On October 4, 2010, the SEC stayed its rule amendments facilitating shareholder director nominations (referred to as the proxy access rule), pending judicial review of a challenge brought by the Business Roundtable and the Chamber of Commerce of the United States. Release Nos. 33-9149, 34-63031, IC-29456 (October 4, 2010). The result is that rule amendments are not expected to be in effect for the 2011 proxy season.

While the proxy access rule applies to mutual funds (open-end management investment companies), most mutual funds rarely have a meeting of shareholders to elect directors. Therefore, in the normal course, the proxy access rule will likely have little impact on mutual funds.

However, should a mutual fund hold a meeting of shareholders to elect directors, the fund would need to first file a Form 8-K (a form heretofore not applicable to mutual funds) indicating a date by which a nominating shareholder or shareholders must give the fund notice of its nominee. This date must be a date that is a reasonable time before the mutual fund mails its proxy material. The SEC's adopting release did not give any guidance as to what it meant by “reasonable.” While it seems unlikely that a mutual fund investor holding three percent of the fund's shares continuously for a three-year period would be so dissatisfied with fund management to nominate an independent director, the requirement to give reasonable notice of the period that shareholders have to nominate a director will slow the proxy process.

For a shareholder to be eligible to have its nominee included in a proxy statement, the following (among other) requirements must be satisfied:

  • The nominating shareholder or shareholders must hold at least three percent of the outstanding shares that are entitled to vote in the election (series of a series mutual fund will be aggregated for purposes of this requirement)
  •  The nominating shareholder or shareholders must have held the minimum number of shares constituting three percent continuously for a three-year period
  • The nominating shareholder or shareholders may not hold any shares with the purpose, or with the effect, of changing control of the mutual fund
  • The nominee must be an independent director, if elected (the nominee does not need to be independent with respect to the shareholder)
  • The nominating shareholder or shareholders must give the mutual fund notice of its nominee a reasonable time before the mutual fund mails its proxy material
  • The nominating shareholder or shareholders may nominate the greater of the number of nominees that represents 25 percent of the mutual fund's board of directors (rounded down to the nearest whole number) or one nominee