SEC Staff Grants No-Action Relief Regarding Board In-Person Voting Requirements
March 4, 2019
The staff of the Securities and Exchange Commission’s (SEC) Division of Investment Management (Staff) issued a no-action letter regarding in-person voting requirements for fund boards with respect to certain actions, such as renewing or approving an investment advisory contract or principal underwriting contract, approving an interim advisory contract, selecting an independent public accountant, or renewing or approving a fund’s 12b-1 distribution plan (“Required Approvals”). In this regard, the Staff agreed not to recommend enforcement action to the SEC for violations of Sections 12(b), 15(c) and 32(a) of the Investment Company Act of 1940, as amended (“1940 Act”), or Rules 12b-1 or 15a-4(b)(2) under the 1940 Act, if fund boards do not adhere to certain in-person voting requirements in certain circumstances, as described below.
The no-action letter notes that, in light of market, regulatory and technological developments, the Staff has continued to review existing director responsibilities and to consider whether they are appropriate and are carried out in a manner that serves shareholders’ best interests. The Staff recognized that the relief would remove significant or unnecessary burdens for funds and their boards and stated its position would not diminish a board’s ability to carry out its oversight role or other specific duties.
Conditions of Relief
Relief is provided for directors to give Required Approvals telephonically, by video conference or by other means by which all participating directors may participate and communicate with each other simultaneously during a meeting, instead of meeting in person as required under the 1940 Act and rules thereunder, in cases where:
- the directors needed for the Required Approval cannot meet in person due to unforeseen or emergency circumstances,1 provided that (i) no material changes to the relevant contract, plan and/or arrangement are proposed to be approved, or approved, at the meeting, and (ii) such directors ratify the applicable approval at the next in-person board meeting (“Request for Relief 1”); or
- the directors needed for the Required Approval previously fully discussed and considered all material aspects of the proposed matter at an in-person meeting, but did not vote on the matter at that time,2 provided that no director requests another in-person meeting (“Request for Relief 2”).
Relief applies only to the following actions:
- renewal (or approval or renewal in the case of Request for Relief 2) of an investment advisory contract or principal underwriting contract pursuant to Section 15(c) of the Act;
- approval of an interim advisory contract pursuant to Rule 15a-4(b)(2) under the 1940 Act (with respect to Request for Relief 2 only);
- selection of the fund’s independent public accountant pursuant to Section 32(a) of the 1940 Act (with respect to Request for Relief 1, such accountant must be the same accountant as selected in the immediately preceding fiscal year); and
- renewal (or approval or renewal in the case of Request for Relief 2) of the fund’s 12b-1 Plan.
While limited, the relief provides funds with flexibility in certain circumstances, which should prove beneficial to funds and their shareholders, including through cost savings attributable to meetings held telephonically or by video conference in lieu of in-person meetings.
1 Unforeseen or emergency circumstances include any circumstances that, as determined by the board, could not have been reasonably foreseen or prevented and that make it impossible or impracticable for directors to attend a meeting in-person. Such circumstances would include, but not be limited to, illness or death, including of family members, weather events or natural disasters, acts of terrorism and disruptions in travel that prevent some or all directors from attending the meeting in person.
2 This could arise, for example: (i) if directors prefer to wait to vote until after a contingent event takes place, such as the vote of shareholders of the investment adviser or a parent company of the investment adviser with respect to a proposed change of control of the adviser or parent company; (ii) if a majority of independent directors have selected the independent public accountant for certain funds in a fund complex and subsequently select the same independent public accountant at a later date for other funds in the same fund complex that have different fiscal years and a majority of the independent directors have concluded that no additional information is needed from the independent public accountant; or (iii) if directors wish to wait to vote on a matter until further requested information is provided or previously-provided information is confirmed, and they determine at the in-person meeting that the nature of the information to be provided or confirmed would not be likely to change the vote of any director needed for the Required Approval.