The U.S. Securities and Exchange Commission (the Commission) recently published for comment a proposed rulemaking soliciting comments on the proposed changes to New York Stock Exchange (the NYSE) Rule 452 that would eliminate discretionary broker voting for the election of directors.3 In response to the Commission’s request for comments on the proposed rulemaking, Sutherland submitted a comment letter on March 31, 2009, requesting that the NYSE and the Commission make a technical amendment to the proposed rulemaking to except all investment companies, including BDCs, from the proposed rulemaking so that BDCs may continue to permit discretionary broker voting for the election of directors.

The proposed rulemaking excepts registered investment companies so that they may continue to permit brokers to vote for the election of directors regardless of whether or not they have received instructions from the beneficial owners of the securities. The exception for registered investment companies came about as a result of the efforts of the Investment Company Institute (ICI), which assisted the NYSE Proxy Working Group and the NYSE staff in considering the disproportionate impact of the proposed changes to Rule 452 on investment companies. Specifically, the ICI emphasized that the proposed changes to Rule 452 would create significant difficulties for investment companies in achieving quorums and electing fund directors as a result of their large retail shareholder base.

Unfortunately, BDCs are not excepted from the proposed changes to Rule 452 because BDCs are not technically “registered” under the 1940 Act pursuant to § 8 but rather “elect to be regulated as a BDC” by filing a notification as required by § 54 of the 1940 Act. As a result of the reference in the proposed rulemaking to “registered investment companies” rather than just “investment companies,” BDCs must comply with the proposed rulemaking despite the fact that registered investment companies and BDCs share the same characteristics that gave rise to the exception provided to registered investment companies—namely, regulatory structure and a large retail shareholder base.

A copy of this letter has been posted to our Web site and is available here.