On October 26, 2016, the SEC proposed amendments to the proxy rules that would require the use of a “universal proxy” – a proxy card that includes the name of all duly nominated director candidates for whom proxies are solicited – for all nonexempt solicitations in contested elections. The proposed universal proxy seeks to address the issue that shareholders voting by proxy are limited to the selection of candidates provided by the soliciting party, whereas shareholders voting in person may select among all of the duly nominated director candidates proposed by any party and vote for any combination of those candidates. In this regard, the proposed universal proxy is based on the SEC’s view that the proxy voting process “should mirror to the greatest extent possible the vote that a shareholder could achieve by attending the shareholders’ meeting and voting in person.”

As proposed, the amendments would not apply to registered funds and business development companies (BDCs). In this connection, the SEC observed that, among other things, open-end funds are generally not required to hold annual shareholder meetings pursuant to the state laws under which they are organized and that contested elections at such funds are rare. For exchange-listed closed-end funds and BDCs, as to which contested director elections are more common compared to open-end funds, dissidents in elections generally have not sought split-ticket voting and, instead, have sought to reduce discounts to net asset value (NAV) either by gaining control of the board of directors or terminating the fund’s advisory contract and subsequently replacing the adviser.

Notwithstanding these observations, the proposing release issued by the SEC seeks comment and data to further inform the SEC as to whether the use of universal proxies should be required in proxy contests for the election of directors of funds or BDCs. Among the questions raised in the proposing release are:

• Should the use of universal proxies be mandatory as applied to investment companies generally, or should their use be mandatory only with respect to certain types of investment companies (e.g., only to closed-end funds or only BDCs)? Should it be optional? Should a hybrid system be applied?

• Should any aspect of the proposed universal proxy system be modified to account for the unique characteristics of investment companies? Would a universal proxy system affect funds and BDCs differently than operating companies?

• How would a universal proxy system affect unitary or cluster boards?

• Would the frequency of contested elections increase or decrease for investment companies under a universal proxy system?

• To what extent do investment companies generally, and open-end funds, closed-end funds and BDCs in particular, experience exempt solicitations under the current proxy rules?

• Should special rules regarding notice apply for investment companies that do not regularly hold annual meetings?