LawFlash

SEC Staff Relieves Fund Boards of Certain In-Person Voting Requirements

March 04, 2019

The US Securities and Exchange Commission staff provides new no-action relief to fund boards of directors from in-person voting requirements under certain circumstances.

The staff of the Division of Investment Management of the US Securities and Exchange Commission issued a no-action letter on February 28 relieving fund boards of directors from in-person voting requirements in certain circumstances.[1] In issuing the no-action letter, the staff agreed that the relief would remove significant or unnecessary burdens for funds and their boards, and would not diminish a board’s ability to carry out its general oversight role or other specific duties.

The Investment Company Act of 1940 and rules thereunder provide that the approval or renewal of an advisory contract, principal underwriting contract, or Rule 12b-1 plan, as well as the selection of a fund’s independent public accountant, requires the vote of a majority of the fund’s independent directors “cast in-person at a meeting called for the purpose of voting” on such matter.[2] Historically, this has been viewed as requiring directors to be physically present when voting. The no-action letter relieves directors from the in-person meeting requirement with respect to certain matters and instead permits voting to be conducted telephonically, by video conference, or by other means by which all participating directors may participate and communicate with one another simultaneously, under the following circumstances:

  • The directors needed for the required approval cannot meet in person due to unforeseen or emergency circumstances, provided that (1) no material changes to the relevant contract, plan, and/or arrangement are proposed to be approved, or approved, at the meeting; and (2) such directors ratify the applicable approval at the next in-person board meeting (Relief Category 1).
  • 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, provided that no director requests another in-person meeting (Relief Category 2).

The no-action position applies only to the following actions.

Board Action Item

Relief Category 1

Relief Category 2

Advisory Contract

No-action relief is applicable to renewals only.

 

No-action relief is applicable to both approvals and renewals.

Principal Underwriting Contract

No-action relief is applicable to renewals only.

 

No-action relief is applicable to both approvals and renewals.

Rule 15a-4(b)(2) Interim Advisory Agreement[3]

 

No relief provided.

No-action relief is applicable to approvals.

Selection of Auditor

No-action relief is applicable to approvals, but the auditor must be the same auditor as selected in the immediately preceding fiscal year.

 

No-action relief is applicable to approvals with no additional conditions.

12b-1 Plan

No-action relief is applicable to renewals only.

No-action relief is applicable to both approvals and renewals.


Relief Category 1 addresses situations where directors are unable to meet in person due to unforeseen or emergency circumstances. For purposes of the relief, unforeseen or emergency circumstances include any circumstances 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 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.[4] Determining whether a particular circumstance is unforeseen or an emergency is ultimately the responsibility of the board. This relief applies only to board actions where a fund’s board is renewing an existing advisory contract, principal underwriting contract, Rule 12b-1 plan, or independent public accountant arrangement, and no material changes are proposed or made to the contract, plan, or arrangement. The staff noted, however, that the no-action relief would not apply in situations such as a change in control of a fund investment adviser that results in the termination of the prior contract. Funds would need to continue to seek individualized relief in those circumstances.

Relief Category 2 addresses situations where directors previously fully discussed and considered all material matters related to a proposed action at an in-person meeting but did not vote at the in-person meeting. Such situations could arise, for example, (1) 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; (2) 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 (3) 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.[5]

The staff’s relief from the in-person voting requirements for board approvals is the most recent product of the staff’s continued efforts to review and modernize existing director responsibilities where appropriate, and follows the staff’s October 2018 determination to grant no-action relief permitting fund directors to rely on representations from the fund’s chief compliance officer that certain affiliated transactions are in compliance with the relevant rule and the board’s procedures.[6] While it is not clear at this point that the staff is considering additional opportunities to grant similar relief in connection with its ongoing review of board responsibilities, we look forward to similar future developments.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Boston
Lea Anne Copenhefer
Barry N. Hurwitz
Roger P. Joseph
Jeremy B. Kantrowitz
Paul B. Raymond
Toby R. Serkin
Mari Wilson

Los Angeles
Michael Glazer

New York
Elizabeth L. Belanger
Brendan R. Kalb

Orange County
Laurie A. Dee

Philadelphia
David W. Freese
Sean Graber
Timothy W. Levin
John J. O’Brien

Washington, DC
Magda El Guindi-Rosenbaum
Laura E. Flores
Thomas S. Harman
W. John McGuire
Christopher D. Menconi
Monica L. Parry
Joshua B. Sterling
Joseph (Beau) Yanoshik



[1]  Independent Directors Council (pub. avail. Feb. 28, 2019). In addition to registered management investment companies or separate series thereof, the staff’s position also extends to business development companies as defined under Section 2(a)(48).

[2]  Section 15(c) (with respect to advisory and principal underwriting contracts), Rule 12b-1 (with respect to Rule 12b-1 plans), and Section 32(a) (with respect to independent public accountant arrangements).

[3] In cases where an advisory contract is terminated by assignment and an adviser receives money or other benefit in connection with the assignment, Rule 15a-4(b)(2) permits the adviser to operate under an interim contract if, among other requirements, the board, including a majority of the independent directors, approves the interim contract in person before the termination of the prior contract.

[4] The Commission and its staff have previously granted exemptive and no-action relief from the in-person voting requirements in unforeseen or emergency circumstances. For example, exemptive relief or no-action relief was provided in the weeks following the terrorist attacks of September 11, 2001, and in connection with the 2008 financial crisis. The current no-action position is intended to remove uncertainty regarding the availability of the type of relief granted in the past and to minimize any need for individual fund families or trade associations to seek relief in future unforeseen or emergency situations.

[5] If information provided after the in-person meeting results in a change in the vote of any director, or any director requests another in-person meeting in order to vote, the directors would meet in person an additional time to reconsider the matter.

[6] Independent Directors Council (pub. avail. Oct. 12, 2018).