Monday, March 04, 2019

SEC staff agrees to waive in-person voting requirements for fund boards in some instances

By John Filar Atwood

In certain circumstances, investment company board members no longer have to meet in person to vote on matters before the board, according to the staff of the SEC’s Division of Investment Management. In a no-action letter issued to the Independent Directors Council (IDC), the staff said that voting by telephone, video conference, or other means would not diminish the board’s ability to carry out its oversight role or other specific duties. The position extends to business development companies as well as investment companies and series thereof.

In the letter, the staff stated that in light of market, regulatory, and technological developments, it has continued to review existing director responsibilities to determine whether they are appropriate and are carried out in a manner that serves the shareholders’ best interests. The staff believes that the relief requested by IDC will remove significant or unnecessary burdens for funds and their boards.

The staff indicated that it will not recommend enforcement action for violations of Investment Company Act Sections 12(b), 15(c) or 32(a), or Rules 12b-1 or 15a-4(b)(2) thereunder if fund boards do not adhere to in-person voting requirements in certain cases.

Applicable situations. The relief applies in situations where the directors needed for the required approval cannot meet in person due to unforeseen or emergency circumstances, provided that no material changes to the relevant contract, plan and/or arrangement are proposed to be approved at the meeting and the directors ratify the applicable approval at the next in-person board meeting (“Scenario 1”). It also applies where the directors needed for the required approval previously fully considered all material aspects of the proposed matter at an in-person meeting but did not vote on the matter at that time, provided that no director requests another in-person meeting (“Scenario 2”).

IDC requested no-action relief with respect to the following actions: 1) renewal (or approval or renewal in the case of Scenario 2) of an investment advisory contract or principal underwriting contract pursuant to Section 15(c); 2) approval of an interim advisory contract pursuant to Rule 15a-4(b)(2) with respect to Scenario 2 only; 3) selection of the fund’s independent public accountant pursuant to Section 32(a) (with respect to Scenario 1, the accountant must be the same accountant as selected in the immediately preceding fiscal year); and 4) renewal (or approval or renewal in the case of Scenario 2) of the fund’s 12b-1 plan.

In its letter, IDC described unforeseen or emergency circumstances as those that 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 could 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.

Consistent with prior relief. IDC argued that relief in this area would be consistent with prior positions taken by the staff in exemptive orders and no-action letters. IDC cited relief granted by the staff in the wake of the September 11, 2001 attacks and during the 2008 financial crisis.

In addition to the arguments put forth by IDC, the staff said that in reaching its decision it also considered the views expressed by the Mutual Directors Forum in a June 2017 letter to Chairman Jay Clayton.