In February 2014, the Staff of the Division of Investment Management of the SEC published a Guidance Update in response to inquiries regarding amendments to fund charters in light of the “unbundling” requirements of Rule 14a-4 under the Exchange Act. Rule 14a-4, in relevant part, requires a form of proxy to identify clearly and impartially each separate matter to be acted upon, whether or not related to or conditioned on the approval of other matters and to provide separate boxes for shareholders to choose between approval, disapproval or abstention with respect to each matter intended to be acted upon.
The Guidance Update reiterates the Staff’s long-time position that a matter should be voted upon separately if the 1940 Act, state law or a fund’s organizational documents (charter and/or by-laws) require a matter under consideration to be submitted to shareholders. The Guidance Update further states that proposed amendments to the charters of funds should be “unbundled” for each proposed material amendment. The Staff acknowledged that, while there is no bright-line test for determining materiality in the context of Rule 14a-4, funds should consider whether a matter substantively affects the rights of shareholders. The Guidance Update provides the following examples of material amendments to fund charters that should be presented separately: (1) amending shareholder voting rights and preferences; (2) authorizing a fund to involuntarily redeem small account balances; (3) authorizing a fund to invest in other funds; and (4) authorizing the board to terminate a fund, merge with another fund or to make future amendments to the charter without a shareholder vote.
The Guidance Update further notes that Rule 14a-4 does not prohibit a fund from “bundling” non-substantive charter amendments with a single material amendment or from conditioning effectiveness of any proposal on the adoption of one or more other proposals.
The Guidance Update is available at: www.sec.gov/divisions/investment/guidance/im-guidance-2014-02.pdf