SEC Issues No-Action Letter Regarding Fund Board In-Person Voting Requirements

Investment Management Update

Date: March 11, 2019

Key Notes:

  • No-action relief would allow boards to renew or approve advisory agreements, auditor engagements and 12b-1 plans without an in-person meeting, subject to certain conditions.
  • May be used for renewals in situations where emergencies or unforeseen circumstances prevent an in-person meeting, provided there are no material changes to the arrangement.
  • May be used for renewals and initial approvals where the board previously met in person to discuss all material aspects of the proposed matter but did not vote on the matter during the meeting.

The Investment Company Act of 1940, as amended (1940 Act), requires that a fund’s board of directors (including a majority of the independent directors) approve various contracts, plans and arrangements at in-person meetings, including the renewal and approval of investment advisory contracts and principal underwriting contracts pursuant to Section 15(c) of the 1940 Act, selection of independent registered public accountants pursuant to Section 32(a), and renewal and approval of Rule 12b-1 plans. Inability to meet these requirements could result in the lapse of an agreement or arrangement that may not be reinstated without a costly shareholder vote. In its ongoing effort to promote modernization of fund governance, the Independent Directors Council (IDC) requested, and was granted, no-action relief by the Securities and Exchange Commission (SEC) to relax certain in-person meeting requirements for the renewal of an advisory agreement or underwriting agreement, selection of the fund’s independent registered public accountant or renewal of a fund’s 12b-1 plan in limited situations, as described below.

No-Action Relief

On February 28, 2019, the SEC staff issued a no-action letter in response to the IDC’s request, stating that the staff would not recommend enforcement action for violations of Sections 12(b), 15(c) or 32(a) of the 1940 Act, or Rules 12b‑1 or 15a-4(b)(2) promulgated thereunder, if a fund’s board made approvals under these sections via teleconference, videoconference or other similar means by which all participating directors may participate and communicate with each other simultaneously during a meeting, in cases where:

  1. The fund’s directors were unable to meet in person due to unforeseen or emergency circumstances, and no material changes were proposed to the relevant contract, plan or arrangement, and the directors ratified the approval at the next in-person meeting; or
  2. The directors, at a prior in-person meeting, discussed and considered all relevant and material factors, but did not hold a vote at that time (provided no director requests another in-person meeting).


For purposes of paragraph 1, “unforeseen or emergency circumstances,” as described by the IDC and accepted by the staff, include any circumstances that the board determines could not have been reasonably foreseen or prevented and that make it impossible or impractical for directors to attend a meeting in person. Such circumstances would include situations such as the illness or death of a director or director’s family member, weather events or natural disasters, acts of terrorism or disruptions in travel. This relief applies only to the renewal of an advisory agreement or underwriting agreement, selection of the fund’s independent registered public accountant (provided the accountant is the same as in the prior year) or renewal of a fund’s 12b-1 plan.

For purposes of paragraph 2, the IDC gave the following examples in its request:

  • Directors choose to wait for a particular event to occur (such as a change in control) before casting an official vote.
  • Directors wish to select an independent registered public accountant who has already been selected at a prior in-person meeting for other funds within the complex that have different fiscal years, and the directors determine that no additional information is needed from the accountant.
  • Directors postpone a vote contingent on the receipt or approval of certain information, and they have determined that the information, when received, would not be likely to change any director’s vote.

This relief applies to the renewal or approval of an advisory agreement or underwriting agreement, approval of an interim advisory contract, selection of the fund’s independent registered public accountant, or renewal or approval of a fund’s 12b-1 plan.

Outlook

Although boards must continue to meet in person under business as usual circumstances, this no-action relief will prevent the lapse of important agreements, plans and arrangements in situations where an in-person meeting is impracticable or impossible, and thus prevent boards from having to reinstate lapsed agreements through costly and unnecessary shareholder votes. If a board chooses to take advantage of this no-action relief, it should retain clear documentation illustrating how its particular circumstances are consistent with the situations contemplated by the no-action relief.

FOR MORE INFORMATION

For more information, please contact:

Andrew J. Davalla
614.469.3353
Andrew.Davalla@ThompsonHine.com

Krisztina Nadasdy
614.469.3243
Krisztina.Nadasdy@ThompsonHine.com

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