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SEC (Securities and Exchange Commission) Guidance on Unbundling Proxy Proposals

The Division of Investment Management issued an Investment Management Guidance Update on amending investment company charters in light of Rule 14a-4 promulgated under the Exchange Act.

The guidance states that Rule 14a-4, the "unbundling" rule, requires that the form of proxy "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 provide separate boxes for shareholders to choose between approval, disapproval, or abstention "with respect to each separate matter . . . ." The SEC believes that breaking out each proposal allows each shareholder to express his or her view to management on each matter up for vote. While some matters may be presented together, as discussed in the updated Exchange Act Rule 14a-4(a)(3) Compliance and Disclosure Interpretations, if the Investment Company Act, state law, or a fund’s organizational documents require a matter to be submitted to shareholders, that matter should be voted on separately.

The guidance further notes that the Division staff has commented that proposed amendments to investment company charters should be unbundled, providing shareholders with the opportunity to separately vote on each proposed material amendment. In considering the materiality of a proposal, the staff advised investment companies to consider whether a given matter "substantively affects shareholder rights" and provided the following examples of proposed amendments that would be material: (i) amending voting rights from one vote per share to one vote per dollar of net asset value; (ii) authorizing a fund to involuntarily redeem small account balances; (iii) authorizing a fund to invest in other investment companies; (iv) changing supermajority voting requirements; (v) authorizing the board to terminate a fund or merge with another fund without shareholder vote; and (vi) authorizing the board to make future amendments to the charter without a shareholder vote.

Sources: Investment Management Guidance Update No. 2014-2, Unbundling of Proxy Proposals – Investment Company Charter Amendments (February 2014); Securities Exchange Act Rules Compliance and Disclosure Interpretations (January 24, 2014), available at http://www.sec.gov/divisions/corpfin/guidance/14a-interps.htm.

Copyright © 2020 Godfrey & Kahn S.C.National Law Review, Volume IV, Number 123
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Chris Cahlamer Investment Management Attorney
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Chris Cahlamer is the team leader of the firm’s Investment Management Practice Group, where he practices in investment management and securities law, focusing on investment companies, investment advisers, regulatory examinations, new product development, SEC compliance and reporting obligations, CCO support, private fund formation and operation, investment company reorganizations, investment advisor mergers and acquisitions, and general corporate and board fiduciary issues.

Chris earned his law degree, summa cum laude, at Marquette University Law School. While there, he...

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Susan Hoaglund, Investment Management Attorney, Godfrey Kahn law firm
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Susan Hoaglund is a member of the Investment Management Practice Group. Susan provides advice to investment advisers, investment companies, broker-dealers and banks regarding legal, regulatory and compliance matters.

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