Following a request from the Independent Directors Council (a registered investment company board advocacy group affiliated with the trade association Investment Company Institute), the SEC staff has provided relief from certain sections of the Investment Company Act of 1940 and the rules under that act regarding in-person voting requirements. In its no-action letter, the SEC’s division of investment management noted that the IDC stated certain in-person voting requirements might create a “significant or unnecessary burden for funds and their boards that outweigh[s] any benefits to fund shareholders.”
Those requirements relate to (1) the approval and renewal of investment advisory and principal underwriting contracts, (2) Rule 12b-1 plans, (3) approval of interim advisory contracts, and (4) selection of independent public accountants.
In those instances, the no-action letter provides that SEC staff would not recommend enforcement action when directors fail to adhere to in-person voting requirements but instead give the required approvals telephonically, by video conference or through another means of simultaneous communication.
The letter indicates that regulatory relief is available in the following circumstances:
- Unforeseen or emergency circumstances preventing the directors from meeting in person, where there is no material change to the contract, plan or arrangement, and where the directors ratify the approval at the next in-person board meeting. This relief applies to:
- Renewal of an investment advisory contract or principal underwriting contract pursuant to Section 15(c) of the 1940 Act;
- Selection of the fund’s independent public accountant pursuant to Section 32(a) of the 1940 Act, if the accountant is the same one that was selected in the immediately preceding fiscal year; and
- Renewal of the fund’s 12b-1 Plan.
- The directors have already fully discussed and considered all material aspects of the proposal at an in-person meeting but did not vote on the matter. Additionally, this relief is only available if no director requests another in-person meeting. This relief applies to the:
- Approval or renewal of an investment advisory contract or principal underwriting contract pursuant to Section 15(c) of the 1940 Act;
- Approval of an interim advisory contract pursuant to Rule 15a-4(b)(2) under the 1940 Act;
- Selection of the fund’s independent public accountant pursuant to Section 32(a) of the 1940 Act; and
- Approval or renewal of the fund’s 12b-1 Plan.
The letter also provides information on the circumstances that might be considered “unforeseen or emergency circumstances” for the purposes of the relief. These are circumstances that, as determined by the board, could not have been reasonably anticipated or prevented, and that make it impossible or impracticable for directors to attend in person. These include illness, death, natural disasters, acts of terrorism and disruptions in travel.
The second set of circumstances could arise if the directors prefer to vote after a contingent event takes place, after they receive certain requested information or after certain information is confirmed (if the directors determined at the in-person meeting that the nature of the information to be confirmed or provided would not be likely to change the vote). Additionally, the directors could have selected the same independent public accountant at a later date for other funds in the same fund complex, if a majority of directors have concluded they did not require additional information from the accountant.
The purpose of this relief is to reflect advances in technology since the requirement of in-person meetings was first implemented in 1970. It helps limit board expenses and promote efficiency. However, this relief is limited to certain specific circumstances, and SEC staff cautioned the no-action letter is not a rule, regulation or statement of the SEC.
Notwithstanding the issuance of the no-action letter by the staff of the SEC, there are risks in relying on mere staff guidance. Section 47 of the Investment Company Act states that a “contract that … involves a violation of [the Act] … is unenforceable.” Provisions of the advisory contract itself, or of state law, may apply limitations independent of the Investment Company Act. The current SEC Chairman has stated that no-action letters are not legally binding, including on the Commission. Investment company boards should, therefore, carefully consider what can or should be done to confirm any actions taken in reliance on the IDC letter.