This letter is in response to comments from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) received from youvia telephone on February 10, 2017 regarding the Registration Statement on FormN-2 (the “Registration Statement”) relating to common shares of beneficial interest of PIMCO Dynamic Income Fund (the “Fund”) to be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), which was filed with the SEC on January 17, 2017 (the “Initial Filing”). The below responses will be reflected, to the extent applicable, inPre-Effective Amendment No. 1 to the Fund’s Registration Statement (“Pre-Effective Amendment No. 1”) or in additionalpre-effective amendments to be filed subsequently.
The following sets forth the Staff’s comments and the Fund’s responses thereto.
PROSPECTUS
Cover page
| 1. | Comment: In the second paragraph (Investment Strategy), please prominently disclose that the Fund may originate loans. |
Response: Please see our response to Comment 11 below.
Prospectus Summary — Investment Objectives and Policies — Portfolio Contents (pages 3 - 4)
| 2. | Comment: On page 3, disclosure sets forth the types of debt instruments in which the Fund may invest for purposes of its 80% policy. Please review this disclosure and confirm to us that it includes only the types of investments in which the Fundprincipally invests.See Item 8.2.b.(1) of FormN-2.See also Item 8.4. of FormN-2 and Instruction a. thereto. |
Response: The Fund confirms that the above-referenced disclosure includes only the types of investments in which the Fund may principally invest. As indicated by the Fund’s name and disclosed in the Fund’s principal investment strategies, the Fund utilizes a dynamic asset allocation strategy across multiple fixed-income sectors and has the flexibility to invest in a variety of debt and related instruments as a principal investment strategy from time to time and as market conditions change.
| 3. | Comment: Disclosure on page 3 states that the Fund may invest in, among other things, convertible debt securities. If the Fund invests in contingent convertible securities (“CoCos”), the Fund should consider what, if any, disclosure is appropriate. The type and location of disclosure will depend on, among other things, the extent to which the Fund invests in CoCos, and the characteristics of the CoCos,(e.g., credit quality, conversion triggers). If CoCos are a principal type of investment, the Fund should provide a description of them and should provide appropriate risk disclosure. In addition, please supplementally inform us whether the Fund invests in CoCos and the amount the Fund currently invests. |
Response: As of December 31, 2016, the Fund had 1.75% of its total assets invested in CoCos.
In response to this Comment, the Fund will specifically disclose in the section “Portfolio Contents” that the Fund may invest in CoCos. The following instrument description for CoCos has also been added to the section “Portfolio Contents:”
Contingent Convertible Securities
Contingent convertible securities (“CoCos”) are a form of hybrid debt security that is structured to either convert into equity or have their principal written down upon the occurrence of certain “triggers.” The triggers are generally linked to regulatory capital thresholds or regulatory actions calling into question the issuing banking institution’s continued viability as a going-concern. CoCos’ unique equity conversion or principal write-down features are tailored to the issuing banking institution and its regulatory requirements. Some additional risks associated with CoCos include, but are not limited to:
Loss absorption risk. CoCos have fully discretionary coupons. This means coupons can potentially be cancelled at the banking institution’s discretion or at the request of the relevant regulatory authority in order to help the bank absorb losses.
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Subordinated instruments. CoCos will, in the majority of circumstances, be issued in the form of subordinated debt instruments in order to provide the appropriate regulatory capital treatment prior to a conversion. Accordingly, in the event of liquidation, dissolution orwinding-up of an issuer prior to a conversion having occurred, the rights and claims of the holders of the CoCos, such as the Fund, against the issuer in respect of or arising under the terms of the CoCos shall generally rank junior to the claims of all holders of unsubordinated obligations of the issuer. In addition, if the CoCos are converted into the issuer’s underlying equity securities following a conversion event (i.e., a “trigger”), each holder will be subordinated due to their conversion from being the holder of a debt instrument to being the holder of an equity instrument.
Market value will fluctuate based on unpredictable factors. The value of CoCos is unpredictable and will be influenced by many factors including, without limitation: (i) the creditworthiness of the issuer and/or fluctuations in such issuer’s applicable capital ratios; (ii) supply and demand for the CoCos; (iii) general market conditions and available liquidity; and (iv) economic, financial and political events that affect the issuer, its particular market or the financial markets in general.
In addition, the following disclosure has been added to the Registration Statement in the section “Principal Risks of the Fund”:
Contingent Convertible Securities RiskContingent convertible securities (“CoCos”) have no stated maturity, have fully discretionary coupons and are typically issued in the form of subordinated debt instruments. CoCos generally either convert into equity or have their principal written down upon the occurrence of certain triggering events (“triggers”) linked to regulatory capital thresholds or regulatory actions relating to the issuer’s continued viability. As a result, an investment by the Fund in CoCos is subject to the risk that coupon (i.e., interest) payments may be cancelled by the issuer or a regulatory authority in order to help the issuer absorb losses. An investment by the Fund in CoCos is also subject to the risk that, in the event of the liquidation, dissolution orwinding-up of an issuer prior to a trigger event, the Fund’s rights and claims will generally rank junior to the claims of holders of the issuer’s other debt obligations. In addition, if CoCos held by the Fund are converted into the issuer’s underlying equity securities following a trigger event, the Fund’s holding may be further subordinated due to the conversion from a debt to equity instrument. Further, the value of an investment in CoCos is unpredictable and will be influenced by many factors and risks, including interest rate risk, credit risk, market risk, liquidity risk and valuation risk. An investment by the Fund in CoCos may result in losses to the Fund.
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| 4. | Comment: Disclosure on page 3 states that, “[A]t any given time and from time to time, substantially all of the Fund’s portfolio may consist of below investment grade securities and/or mortgage-related and other types of asset-backed securities.” Please disclose whether the Fund may invest in equity tranches of mortgage-related and other asset-backed securities and if so, please add related risk disclosure. |
Response: The Fund confirms that it may invest in equity tranches of mortgage-related and other asset-backed securities. Accordingly, the Fund has added the following disclosure to the “Portfolio Contents” section of the Prospectus:
The Fund may invest in any level of the capital structure of an issuer of mortgage-backed or asset-backed securities, including the equity or “first loss” tranche.
In addition, the Fund has added the following disclosure tothe section titled “Mortgage-Related and Other Asset-Backed Securities Risk” on pages 12 and 67 of the Prospectus:
The Fund may also invest in the residual or equity tranches of mortgage-related and other asset-backed securities, which may be referred to as subordinate mortgage-backed or asset-backed securities and interest-only mortgage-backed or asset-backed securities. Subordinate mortgage-backed or asset-backed securities are paid interest only to the extent that there are funds available to make payments. To the extent the collateral pool includes a large percentage of delinquent loans, there is a risk that interest payment on subordinate mortgage-backed or asset-backed securities will not be fully paid. There are multiple tranches of mortgage-backed and asset backed-securities, offering investors various maturity and credit risk characteristics. Tranches are categorized as senior, mezzanine, and subordinated/equity or “first loss,” according to their degree of risk. The most senior tranche of a mortgage-backed or asset-backed security has the greatest collateralization and pays the lowest interest rate. If there are defaults or the collateral otherwise underperforms, scheduled payments to senior tranches take precedence over those of mezzanine tranches, and scheduled payments to mezzanine tranches take precedence over those to subordinated/equity tranches. Lower tranches represent lower degrees of credit quality and pay higher interest rates intended to compensate for the attendant risks. The return on the lower tranches is especially sensitive to the rate of defaults in the collateral pool. The lowest tranche (i.e. the “equity” or “residual” tranche) specifically receives the residual interest payments (i.e., money that is left over after the higher tranches have been paid and expenses of the issuing entities have been paid) rather than a fixed interest rate. The Fund expects that investments in subordinate mortgage-backed and other asset-backed securities will be subject to risks arising from delinquencies and foreclosures, thereby exposing its investment portfolio to potential losses. Subordinate securities of mortgage-backed and other asset-backed securities are also subject to greater credit risk than those mortgage-backed or other asset-backed securities that are more highly rated.
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Prospectus Summary — Leverage (pages 4 - 6)
| 5. | Comment: On page 4, disclosure states that, “[A]ssets attributable to credit default swaps, other swap agreements or futures contracts will not be counted towards the 50% policy to the extent that the Fund owns offsetting positions or enters into offsetting transactions.” The Staff’s view is that credit default swaps purchased or sold by the Fund cannot be “covered” such that they are no longer senior securities by entering into offsetting positions. Please revise the referenced disclosure to reflect the Staff’s position. |
Response: The Fund notes that it complies with the Staff’s position noted above with respect to the limits on senior securities and leverage imposed by Section 18 of the 1940 Act (the “Section 18 Limits”). The referenced 50% policy (the “50% Policy”), however, is not designed to be responsive to the Section 18 Limits. Rather, the 50% Policy is a self-imposed investment restriction that limits the Fund’s use of leverage beyond the Section 18 Limits, including by counting the use of reverse repurchase agreements and dollar rolls, regardless of whether such instruments are covered by the segregation of liquid assets, toward the 50% Policy limit.
Accordingly, the Fund believes that it is permitted to define and apply the 50% Policy in accordance with the referenced disclosure and respectfully declines to make any changes in response to the Staff’s comment.
Prospectus Summary — Investment Manager (page 6)
| 6. | Comment: On page 6, disclosure states that “Dan Ivascyn, Alfred Murata and Joshua Anderson are primarily responsible for theday-to-day management of the Fund.” Please revise the disclosure to clarify that the referenced individuals are “jointly and primarily responsible for theday-to-day management of the Fund,” consistent with the disclosure on pages88-89 of the Prospectus. |
Response: The referenced disclosure has been revised as follows: “Dan Ivascyn, Alfred Murata and Joshua Anderson arejointly and primarily responsible for theday-to-day management of the Fund.”
| 7. | Comment: In the second paragraph on page 6, please disclose how derivatives will be valued for purposes of calculating “total managed assets.” |
Response: The above-referenced disclosure has been updated inPre-Effective Amendment No. 1 to reflect that, for purposes of calculating total managed assets, the Fund’s derivative investments will be valued based on their market value.
Prospectus Summary — Principal Risks of the Fund
| 8. | Comment: The disclosure in this section sets forth 58 principal risks. Please review this risk disclosure and limit it so that it only includes the Fund’sprincipal risks.See Item 8.3.(a) of FormN-2. |
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Response: In response to the Staff’s Comment, the Fund has removed the following risks from the “Principal Risks of the Fund” section inPre-Effective Amendment No. 1: Private Placements Risk, Focused Investment Risk, Real Estate Risk, Failure of Futures Commission Merchants and Clearing Organizations, Smaller Company Risk, Short Sale Risk; Other Investment Companies Risk, and Recent Economic Conditions Risk.
Summary of Fund Expenses (pages33-34)
| 9. | Comment: In footnote 4 to the Annual Fund Operating Expenses table in the “Summary of Fund Expenses,” please add disclosure stating that the Fund will be responsible for certain fees and expenses that are not covered by the unified management fee under the investment management agreement, consistent with the disclosure on page 90 of the Prospectus. |
Response: In consideration of the Staff’s comment, the Fund has incorporated the following additional disclosure related to the Fund’s management fee structure in Footnote 4 to the fee table:
Management Fees include fees payable to the Investment Manager for advisory services and for supervisory, administrative and other services. The Fund pays for the advisory, supervisory and administrative services it requires under what is essentially anall-in fee structure(the “unified management fee”). Pursuant to an investment management agreement, PIMCO is paid a Management Fee of 1.15% of the Fund’s average daily total managed assets.The Fund (and not PIMCO) will be responsible for certain fees and expenses that are not covered by the unified management fee under the investment management agreement.Pleasesee “Management of the Fund –Investment Manager”for an explanation of the unified management fee and definition of “total managed assets.”
| 10. | Comment: Footnote 5 to the fee table, as well as the paragraph immediately preceding the fee table, states that the line item “Interest Payments on Borrowed Funds” assumes that, “the use of leverage in the form of reverse repurchase agreements and credit default swaps representing [ ]% of the Fund’s total assets (including the amount of leverage obtained through the use of such instruments).” Given that the Fund is currently in operation, please use the actual amount of leverage utilized by the Fund as of a particular date to calculate this line item. |
Response: In response to the Staff’s comment, the referenced disclosure in the paragraph preceding the expense table has been revised as follows:
The tableassumesreflects the use of leverage in the form of reverse repurchase agreementsand credit default swaps in an amount equal to[ ]45.73% of the Fund’s totalmanaged assets (includingthe amount of leverage obtained through the use of such instrumentsassets attributable to reverse repurchase agreements), which reflects approximately the percentage of the Fund’s totalmanagedassets attributable to such leverage as of[ ]December 31, 2016, and shows Fund expenses as a percentage of net assets attributable to Common Shares.The percentage above and information below do not reflect the Fund’s use of other forms of economic leverage, such as credit default swaps or other derivative instruments. The table and example below are based on the Fund’s capital structure as of[ ]December 31, 2016.
In addition, the referenced disclosure in footnote 5 has been revised as follows:
| (5) |
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Portfolio Contents—Indebtedness, Loan Participations and Assignments (page 48)
| 11. | Comment: Please disclose the following with respect to loans originated by the Fund. We may have more comments after reviewing your response. |
| a. | Any limits on loan origination by the Fund, including a description of any limits imposed by the Fund’s fundamental investment restrictions that the Fund may not make loans except as permitted by the 1940 Act (as disclosed on page 80 of the Statement of Additional Information); |
| b. | Description of overall loan selection process, including maturity and duration of individual loans, borrower and loan types and geographic location of the borrower; |
| c. | Description of Fund’s underwriting standards for these loans; |
| d. | Whether the Fund will be involved in servicing the loans and, if so, a description of its servicing obligations; and |
| e. | Whether the Fund will set up its own online lending platform to originate these loans. |
Response: The Fund does not currently intend to originate loans as a principal investment strategy and has removed related disclosure from the Prospectus.
| 12. | Comment: Please add disclosure to this risk factor that, when the Fund originates loans, it will be subject to the credit risk of borrowers. |
Response: Please see the response to Comment 11 above.
| 13. | Comment: Please disclose any limits on the amount of loans the Fund may originate to issuers in the same industry(e.g., no more than 25% of the Fund’s assets). |
Response: Please see the response to Comment 11 above.
| 14. | Comment: Please disclose the Fund’s procedures for valuing such loans, including the following. We may have more comments after reviewing your response. |
| a. | What factors does the Fund consider when valuing the loans? |
| b. | How are factors incorporated in the Fund’s valuation methodology? |
| c. | Does the Fund rely on third party pricing services to value the loans? If so, what is the pricing services’ methodology to determine prices? |
| d. | How does the Fund adjust the fair value of the loans to reflect changes in interest rates, spread levels and other market conditions? |
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| e. | Confirm that valuation is determined on an individual loan basis and not on a pool of loans basis (even if the loans are pooled into Securitized Vehicles). |
| f. | To what extent are reliable market quotations available to determine fair value? |
Response: Please see the response to Comment 11 above.
Portfolio Contents—Credit Default Swaps (page 56)
| 15. | Comment: The disclosure states that “In connection with credit default swaps in which the Fund is the seller, if the Fund covers its position through asset segregation, the Fund will segregate or “earmark” cash or liquid assets with a value at least equal to the full notional amount of the swap (minus any amounts owed to the Fund).” Please revise this disclosure to remove the reference to “(minus any amounts owed to the Fund).” |
Response: The Fund has made the following changes in response to this Comment:
In connection with credit default swaps in which the Fund is the seller, if the Fund covers its position through asset segregation, the Fund will segregate or “earmark” cash or liquid assets with a value at least equal to the full notionalamount of the Fund’s obligation under the swap amount of the swap (minus any amounts owed to the Fund).
Management of the Fund — Investment Manager—Additional Information (page 89)
| 16. | Comment: The disclosure states that, “Neither this prospectus, the Fund’s Statement of Additional Information, any contracts filed as exhibits to the Fund’s registration statement, nor any other communications or disclosure documents from or on behalf of the Fund creates a contract between a shareholder of the Fund and the Fund, a service provider to the Fund, and/or the Trustees or officers of the Fund.” Please revise the referenced disclosure to exempt any rights under federal or state law that cannot be waived from this statement. |
Response: The above-referenced disclosure has been updated inPre-Effective Amendment No. 1 as follows:
Neither this prospectus, the Fund’s Statement of Additional Information, any contracts filed as exhibits to the Fund’s registration statement, nor any other communications or disclosure documents from or on behalf of the Fund creates a contract between a shareholder of the Fund and the Fund, a service provider to the Fund, and/or the Trustees or officers of the Fund, other than pursuant to any rights under federal or state law that cannot be waived.
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Repurchase of Common Shares; Conversion to Open End Fund (page 99)
| 17. | Comment: The disclosure states that, “If the Common Shares were to trade at a substantial discount to NAV for an extended period of time, the Board of Trustees may consider the repurchase of its Common Shares on the open market or in private transactions, the making of a tender offer for such shares or the conversion of the Fund to anopen-end investment company.” In light of the restrictions set forth in Regulation M on the repurchase of common shares during a distribution, please confirm supplementally whether there is a specific repurchase plan contemplated by the Fund’s Board of Trustees and if so, the details of such plan. |
Response: The Fund confirms that no specific repurchase plan with respect to the Fund’s common shares is contemplated at this time.
STATEMENT OF ADDITIONAL INFORMATION
Investment Objectives and Policies — Derivative Instruments (pages 50 - 69)
| 18. | Comment: On page 69, the section titled “Asset Segregation” states that, “With respect to forwards, futures contracts, options and swaps that are contractually permitted or required to cash settle (i.e., where physical delivery of the underlying reference asset is not required), the Fund is permitted to segregate or earmark liquid assets equal to the Fund’s daily marked-to-market net obligation under the derivative instrument, if any, rather than the derivative’s full notional value.” Inasmuch as the Staff only views this type of asset segregation as appropriate with respect to forwards and futures contracts that are contractually required to cash settle, please revise this sentence so that it only refers to forwards and futures contracts that are contractually required to cash settle. |
Response: The Fund and PIMCO respectfully disagree with the Staff’s Comment and seemingly inconsistent position that Section 18 of the 1940 Act allows for segregation or “earmarking” of liquid assets equal to a fund’s dailymarked-to-market net obligations for certain types of derivative instruments that require cash settlement and not others. Investment Company Act Release No. 10666 (April 18, 1979) (“Release 10666”) and subsequent SEC staffno-action letters stand for the proposition that derivatives transactions that give rise to economic leverage will not be treated as “senior securities” under Section 18 provided a fund segregates or earmarks liquid assets in an amount sufficient to satisfy 100% of the fund’s obligations under the transaction. In the case of derivative instruments that are required to cash settle, whether they be futures, forwards, swaps, options or other instruments, a fund will have fully covered its obligation and maximum exposure from the transaction by segregating liquid assets equal to its dailymarked-to-market obligations. Segregation of the derivative’s full notional value in these circumstances represents a form of overcollateralization that unduly restricts the fund and its investment operations, and deviates from the spirit and intent of Release 10666 and its progeny. The Fund believes that the practices in the disclosure referenced above are consistent with currently effective policies of other registered funds that use similar descriptions of coverage practices in their registration statements. The SEC’s and Staff’s position is that segregation ofmarked-to-market net obligations is permissible for certain types of instruments that are required to cash settle, including forwards, futures and
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interest rate swap contracts1, but apparently not others, including written credit default swaps, written total return swaps and written options. These positions appear to have been expressed entirely through comments provided by the SEC staff in recent inspections and registration statement filings, rather than from any affirmative statement in a statute, rule, SEC release or Staffno-action letter. The Fund believes that subjecting it to recent, informal positions of the SEC staff through the registration statement review process places the Fund at a competitive disadvantage to other funds in the industry, and sees no sound basis for the Staff’s position, as there is no practical difference between the Fund’s potential obligation under a forward or future that is required to cash settle and other types of derivatives that are required to cash settle.
However, solely for purposes of having the Registration Statement declared effective, the Fund has revised the referenced disclosure as follows. We note that this disclosure will be observed by the Fund, but does not necessarily represent the position or policy of other funds managed by PIMCO, each of which is governed by its own registration statement:
With respect to forwards and futures contracts and interest rate swaps that are contractually required to cash settle (i.e., where physical delivery of the underlying reference asset is not permitted or physical settlement is not otherwise involved), the Fund is permitted to segregate or earmark liquid assets equal to the Fund’s dailymarked-to-market net obligation under the derivative instrument, if any, rather than the derivative’s full notional value, but will segregate full notional value, as applicable, with respect to other derivative instruments (including written credit default swaps, written total return swaps and written options) that contractually require or permit physical delivery of securities or other underlying assets.
Investment Objectives and Policies — Short-Term Investments/Temporary Defensive Strategies (page 79)
| 19. | Comment: The disclosure states that for temporary defensive purposes, the Fund may “invest up to 100% of its net assets in investment grade debt securities, including high quality, short-term debt instruments, credit-linked trust certificates and/or index futures contracts or similar derivative instruments.” Inasmuch as the Staff views only investments designed for principal protection, rather than to implement a new strategy, as appropriate when a fund takes a temporary defensive position, please delete the reference to the instruments described above. Alternatively, please explain to us how these instruments are appropriate as investments for temporary defensive purposes. |
Response: The disclosure referenced in this Comment is intended to give PIMCO broad flexibility to manage the Fund in such a way as to limit the Fund’s exposure in a variety
| 1 | See “Use of Derivatives by Registered Investment Companies and Business Development Companies,” SEC ReleaseIC-31933 (December 11, 2015), at footnote 57 and accompanying text (“For certain derivatives that are required by their terms to be net cash settled, and thus do not involve physical settlement, funds often segregate an amount equal to the fund’s dailymark-to-market liability, if any(‘mark-to-market segregation’). Funds initially applied this approach to specific types of transactions addressed through guidance by our staff: first interest rate swaps and later cash-settled futures andnon-deliverable forwards (‘NDFs’)”). |
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of circumstances, some of which may not be currently anticipated. The Fund believes that a variety of temporary defensive strategies may be appropriate under different circumstances. The Fund does not believe that limiting the available defensive investments or strategies would be appropriate, and potentially could reduce the Fund’s ability to take measures intended to mitigate risk. Accordingly, the Fund respectfully declines to make any changes in response to this Comment.
Investment Restrictions (pages80-82)
| 20. | Comment: The disclosure on page 81 states that, “[M]unicipal bonds issued by states, municipalities and other political subdivisions, agencies, authorities and instrumentalities of states and multi-state agencies and authorities are not subject to the Fund’s industry concentration policy.” Please revise the referenced disclosure to reflect the Staff’s view that onlytax-exempt municipal bonds are not subject to a fund’s industry concentration policy. See Investment Company Act Release No. 9785, dated May 31, 1977. |
Response: The referenced disclosure has been revised as follows:
Similarly,tax-exempt municipal bonds issued by states, municipalities and other political subdivisions, agencies, authorities and instrumentalities of states and multi-state agencies and authorities are not subject to the Fund’s industry concentration policy.
| 21. | Comment: Page 47 of the Prospectus states that the Fund may invest in private activity municipal bonds. Please confirm that the Fund will look through a private activity municipal bond whose principal and interest payments are principally derived from the assets and revenues of anon-governmental entity in order to determine the industry to which the investments should be allocated when applying the Fund’s concentration policy. |
Response: The Fund confirms that, for purposes of the industry concentration policy, to the extent practicable, it will associate each private activity municipal bond in which it invests with a particular “industry” associated with the non-governmental entity from whose assets and revenues the bond’s principal and interest payments are principally derived, as determined by PIMCO. We note that this policy will be observed by the Fund for purposes of having the Registration Statement declared effective, but does not necessarily represent the position or policy of any other fund managed by PIMCO.
| 22. | Comment: The disclosure on page 82 states that, “It shall not be a violation of the policy in the second sentence of paragraph (1) above if the Fund has less than 25% of its total assets invested in privately-issued mortgage-related securities and other investments that PIMCO determines have the same primary economic characteristics at a time when the market for privately-issued mortgage-related securities is inactive or ceases to exist in sufficient volume, such that it is not reasonably practicable for the Fund to invest 25% or more of its total assets in privately-issued mortgage-related securities in the best interests of the Fund.” Please delete this disclosure, as it appears to permit a deviation from the Fund’s fundamental investment policy to concentrate in privately-issued mortgage-related securities. See Section 13(a)(3) of the 1940 Act. |
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Response: The Fund respectfully declines to make any changes in response to this Comment. The above-referenced disclosure is not intended to permit the Fund to deviate from its concentration policy under normal circumstances or even in most abnormal market conditions. Rather, it is intended to convey to shareholders that there may be some circumstances where the Fund is unable to invest in privately-issued mortgage-related securities due to such instruments being unavailable for investment such that it is not practicable for the Fund to comply with the concentration policy in a way that is consistent with the best interests of the Fund.
| 23. | Comment: Please confirm that the Fund will consider the investment policies of any underlying funds in which it invests when testing for compliance with the Fund’s industry concentration policy (e.g., if an underlying fund has an 80% policy to invest in a particular industry, the Fund will take such policy into consideration for purposes of the Fund’s industry concentration policy). |
Response: The Fund confirms that, to the extent an underlying investment company has adopted an 80% policy to invest in a particular industry, the Fund will take such policy into consideration for purposes of the Fund’s industry concentration policy.
* * * * *
We believe that this submission fully responds to your comments.
In addition, please find the updated Summary of Fund Expenses section of the Prospectus to be filed with Pre-Effective Amendment No. 1 attached asAppendix A hereto for your review and comment.
Please feel free to call me at (202) 626-3909 if you have any questions regarding the foregoing.
Very truly yours,
/s/ Nathan Briggs
Nathan Briggs
| cc: | Joshua Ratner, Esq. |
Wu-Kwan Kit, Esq.
David C. Sullivan, Esq.
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Appendix A
Summary of Fund Expenses
The following table is intended to assist investors in understanding the fees and expenses (annualized) that an investor in Common Shares of the Fund would bear, directly or indirectly, as a result of an offering. The table reflects the use of leverage in the form of reverse repurchase agreements in an amount equal to 45.73% of the Fund’s total managed assets (including assets attributable to reverse repurchase agreements), which reflects approximately the percentage of the Fund’s total managed assets attributable to such leverage as of December 31, 2016, and shows Fund expenses as a percentage of net assets attributable to Common Shares. The percentage above and information below do not reflect the Fund’s use of other forms of economic leverage, such as credit default swaps or other derivative instruments. The table and example below are based on the Fund’s capital structure as of December 31, 2016. The extent of the Fund’s assets attributable to leverage following an offering, and the Fund’s associated expenses, are likely to vary (perhaps significantly) from these assumptions.
Shareholder Transaction Expenses | ||||
Sales load (as a percentage of offering price)(1) | [—]% | |||
Offering Expenses Borne by Common Shareholders (as a percentage of offering price)(2) | [—]% | |||
Dividend Reinvestment Plan Fees(3) | None |
| Percentage of Net Assets Attributable to Common Shares (reflecting leverage attributable to reverse repurchase agreements) | |||
Annual Expenses | ||||
Management Fees(4) | 2.11% | |||
Interest Payments on Borrowed Funds (5) | 1.89% | |||
Other Expenses(6) | 0.02% | |||
Total Annual Expenses | 4.02% | |||
| (1) | In the event that the Common Shares to which this prospectus relates are sold to or through underwriters or dealer managers, a corresponding prospectus supplement will disclose the applicable sales load and/or commission. |
| (2) | The related prospectus supplement will disclose the estimated amount of offering expenses, the offering price and the offering expenses borne by the Fund and indirectly by all of its Common Shareholders as a percentage of the offering price. |
| (3) | You will pay brokerage charges if you direct your broker or the plan agent to sell your Common Shares that you acquired pursuant to a dividend reinvestment plan. You may also pay a pro rata share of brokerage commissions incurred in connection with open-market purchases pursuant to the Fund’s Dividend Reinvestment Plan. See “Dividend Reinvestment Plan.” |
| (4) | Management Fees include fees payable to the Investment Manager for advisory services and for supervisory, administrative and other services. The Fund pays for the advisory, supervisory and administrative services it requires under what is essentially anall-in fee structure (the “unified management fee).” Pursuant to an investment management agreement, PIMCO is paid a Management Fee of 1.15% of the Fund’s average daily total managed assets. The Fund (and not PIMCO) will be responsible for certain fees and expenses that are not covered by the unified management fee under the investment management agreement. Please see “Management of the Fund — Investment Manager” for an explanation of the unified management fee and definition of “total managed assets.” |
| (5) | Reflects the Fund’s use of leverage in the form of reverse repurchase agreements as of December 31, 2016, which represented 45.73% of the Fund’s total managed assets (including assets attributable to reverse repurchase agreements) as of that date, at an annual interest rate cost to the Fund of 2.38%, which is based on current market conditions. See “Leverage—Effects of Leverage.” The actual amount of interest expense borne by the Fund will vary over time in accordance with the level of the Fund’s use of reverse repurchase agreements, dollar rolls and/or borrowings and variations in market interest rates. Borrowing expense is required to be treated as an expense of the Fund for accounting purposes. Any associated income or gains (or losses) realized from leverage obtained through such instruments is not reflected in the Annual Expenses table above, but would be reflected in the Fund’s performance results. |
| (6) | Other expenses are estimated for the Fund’s current fiscal year ending June 30, 2017. |
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EXAMPLE
The following example illustrates the expenses that you would pay on a $1,000 investment in Common Shares of the Fund, assuming (1) that the Fund’s net assets do not increase or decrease, (2) that the Fund incurs total annual expenses of 4.02% of net assets attributable to Common Shares in years 1 through 10 (assuming assets attributable to reverse repurchase agreements representing 45.73% of the Fund’s total managed assets) and (3) a 5% annual return(1):
| 1 Year | 3 Years | 5 Years | 10 Years | |||||||
Total Expenses Incurred | $40 | $122 | $206 | $422 |
| (1) | The example above should not be considered a representation of future expenses. Actual expenses may be higher or lower than those shown.The example assumes that the estimated Interest Payments on Borrowed Funds and Other Expenses set forth in the Annual Expenses table are accurate, that the rate listed under Total Annual Expenses remains the same each year and that all dividends and distributions are reinvested at NAV. Actual expenses may be greater or less than those assumed. Moreover, the Fund’s actual rate of return may be greater or less than the hypothetical 5% annual return shown in the example. The example does not include commissions or estimated offering expenses, which would cause the expenses shown in the example to increase. In connection with an offering of Common Shares, the prospectus supplement will set forth an example including sales load and estimated offering costs. |
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