March 15, 2017
Tanya L. Goins
c/o Thompson Hine
41 South High Street
Suite 1700
Columbus, Ohio 43215-6101
Re: AlphaCentric Prime Meridian Income Fund
Registration Statement on Form N-2
File Nos.: 333-216033 and 811-23230
Dear Ms. Goins:
AlphaCentric Prime Meridian Income Fund (the "Fund") filed a
registration
statement on February 13, 2017 (the "Registration Statement"), for the purpose
of
registering common shares of the Fund. Based on our review of the Registration
Statement,
we have the following comments. The captions used below correspond to the
captions used
in the Registration Statement. Please note, however, that the comments we give
in one
section are applicable to other sections of the Registration Statement that
contain similar
disclosure, unless otherwise indicated.
General
1. Please advise us if you have submitted any exemptive application(s) or
no-action
request(s) in connection with your Registration Statement.
2. Please confirm that the Fund does not intend to issue preferred stock,
convertible or debt
securities in the 12 months following effectiveness of the Registration
Statement.
3. What are the Fund's plans for distributing securities, i.e., will the Fund
be sold only
through certain channels? Please disclose.
4. In an appropriate location in the prospectus, please adopt and disclose a
fundamental
policy prohibiting the Fund from investing in loans that are of subprime
quality at the
time of investment.
Cover Page
Investment Objectives
5. The second paragraph discloses the Fund is not restricted by any borrower
credit criteria
or credit risk limitations. Please delete this sentence consistent with
general comment 4
above.
Securities Offered
6. Please confirm whether the Fund must achieve a minimum amount of sales in
order to
proceed with the offering. Please add disclosure that describes the risks
involved if the
Fund does not achieve adequate capitalization.
7. The final paragraph of the Cover Page notes several key risk factors in
bold. Please
disclose each of these key risk factors in a separate bullet point.
8. Please add a bold and bulleted statement explaining that substantially
all of the Fund's
investments will be loans that are unsecured or undercollateralized.
Prospectus Summary
General Comments
9. Does the Fund intend to securitize pools of loans that it acquires or
engage in other
forms of structured finance origination in the normal course of business?
If so, please
disclose in the Prospectus.
Investment Objective and Policies
Page 1
10. The disclosure states the Fund may invest in online loans "originated
through a
marketplace lending platform (or an affiliate)." In your response,
please confirm that the
Fund may not purchase loans originated by AlphaCentric affiliates.
Please revise the
disclosure to add clarity.
11. With respect to the Fund's stated intention to provide loans, credit
lines or other
extensions of credit to a marketplace lending platform, please disclose
if such
investments are considered below investment grade; if so, add disclosure
explaining that
such investments may be categorized as "junk" or "high yield." Please
disclose if the
Fund expects that such loans will have a security interest over any
assets of the
platforms, explain if the Fund will have priority over such collateral,
or whether such
investments are expected to be unsecured obligations of the platform.
12. The definition of Marketplace Lending Instruments on this page differs
from the
definition on the cover page. Please reconcile.
Please disclose with specificity what is meant by "other transactions
that provide the
Fund with investment exposure to Marketplace Loans."
13. The Staff notes that the Fund may invest up to 20% of its gross assets
outside of the 80%
basket for Marketplace Lending Instruments. Does the Fund anticipate
holding
significant amounts of uninvested cash or other short-term fixed income
securities in the
regular course of operations or otherwise (for example, during the
initial stages of
investing offering proceeds in accordance with the principal strategy)?
If so, consider
whether it is appropriate to add disclosure to explain that cash and
cash equivalents are
included in the principal investment strategy, and/or to the risk
factors section, to explain
that the Adviser will receive a management fee on gross assets, even if
the Fund is not at
all times fully invested.
14. The disclosure states that the sub-advisor uses a proprietary model that
scans and
eliminates loans, however on p. 16, the disclosure states that the
sub-advisor will not
review each individual Marketplace Loan to which the Fund has investment
exposure.
Please clarify whether the sub-advisor reviews each loan individually
before determining
whether to invest.
15. The disclosure notes that the sub-advisor's proprietary model eliminates
loans that it
determines "have a higher likelihood of default." Please clarify the
disclosure to indicate
the benchmark against which the sub-advisor is reviewing the likelihood
of default and
how it determines which loans to exclude.
16. The disclosure states the advisor invests the Fund's assets in loan that
meet the model's
"criteria." Please disclose the criteria considered by the sub-advisor to
include a loan in
the Fund, i.e. does the sub-advisor review each borrower's FICO score?
Also, please
disclose the minimum FICO score for borrowers that the Fund will accept,
and indicate
whether these loans are prime or superprime.
17. The disclosure states the sub-advisor may invest in debt securities as
an alternative to
Marketplace Lending Instruments. Disclose the specific types of debt
securities in which
the Fund may invest, and if such investments will be principal, include
appropriate risk
disclosure.
Leverage
18. The disclosure states the Fund may obtain financing to invest in
"alternative lending-
related securities." Please supplementally explain and revise the
disclosure to clarify
what these securities are and how they are different from Marketplace
Lending
Instruments. Please also revise the disclosure to reflect the same.
19. Please disclose with specificity the types of derivative instruments to
be used, the
purpose of those instruments, and the incumbent risks.
Subsidiaries
20. The disclosure states the Fund will invest in wholly-owned and
controlled subsidiaries in
"alternative lending-related securities." Define "alternative
lending-related securities"
and clarify what these securities are.
21. For each subsidiary, provide details regarding the business purpose of
the investment.
For each subsidiary, provide details regarding the vehicle's
jurisdiction of organization
and corporate form. Please confirm the following:
a. that the Fund will comply with the provisions of the 1940 Act
governing
investment policies (Section 8) and capital structure and
leverage (Section 18) on
an aggregate basis with the subsidiary.
b. that each investment adviser to the subsidiary will comply with
provisions of the
1940 Act relating to investment advisory contracts (Section 15)
as an investment
adviser to the Fund under Section 2(a)(20) of the 1940 Act. The
investment
advisory agreement between the subsidiary and its investment
adviser is a
material contract that should be included as an exhibit to the
registration
statement. If the same person is the adviser to both the Fund and
the subsidiary,
then, for purposes of complying with Section 15(c), the reviews
of the Fund's
and the subsidiary's investment advisory agreements may combined.
c. that the subsidiary complies with provisions relating to
affiliated transactions and
custody (Section 17). Identify the custodian of the subsidiary.
d. that the financial statements of the subsidiary will be
consolidated with those of
the Fund.
e. any management fee (including any performance fee) payable to the
advisor of
the subsidiary will be included in "Management Fees" and the
expenses of the
subsidiary will be included in "Other Expenses" in the Fund's fee
table.
Marketplace Lending
22. The disclosure states a limited number of platforms originate
Marketplace Loans and
that the Fund anticipates that a substantial portion of its investments
will originate from
one of these platforms. Please provide the following disclosure if the
Fund anticipates
investing 25% or more of its assets in loans originated by a single
platform.
a. Please include disclosure in the Registration Statement, and in
the Fund's
periodic reports (when applicable), the following disclosure: the
name of each
platform through which the Fund invests greater than 25% of its
assets, a
description of the platform and a discussion of any unique risks
that the
platform presents.
b. In the appropriate section of the Registration Statement, please
disclose that
the purchase of whole loans through an alternative lending
platform involves
the purchase of "securities" under the 33 Act, issued by the
originating
platforms, and that the purchase of whole loans by the Fund
involves the
purchase of securities.
c. In addition, please confirm in your response letter that the Fund
understands
that the platform is an issuer and that if the Fund invests 45% or
more of its
assets in loans issued by a single platform, then the platform
will be
considered a "co-issuer" of the Fund under Rule 140 of the 33 Act.
d. Confirm in your response letter that if the Fund were to be
regarded as
engaged in a distribution of the securities of a platform, or if a
platform were
considered a co-issuer with the Fund, the Registration Statement
would need
to contain all required disclosure regarding that platform, and
that platform
would need to execute the Registration Statement as an issuer and
would have
issuer liability under the 33 Act for the disclosure contained in
the
Registration Statement.
e. In the event the 45% threshold is crossed after the Registration
Statement is
declared effective, please confirm that the Fund will file a POS
8C promptly
to comply with the requirements in (d) above.
f. Furthermore, the principal investment strategy of the Fund
includes
investments in asset-backed securities representing pools of
Marketplace
Loans. Please confirm that for the purposes of determining whether
any
individual platform is considered a "co-issuer" under the 33 Act,
the Fund will
look through the special purpose vehicle and aggregate all loans
issued by
individual platforms.
23. If the Fund intends to invest in platforms outside of the U.S., disclose
any differences in
the foreign regulatory regime and any additional risks.
24. Please disclose whether the Fund anticipates that Marketplace Loans (and
Marketplace
Lending Instruments, in general) will be fixed rate or floating rate loans.
In the case it is
the latter, please add disclosure regarding which reference rate will be
typically used.
25. The disclosure states that the Fund will enter into purchase agreements
with platforms.
Will the Fund be obligated to commit to purchase a certain amount of loans
from the
platforms under the purchase agreement?
Marketplace Loans and Pass-Through Notes
Page 3
26. With respect to pass-through notes, please explain in your response
whether the Fund
will have the ability to enforce rights against delinquent borrowers or
collateral directly.
27. The Fund may purchase (a) Marketplace Loans either individually or in
aggregations,
and (b) pass-through obligations issued by a platform, including in
interests that
represent fractional portions of individual loans. With respect to
aggregations of whole
loans, disclose the quantitative and qualitative criteria that the Fund
expects to impose
with respect to individual loans. With respect to fractional loans, do
such investments
have varying priority over the receipt of payments from the borrower or
over collateral?
How are the rights of each investor, including the Fund, in such
investments established
(i.e. what is the operative legal document)? Are there any legal
precedents that establish
the extent to which contractual agreements between lenders are going to
be respected in
bankruptcy proceedings?
28. In the second full paragraph on page 3, define "SME lenders."
Asset-Backed Securities
29. With respect to investments in asset-backed securities representing
pools of Marketplace
Loans, please explain in your response how the costs associated with
such investments
will be reflected in the Fee Table. Does the Fund intend to focus on
particular tranches?
30. The disclosure states the Fund may invest in both the senior tranches of
the SPVs, as
well as the "residual" tranches. Please add appropriate disclosures that
describe the
relationship between the tranches, explaining the cash flow waterfalls,
overcollateralization of senior tranches, the risks of equity and junior
tranches as the
"first loss" pieces in the structure, etc.
Private Investment Funds
31. The Fund may purchase interests in private funds that invest in
Marketplace Loans, up to
10% of its assets. Does the 10% limitation apply to all private funds,
including those that
rely on an exclusion from the definition of investment company in
Section 3(c)(1) and
3(c)(7), and also to private funds that rely on Section 3(a)(1)(c),
3(c)(5)(A) or (B)?
32. In the risk sections of the Registration Statement, please add
disclosures discussing the
various risks associated with investments in such vehicles:
a. Please disclose that the Fund intends to make commitments to
purchase shares
of such private investment funds or otherwise make unfunded
commitments.
Please disclose the risks of the Fund failing to fund a capital
call issued by an
underlying fund, including a summary of the typical default
provisions and
remedies to which the Fund may be subject.
b. Please disclose market risks that may make it more difficult
for the Fund to
fund capital calls.
c. In your response, please represent to the Staff that the Fund
will at all times
have sufficient assets that, in the Fund's reasonable belief,
will provide cover
to allow it to satisfy all such unfunded commitments.
d. Please disclose that such private funds impose another level of
fees, both
management and incentive fees, which results in higher costs
for the Fund
and, therefore, for the Fund's shareholders. Please explain if
such funds may
charge fees on uncalled capital commitments and explain related
risks
associated with such fee structure.
e. Please explain to the Staff how investments in such funds will
be valued. To
the extent that the Fund will use valuations that are prepared
by the investment
funds, please discuss whether such valuations are required to
be verified by an
independent pricing agent. Please disclose whether the Fund
intends to invest
in private funds that comply with Rule 206(4)-2 of the
Investment Advisers
Act of 1940 by sending investors annual financials that are
audited by an
independent public accountant that is registered with, and
subject to regular
inspection by, the PCAOB.
f. Please confirm that costs associated with investments in
private funds, as well
as in registered investment companies and any other Section
3(c)(1) and
3(c)(7) funds, will be reflected in the Fee Table. Please add
appropriate
disclosures regarding any assumptions that are made about the
average fees
charged by private fund advisers.
Investment Advisor and Fee
Page 4
33. It is the Staff's position that any fee waived or expense reimbursed
must occur within
three years of the specific waiver or reimbursement. In addition, any
recapture provision
is limited to the lesser of (1) the expense cap in effect at the time of
waiver, and (2) the
expense cap in effect at the time of recapture. (See 2009 Investment
Companies
Industry Developments Audit Risk Alert ARA-INV.73) Please confirm that
the Fund's
policy aligns with this position and revise the disclosure as
applicable.
Repurchase of Shares
34. Because Marketplace Loans are illiquid, and this is an interval fund,
please disclose how
the Fund will meet the requirements of Rule 23c-3(b)(10).
Summary of Risks
Page 6
35. Consider whether the following risks are principal to the Fund and
should be included in
the Summary of Risks:
g. Interest Rate Risk;
h. Cybersecurity Risk;
i. No operating history; and non-listed, closed-end Fund Risk.
36. Under the heading, "Distribution Policy Risk," please revise the first
sentence to state in
plain English the Fund's distribution policy and the risk of that policy
(i.e. the Fund may
make distributions by returning investor principal, which is also known
as return of
capital and that such distributions are not tied to the Fund's
investment income and
capital gains and do not represent yield or investment return in the
Fund's portfolio).
37. Under the heading, "Geographic Focus Risk," please disclose if the Fund
will be
concentrated in a particular geographic area as a principle strategy and
if so disclose the
risks associated with that area.
38. Under the heading, "Leverage Risk," clarify the first sentence, which
indicates the Fund
may obtain financing to make investments in marketplace lending-related
securities.
Please confirm if by "financing" the Fund intends to borrow money and if
so, please
state. Please also explain that because the Fund's management fee is
charged on gross
assets, the Adviser has an incentive to cause the Fund to incur
additional leverage.
39. Please add risk disclosure explaining the tax risks of the platforms
being deemed
"issuers" under Subchapter M and explain how this could impact the
Fund's ability to
qualify as a registered investment company under Subchapter M of the
Internal Revenue
Code (the "IRC").
40. If the Fund will invest in CLOs, please include additional disclosure
discussing risks
related to equity and junior debt tranches of CLOs. Please highlight the
special risks
associated with investing in such instruments; e.g. that such
investments are highly
levered, that they may be riskier and less transparent than direct
investments in
underlying loans, that they may be illiquid, that the Fund will have
limited control over
the CLO vehicles, etc.
Fund Expenses
Page 13
41. Please provide the completed fee table and expense.
42. In the third footnote to the fee table, the disclosure states the
Expense Limitation
Agreement will remain in effect until at least []. Please confirm the
agreement will be in
place for a year from the effective date of the registration statement.
43. Please disclose if there is a redemption fee, and if so, please reflect
it in the fee table.
44. Please disclose the amount of offering proceeds assumed in calculating
the fee table, and
explain supplementally why that figure is a reasonable estimate.
Use of Proceeds
Page 14
45. The disclosure states that the Fund will invest net offering proceeds
"as soon as
practicable after receipt." If the Adviser expects the investment period
to exceed three
months, disclose the reason for such delay. To the extent that the Fund
has not invested
net proceeds in accordance with its investment objectives within six
months, the Fund
will be required to seek shareholder consent to change its investment
objectives. Please
confirm in your response. See Item 7.2 of Form N-2 and Guide 1 to Form
N-2.
Investment Objectives, Policies and Strategies
Investment Philosophy and Process
Page 16
46. The last sentence of the second paragraph in this section states the
sub-advisor seeks to
"allocate [the Fund's] assets to the segments identified as being the
most attractive on a
risk-adjusted return basis." Please disclose the general range of
interest rates charged to
the Marketplace Loans that are expected to be in the Fund's portfolio
and explain that
higher rates reflect higher risks, including higher risk of default,
associated with such
investments.
47. The disclosure states that the sub-advisor will seek loans that are
originated from
platforms that "have met the sub-advisor's minimum requirements related
to, among
other things, loan default history and overall borrower credit quality."
Please include a
discussion of such minimum requirements.
48. The disclosure states that the sub-advisor will perform an analysis of
the historical "loan
tapes" of platforms. Please disclose the period of time that will be
typically analyzed,
whether the analysis begins with the platform's inception or if it will
cover a short
period.
49. The disclosure states the sub-advisor does not expect to review each
individual
Marketplace Loan prior to investment, but expects that it will impose
minimum
"quantitative and qualitative criteria." It is further explained that,
in effect, this means
that the sub-advisor "expects to adopt the minimum investment criteria
inherent in a loan
segment or imposed by a platform that it has identified as having the
appropriate
characteristics for investment." Please clarify whether the Fund expects
to provide
platforms with independent criteria set by the Fund or if it expects to
rely on the
platform's grading. If it is the latter, to what extent does platform
grading incorporate the
minimum qualitative and quantitative criteria used the Adviser? Are
factors given the
same weight?
50. It is disclosed that the sub-advisor does not intend to invest through
platforms where it
cannot "evaluate to its satisfaction the completeness and accuracy of
the individual loan
data provided by the platforms" relevant to determining the existence
and valuation of
the loans purchased and utilized in the accounting of the loans. In this
regard, the Staff
notes that "completeness and accuracy" are the financial statement
assertions relevant to
the integrity of the data used to account for the loans. Please also
revise the parenthetical
explanation to state that the sub-advisor's belief must be reasonable.
Marketplace Lending
Page 18
51. Describe the Fund's accounting policy for placing a Marketplace Loan
investment on
nonaccrual status.
52. With regard to the Financial Statement disclosure, to be Regulation S-X
12-12
compliant, the Fund must disclose the platform as the issuer of each
loan (in the
schedule of investments) and list the ten largest platforms in which the
Fund invests.
Private Investment Funds
Page 20
53. The Fund discloses that it may invest up to 10% of its assets in private
investments
funds, and that the structure of the investment creates diversification
and reduces
operator credit risk. Confirm the private investments in which the Fund
may invest are
unaffiliated.
Determination of Net Asset Value
Page 32
54. Please disclose the valuation methodologies that the Fund and
independent pricing
agents expect to use in valuing Marketplace Lending Instruments.
55. Disclose in this section, as well as in the valuation policy footnote to
the Fund's
financial statements, that the Fund has adopted a valuation policy which
states that (1)
the unit of account is at the individual loan level and (2) fair
valuation will be performed
using inputs which incorporate borrower level data.
56. Please confirm in correspondence that the Fund's financial statements
will classify the
loans in which the Fund invests as Level 3 in the fair value hierarchy
based on the
valuation methodology and characterize the loans as illiquid.
Statement of Additional Information
Page SAI-3
57. The Fund has adopted a fundamental policy not to invest greater than 25%
of total assets
in a single industry of group of industries, other than "diversified
financials." What
classification system is the Fund using? Disclose.
Page SAI-33/34
58. Please include Regulation S-X compliant financials of the predecessor
Fund for the
previous two years.
59. Please include the auditor's consent before effectiveness.
60. Please include audited seed financial statements before effectiveness.
Exhibits
61. Please confirm that the Fund has received an opinion of counsel
regarding the Fund's
ability to qualify as a registered investment company under Subchapter M
of the IRC.
Please file the opinion of counsel as an exhibit to the registration
statement. For
guidance, please see Staff Legal Bulletin No. 19, Legality and Tax
Opinions in
Registered Offerings (Oct. 14, 2011).
* * * * * *
We note that portions of the filing are incomplete. We may have
additional comments
on such portions when you complete them in a pre-effective amendment, on
disclosures made
in response to this letter, on information supplied supplementally, or on
exhibits added in any
pre-effective amendment.
In closing, we remind you that the company and its management are
responsible for
the accuracy and adequacy of their disclosures, notwithstanding any review,
comments, action
or absence of action by the staff.
Should you have any questions regarding this letter, please contact me
at (202) 551-
6966.
Sincerely,
Marianne
Dobelbower
Attorney
Adviser