Introduction
On February 28, 2019, the Chief Counsel’s Office of the Securities and Exchange Commission’s Division of Investment Management issued a letter stating its no-action position regarding certain in-person voting requirements under the Investment Company Act of 1940. The Staff’s position provides limited relief to registered investment companies and business development companies1 seeking board approval for the renewal of (1) an investment advisory contract, (2) a principal underwriting agreement, (3) selection of the fund’s independent public accountant, or (4) in the case of mutual funds (and closed-end interval funds operating pursuant to multi-class relief) renewal of the fund’s 12b-1 Plan. For each of these approvals, the Staff would not object to a fund’s board giving the required approval at a telephonic or video-conference meeting in cases where directors cannot meet in-person due to unforeseen or emergency circumstances (Relief 1) or where the directors have previously fully discussed all material aspects of the proposal at an in-person meeting, but did not vote at that time (Relief 2). While the relief is limited in its scope and application, the position signals the Staff does consider the demands on directors and may support modernization and improvement efforts where the burdens on the board outweigh benefits to fund shareholders.
The Required Approvals
The 1940 Act requires that certain registered investment company agreements and arrangements be approved at a meeting where its board of directors are physically present. At the time of establishing these requirements, Congress believed that in-person voting was necessary to ensure informed voting on matters essential to the effective protection of shareholder’s interest. Agreements and arrangements with the fund’s investment adviser, principal underwriter and independent public accountant are all required to be approved by an in-person vote. Additionally, an open-end fund requires in-person approval for a plan pursuant to Rule 12b-1 under the 1940 Act for making distribution related payments that would otherwise be prohibited under Section 12(b) of the Act. As a condition to relying on exemptive relief permitting an interval fund to issue multiple classes of its common stock, an interval fund that charges an asset-based distribution fee must charge such fee pursuant to a plan that complies with Rule 12b-1.
The Relief
Relief 1 provides similar relief to that provided by the Commission following the terrorist attacks on September 11, 2001. There, the Commission issued an order permitting registered investment companies a 30-day window to make required in-person approvals by other means of communication, so long as the action did not result in a material change to the existing contract, plan or arrangement, and the action was ratified by in-person vote within 90 days.2 Relief 1 permits flexibility in the event of unforeseen circumstances and allows funds to forego the process of seeking ad hoc relief for emergency circumstances impacting the fund or its directors. However, Relief 1 does not alleviate the need for an in-person meeting. Unlike the 9/11 Relief, Relief 1 does not specify a deadline for in-person ratification. However, the 90-day timeframe may prove a useful guidepost for funds relying on Relief 1. Relief 1 does not lift the burden of holding an in-person meeting for these matters, but provides blanket relief in cases where an emergency would prevent one or more directors from attending the scheduled in-person meeting.
Relief 2 eases the requirement on directors to reconvene in cases where the directors already met in- person and fully discussed and considered all material matters related to the required approvals, but, for some reason, did not take a vote. Here, the board would have effectively satisfied the in-person voting requirements, just without the actual vote. This circumstance could arise where (i) the directors postponed the vote until after a contingent event takes place; (ii) an independent public accountant was properly selected for certain funds in a fund complex, and the same accountant is subsequently selected for other funds in the same fund complex; or, (iii) if the vote is postponed while further information is requested, but it is later determined that the information would not be likely to change the vote of any director needed for the required approval. Under these circumstances, the Staff would not object to a fund’s board giving the required approval at a telephonic or video-conference meeting.
Takeaways
The no-action position provides limited relief for funds facing emergencies and other unforeseen circumstances and also provides limited relief from the need to reconvene in person after a prior in-person meeting was held. The relief does not fundamentally change the in-person approval processes for fund advisory contracts and other agreements. However, the relief may prove useful for funds facing scheduling challenges stemming from emergency events beyond the fund’s control and eases some of the burden for scheduling multiple in-person meetings regarding the same approval item. The Staff’s action reflects the Staff’s openness to review the fund director’s responsibilities, in light of market, regulatory, and technological developments, in a manner that best serves the shareholders’ interests.
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1 The no-action letter refers to “funds.” The term “funds” is described to include “a registered management investment company or a separate series thereof, as the context requires” and also “extends to a business development company, as defined under Section 2(a)(48) of the Act.”
2 Investment Company Act Release No. 25156 (Sept. 14, 2001), https://www.sec.gov/rules/other/ic-25156.htm (referred to herein as the 9/11 Relief).
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