Morgan, Lewis & Bockius LLP MORGAN LEWIS
1701 Market Street
Philadelphia, PA 19103-2921
Tel: 215.963.5000
Fax: 215.963.5001
www.morganlewis.com
JOHN J. O'BRIEN
ASSOCIATE
215.963.4969
October 14, 2015
FILED AS EDGAR CORRESPONDENCE
Ms. Amy W. Miller
Senior Counsel
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549
Re: Response letter to comments on Registration Statement on Form N-1A of The
Community Development Fund (File Nos. 333-206012 and 811-23080)
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Dear Ms. Miller:
Set forth below are your comments (phrased from your letter dated August 26,
2015), and our responses to those comments, on the initial Registration
Statement on Form N-1A of The Community Development Fund (the "Fund") filed
under the Investment Company Act of 1940, as amended (the "1940 Act"), and the
Securities Act of 1933, as amended (the "1933 Act"), with the Securities and
Exchange Commission ("SEC") on July 31, 2015, regarding the registration of
shares of the Fund. Unless otherwise noted, capitalized terms have the same
meaning as contained in the Prospectus and/or Statement of Additional
Information included in the Registration Statement. (Numbers listed alongside
each "Comment" refer to the items in your letter). Please note that although we
did not repeat comments 19-20 and 22-23 because they do not require an
affirmative response, we nonetheless have taken the comments into consideration.
PROSPECTUS
FEES AND EXPENSES
1. COMMENT: Although the prospectus states that the Fund will invest in
investment companies, the Fee Table does not contain a line-item for AFFE.
Please revise the Fee Table to include a line-item for AFFE, or else
explain why one is not required. See Instr. 3(f) to Item 3 of Form N-1A.
RESPONSE: Because the Fund does not expect to have acquired fund fees and
expenses greater than one basis point of its average net assets, the Fee
Table does not contain a line-item for AFFE. Instead, any such expenses
will be included in the "Other Expenses" line item in the Fee Table.
2. COMMENT: The Fee Table contains a line-item for "Fee Reductions and/or
Expense Reimbursements," while footnote (2) clarifies that the Fund's
adviser and/or affiliates "[c]ontractually agreed to waive fees and
reimburse expenses for a period of one year in order to keep total direct
operating expenses (exclusive of interest from borrowings, brokerage
commissions, taxes, acquired fund fees and expenses, and other
extraordinary expenses not incurred in the ordinary course of the Fund's
business) from exceeding [1.00]%," which agreement shall remain in effect
until [20XX+1], unless earlier terminated."
a. Disclose that the fee waiver and reimbursement agreement will
remain in effect for no less than one year from the effective
date of the Fund's registration statement. See Instr. 3(e) to
Item 3.
b. Please include the fee waiver and reimbursement agreement, which
is a material contract of the Fund, as an exhibit to the
registration statement. See Item 28(h) of Form N-1A.
RESPONSE:
a. In response to your comment, we have revised the disclosure
accordingly.
b. The fee waiver and reimbursement agreement has been filed with
the Fund's first pre-effective amendment to its Registration
Statement, to which this Correspondence is an accompaniment.
3. COMMENT: The Expense Example states that "[a]lthough your actual costs and
returns may be higher or lower, based on these assumptions, your costs
would be " (Emphasis added.) Please delete the italicized language as it is
neither permitted nor required. See General Instr. C.3.(b) of Form N-1A.
RESPONSE: In response to your comment, the italicized language has been
deleted.
PRINCIPAL INVESTMENT STRATEGY
4. COMMENT: Please disclose the expected maturity and credit quality of the
debt securities in which the Fund will invest.
RESPONSE: In response to your comment, we have added disclosure to the
Fund's principal investment strategy stating that although the Fund will
invest primarily in investment grade fixed income securities, the Fund may
at times invest in securities rated below investment grade (also referred
to as "high yield" or "junk" bonds). Because the Fund, as a principal
investment strategy, is not managed to a particular maturity, no disclosure
has been added regarding the expected maturity of the debt securities in
which the Fund will invest.
5. COMMENT: The disclosure in this section states that the Fund will invest a
significant amount of its assets in securities issued by the Federal
National Mortgage Association ("Fannie Mae"), Federal Home Loan Mortgage
Corporation ("Freddie Mac"), and Government National Mortgage Association
("Ginnie Mae"). Does the Fund also intend to invest in privately-issued
mortgage backed securities? If so, please disclose here, and include any
associated risks in the Principal Risks section.
RESPONSE: The Fund does not currently expect to invest in privately-issued
mortgage backed securities as part of its principal investment strategies.
6. COMMENT: The disclosure in this section states that while the Fund is
seeking to invest available cash in CRA-qualifying investment
opportunities, it may invest in "[m]oney market instruments, debt
securities issued or guaranteed by the US Government or its agencies,
repurchase agreements, convertible securities, shares of exchange-traded
funds, or certain derivative instruments that provide exposure to one or a
basket of securities that are consistent with the Fund's investment
objectives." (Emphasis added.) Please disclose the extent to which the Fund
expects to invest in the italicized instruments, particularly derivatives,
and add corresponding risk disclosure to the Principal Risks section.
RESPONSE: In response to your comment, we have added risk disclosure for
repurchase agreements, convertible securities, exchange-traded funds, and
derivative instruments. We have also added disclosure to the Fund's
principal investment strategy clarifying the extent to which the Fund
expects to invest in these instruments.
PRINCIPAL RISKS
7. COMMENT: The introductory paragraph in this section states that
"CRA-qualified loans in geographic areas sought by the Fund may not provide
as favorable return as CRA-qualified loans in other geographic areas."
Please explain the significance of this statement. Does the Fund have a
current intent to concentrate its investments in specific geographic
locations? If so, please disclose in the Principal Investment Strategy and
Risk sections.
RESPONSE: The Fund does not currently intend to concentrate its portfolio
as a whole in investments in specific geographic locations. Because
CRA-qualified loans are generally tied to specific regions, the referenced
language indicates that the Fund's investment in a CRA-qualified loan
located in particular geographic area may not be as favorable as an
investment in a different CRA-qualified loan located in another area.
Additionally, the Principal Risks section contains a "Regional Focus Risk."
8. COMMENT: Although bank loans are identified as a Principal Risk of the
Fund, such loans are not included in the Principal Investment Strategy
section. Please explain to us why bank loans create a principal risk of the
Fund, but are not a principal strategy. Also, will bank loans be treated as
illiquid securities? If not, please explain why they will be treated as
liquid securities.
RESPONSE: In response to your comment, we have removed the bank loans risk
disclosure as these are not currently expected to be a principal investment
of the Fund.
9. COMMENT: The Portfolio Turnover Risk states that the Fund may buy and sell
securities frequently. If active and frequent trading will be a principal
strategy of the Fund, please revise the Principal Investment Strategy
section to include this information.
RESPONSE: In response to your comment, we have added disclosure to the
Fund's principal investment strategy stating that the Fund may buy and sell
securities frequently, which could result in a high portfolio turnover
rate.
10. COMMENT: The Regional Focus Risk states that "to the extent [the Fund]
focuses its investments in a particular geographic region, the Fund may be
more susceptible to economic, political, regulatory or other events or
conditions affecting issuers and countries within that region. As a result,
the Fund may be subject to greater price volatility and risk of loss than a
fund holding more geographically diverse investment." (Emphasis added.) The
italicized language suggests that the Fund may invest in issuers in other
countries, while the SAI states that the Fund will not invest in foreign
securities. Please revise this inconsistency.
RESPONSE: In response to your comment, the italicized language has been
modified to state "to the extent that it focuses its investments in a
particular geographic region for CRA accreditation purposes, the Fund may
be more susceptible to economic, political, regulatory or other events or
conditions affecting issuers and states or municipalities within that
region."
MANAGEMENT
11. COMMENT: Please confirm to us the registration status of the Fund's
adviser, Community Development Fund Advisors, LLC.
RESPONSE: Community Development Fund Advisors, LLC's registration with the
SEC under the Investment Advisers Act of 1940, as amended, has become
effective since the initial Registration Statement was filed. Additionally,
please note that the Fund is in the process of negotiating service
contracts with SEI Investments Global Funds Services which would serve as
administrator, Atlantic Fund Services, LLC which would serve as transfer
agent, Foreside Fund Services, LLC which would serve as distributor, Logan
Circle Partners L.P. which would serve as sub-adviser, and Tait Weller &
Baker LLP which would serve as fund accountant.
TAX INFORMATION
12. COMMENT: We note that the prospectus states Class A Shares of the Fund are
available for purchase by financial institutions seeking positive CRA
consideration with respect to shares of the Fund owned by them.
Nevertheless, the Tax Information discloses that "if you are investing
through a tax-deferred arrangement, such as a 401(k) plan or individual
retirement account ("IRA"), you will generally not be subject to federal
taxation on Fund distributions until you begin receiving distributions from
your tax-deferred arrangement." Since this disclosure language is generally
applicable only to individual retail investors (not to financial
institutions), explain to us why it is included in the prospectus.
RESPONSE: In response to your comment, we have clarified that Class A
Shares of the Fund are available for purchase both by financial
institutions seeking positive CRA consideration with respect to shares of
the Fund owned by them and by other institutional and individual investors.
FUND INVESTMENTS - OTHER INVESTMENT COMPANIES
13. COMMENT: This section states that "[t]he Fund also may invest in
securities issued by other investment companies." Please provide more
detail regarding the types of investment companies in which the Fund
intends to invest. For example, does this only include money market funds
or ETFs, or are investments in other funds contemplated? Would such
investments be CRA-qualified?
RESPONSE: In response to your comment, we have included more detailed
disclosure regarding the types of investment companies in which the Fund
intends to invest and if such investments would be CRA-qualified. In
general, this is expected to represent less than 5% of the Fund's total
assets.
INVESTMENT ADVISER
14. COMMENT: This section states that "[p]ursuant to a CRA Servicing Plan that
has been approved by the Board, the Adviser will maintain books and records
that document that the Fund generally holds CRA-qualifying investments with
a primary purpose of community development and explicitly earmark for
CRA-qualifying purposes specific securities to specific shareholders and
track Shareholder Assessment Areas." (Emphasis added.) Please explain how
the Fund is able to explicitly earmark specific securities to specific
shareholders. How does this arrangement comply with Section 18 of the
Investment Company Act of 1940 (the "1940 Act")?
RESPONSE: The earmarking process to which this disclosure is referring does
not refer to investment performance or otherwise designate the Fund's
profits and losses on particular investments differently between
shareholders. Instead, earmarking, as used in this context, is a term
originating from the regulations associated with the Community Reinvestment
Act of 1977, as amended (the "CRA"), referring to the practice of giving
consideration to an investment within a commingled investment vehicle to a
particular shareholder purely for CRA accreditation purposes. As with any
other mutual fund, each shareholder of the Fund will still own a pro-rata
share of the entire fund, regardless of the underlying securities that may
have been earmarked for CRA purposes. Earmarking does not in any way
suggest or create an ownership interest in that security by that
shareholder.
PURCHASING AND SELLING FUND SHARES
15. COMMENT: This section states that an investor "may request to have its
investment amount invested in particular areas of the United States as its
preferred geographic focus or designated target region." If the Fund
accommodates such a request, could it result in some investors sharing in
the profits and losses of some, but not all, of the Fund's investments? If
yes, please explain how this is consistent with Section 18 of the 1940 Act.
RESPONSE: Each shareholder's returns will be based on the investment
performance of the Fund's blended overall portfolio of investments and not
just on the performance of the assets, if any, in the designated target
region(s) selected by that shareholder. Accordingly, we have revised this
section to state that an investor "may request to have its investment
amount invested in particular areas of the United States as its preferred
geographic focus or designated target region solely for CRA accreditation
purposes."
HOW TO PURCHASE FUND SHARES
16. COMMENT: This section states that "[p]ending the termination of the
initial offering period, funds received from prospective investors will be
placed in an interest-bearing escrow account with the Fund's escrow agent.
On the date of termination of the initial offering period, the balance in
the escrow account with respect to each investor whose investment is
accepted will be invested in the Fund on behalf of such investor. Any
interest earned on escrowed amounts will be credited to the Fund" (Emphasis
added.) Please explain why the interest earned on the escrowed amounts
could be properly credited to the Fund, and not the investors.
RESPONSE: In response to your comment, the referenced language has been
revised to state that "[d]uring the initial offering period, orders may
only be placed through the Fund. Payments for shares of the Fund will not
be accepted until the completion of the initial offering period."
STATEMENT OF ADDITIONAL INFORMATION
INVESTMENT LIMITATIONS
17. COMMENT: Investment Limitation No. 5 states that the Fund may not
"[p]urchase any securities which would cause 25% or more of the value of
the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, although this limitation does not apply to
mortgage-backed securities; provided, however, that there is no limitation
with respect to obligations issued or guaranteed by the U.S. government,
any state, territory or possession of the U.S. government, the District of
Columbia or any of their authorities, agencies, or instrumentalities
(including U.S. government-sponsored enterprises) or political
subdivisions, including municipal bonds." (Emphasis added.)
a. Please explain why this limitation does not apply to
mortgage-backed securities. If the Fund intends to concentrate in
mortgage-backed securities, please explicitly disclose here, and
in the prospectus.
b. To be exempt from the concentration limits, obligations issued
or guaranteed by any state, territory or possession of the U.S.
government, etc., must be tax-exempt. See Rel. No. IC-9785 (May
31, 1977) (stating the Division's view that Section 8(b)(1)(E)'s
disclosure requirement "as to concentration of investment in an
industry or group of industries is not applicable to investments
in tax-exempt securities issued by governments or political
subdivisions of governments since such issuers are not members of
any industry," but requiring "[a]ny intended exclusion of
government issued tax-exempt bonds from such a policy by a fund
should be made clear."). (Emphasis added.) Please revise.
RESPONSE: In response to your comments, we have revised Investment
Limitation No. 5 to state that the Fund will not:
Purchase any securities which would cause 25% or more of the
value of the Fund's total assets at the time of purchase to be
invested in the securities of one or more issuers conducting
their principal business activities in the same industry;
provided, however, that there is no limitation with respect to
obligations issued or guaranteed by the U.S. government, any
state, territory or possession of the U.S. government, the
District of Columbia or any of their authorities, agencies, or
instrumentalities (including U.S. government-sponsored
enterprises) or political subdivisions, including municipal
bonds, provided such instruments are tax-exempt;
TRUSTEE EXPERIENCE, QUALIFICATIONS, ATTRIBUTES AND/OR SKILLS
18. COMMENT: Although the SAI states that "[s]et forth below are the names,
dates of birth, position with the Trust, length of term of office and the
principal occupations for the last five years of each of the persons
currently serving as Executive Officers of the Trust," no such information
is provided. Please disclose this, and all other information required by
Item 17 of Form N-1A.
RESPONSE: This disclosure has been included in the Fund's first
pre-effective amendment to its Registration Statement.
GENERAL COMMENTS
21. COMMENT: Please advise us if you have submitted or expect to submit an
exemptive application or no-action request in connection with your
registration statement.
RESPONSE: The Fund does not currently intend to submit any exemptive
application or no-action request in connection with its registration
statement.
I hereby acknowledge on behalf of the Fund that: (i) should the Commission or
the staff, acting pursuant to delegated authority, declare the registration
statement effective, it does not foreclose the Commission from taking any action
with respect to the registration statement; (ii) the action of the Commission or
the staff, acting pursuant to delegated authority, in declaring the registration
statement effective, does not relieve the Fund from its full responsibility for
the adequacy and accuracy of the disclosure in the registration statement; and
(iii) the Fund may not assert this action as a defense in any proceeding
initiated by the Commission or any person under the federal securities laws of
the United States.
Please do not hesitate to call the undersigned with any questions or comments.
Sincerely,
/s/ John J. O'Brien
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John J. O'Brien