SEC Opposes Closed-End Fund Use of Antitakeover Statute
- The staff of the Securities and Exchange Commission, in a no-action letter, has taken the position that a registered closed-end fund may not opt in to the Maryland Control Share Acquisition Act. Boulder Total Return Fund (Nov. 15, 2010). The issue had been unresolved, with some published commentary arguing that the MCSAA is available to closed-end funds. The SEC staff position effectively removes an important antitakeover device for closed-end funds. Although the letter was issued the next business day after the submission of a request letter, it is carefully researched and obviously represents the considered view of the SEC's Division of Investment Management. It is not clear whether there is any connection between its timing and the impending departure of Division Director Buddy Donohue.
The no-action letter was issued under Section 18(i) of the Investment Company Act of 1940, which generally provides that every share of stock issued by a registered management investment company or business development company shall be a voting stock and have equal voting rights with every other outstanding voting stock. The Maryland statute provides that, when an investor crosses certain threshold percentages of stock ownership, the investor's shares lose their voting rights, unless the voting rights are restored by a shareholder vote in which the investor may not participate. The statute's purpose is to compel prospective acquirers to deal directly with a corporation's management, rather than obtaining significant voting power through market purchases. The SEC staff stated that nullifying the voting rights of an acquiring person as contemplated by the MCSAA would be inconsistent with Section 18(i) because the acquiring person would no longer presently be entitled to vote such shares for the election of directors - which is, the staff noted, precisely the aim of the MCSAA.
Many closed-end funds are organized in Maryland, so the no-action letter will have broad applicability. The no-action letter lists 25 other states with control share acquisition statutes and notes that the same analysis may be applicable to them. The letter also addresses business development companies, which are subject to the MCSAA unless they opt out of it (in contrast to the opt-in coverage for closed-end funds). The letter states that it would be inconsistent with Section 18(i) for a business development company organized under Maryland law to fail to opt out of the MCSAA.
The no-action letter is available online at
The Boulder Total Return Fund was also the subject of another no-action letter this year, refusing to allow closed-end funds to omit from their proxy statements a shareholder proposal that would, under some circumstances, require the fund's board of directors to terminate the fund's investment advisory agreement. That letter is discussed in my post at
John M. Baker <JMB@...>
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
FundLaw Listowner http://groups.yahoo.com/group/fundlaw