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Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Rules and Regulations
J. Funds
structures, several commenters observed that split-ticket voting that results in dissident directors joining a fund board could disrupt the widespread practice of unitary and cluster boards at funds,169
which could lead to additional and costly administrative complexities and redundancies for funds that ultimately would be borne by fund shareholders.170
In addition to providing reasons that the universal proxy rules should not apply to funds generally, some commenters also discussed the application of those universal proxy rules to specific types of management investment companies. Specifically, some commenters stated that universal proxies are not necessary for open-end funds because open-end funds are not required to have annual shareholder meetings and investors are able to redeem at net asset value, resulting in contested elections being rare.171 With regard to closed-end funds and BDCs, several commenters also suggested that universal proxies are not necessary because dissidents almost always nominate a full slate of nominees in order to achieve a specific objective, such as a liquidation event.172
Therefore, according to these commenters, shareholders typically have a binary choice to vote with fund management or against it and these commenters believed such binary choices would likely continue with the use of a universal proxy card.173
On the other hand, many commenters opposed the exclusion of funds generally, and registered closed-end funds and BDCs in particular, from the Proposed Rules.174 Some commenters contended that because of the large retail investor base of registered closedend funds and BDCs, it is difficult for shareholders to effect change when necessary.175 One commenter expressed support for universal proxies for BDCs
1. Proposed Rules The Proposed Rules excluded funds.
Like operating companies, funds have boards of directors that are elected by shareholders. Also like operating companies, fund boards have significant responsibilities in protecting shareholder interests and funds are subject to the Federal proxy rules.
However, fund shareholders also have important rights granted to them under the Investment Company Act of 1940
that distinguishes funds from operating companies. For reasons detailed in the Proposing Release,165 the Commission did not propose to apply the universal proxy requirement to funds, but solicited comment on whether funds should be covered by the Proposed Rules. In the Reopening Release, the Commission observed that since the Proposing Release, there had been certain developments in corporate governance matters affecting funds, particularly registered closed-end funds and BDCs. In light of such developments, the Commission stated that it was considering applying the proposed universal proxy card requirements to registered closed-end funds and BDCs and again solicited comment on whether funds should be covered by the Proposed Rules, with particular emphasis on issues related to such funds.166

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2. Comments Received Comments received in response to the Proposing Release and Reopening Release were mixed. On the one hand, many commenters supported excluding funds from the Proposed Rules because of the differences between funds and operating companiesincluding the investor protections provided by applicable securities laws and regulations and fund governance structures.167 With respect to statutory and regulatory protections, some commenters observed that the Investment Company Act of 1940
supplements state law to provide shareholders with the right to approve fundamental fund features, including the right to approve the investment advisory contract and any material amendments to the investment advisory contract and changes to any of a funds fundamental investment policies.168
With respect to fund governance 165 See
Proposing Release at Section II.D.
Reopening Release at Section II.
167 See, e.g., letters from ICI; CII; Fidelity; letter dated Jan. 9, 2017 from Independent Directors Council IDC; letter dated Feb. 27, 2017 from Mutual Fund Directors Forum Forum.
168 See letters from CII, ICI; IDC; Fidelity.
166 See
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169 See
letters from ICI; IDC; Fidelity; Forum.
letters from ICI; IDC; Forum. In addition, those commenters explained that a dissident director may disrupt other fund governance standards such as standards regarding disinterested and independent directors.
171 See letters from ICI; IDC; Fidelity; Forum.
172 See letters from Forum; ICI; see also letter from IDC. One commenter stated that to serve the interests of long-term investors, the Commission should provide closed-end funds with more protections against activist investors and not erode the protections and benefits offered by closed-end funds. See letters from ICI.
173 See letters from ICI; IDC; Forum.
174 See letters from Bulldog; Ad Hoc Coalition; E.
Burke; BM; Mediant; letter dated Jan. 12, 2017 from Blue Bell Private Wealth Management; letter dated Feb. 3, 2017 from Almitas Capital Almitas;
letter dated Jun. 29, 2021 from Saba Capital Management, L.P. Saba.
175 See letters from Almitas; Bulldog.
170 See
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and closed-end funds and suggested that whether shareholders of such entities are well-served by unitary or cluster boards is an open question.176 Another commenter stated that the administrative efficiency of a unitary board structure, while worth considering, should be secondary to allowing shareholders to promote nominees of their choosing to effect the investment objectives of the fund.177 A
separate commenter recommended extending the Proposed Rules to closedend funds and BDCs, but not to openend funds, given the latters greater organizational complexity and the extreme rarity of proxy contests affecting them.178
3. Final Amendments The final rules we adopt in this document will not apply to funds at this time, as the Commission continues to consider any application of the rules to funds. Developments since 2016, along with various comments discussed above that we have received have led us to conclude that further consideration of potential application of the universal proxy rules to certain funds is warranted.
K. Compliance Dates Because the rule amendments we adopt in this document involve significant changes to the manner in which election contests are conducted, a transition period is appropriate. New Rule 14a19 imposes notice and other mandates that will require planning and coordination by both parties to an election contest. Therefore, to avoid disruption to the upcoming proxy season, the rule changes we adopt in this document will become effective for any shareholder meeting featuring an election contest held after August 31, 2022. The length of this transition period is designed to allow adequate time for affected parties to plan and prepare for compliance with the new rules, and to adjust to the elimination of existing provisions, such as the short slate rule.
Some of the rule amendments we adopt in this document will apply to all director elections, not just those that are contested. While these changes do not require coordination and notice to the other party, as is required in a contested election, they do involve enhanced disclosure of the legal effect of votes under the applicable voting standard for the election. The amendments also impose new voting options where the 176 See
letter from Ad Hoc Coalition.
letter from Saba.
178 See letter from Mediant.
177 See
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