On February 28, 2019, the staff of the SEC’s Division of Investment Management granted no-action relief in connection with the 1940 Act’s in-person meeting requirements under Section 15 of the Investment Company Act of 1940 (the “1940 Act”).[1]  This relief would apply to the boards of directors of a registered investment companies (each a “fund”) and would permit them to, under certain delineated circumstances, approve certain investment advisory and principal underwriting contracts of a fund, the 12b-1 plan of a fund and the selection of a fund’s independent public accountant telephonically, either by video conference or by other means by which all participating directors may participate and communicate with each other simultaneously during a meeting.

Section 15(a)(2) of the 1940 Act provides that an investment advisory contract with a fund “shall continue in effect for a period of more than two years from the date of its execution, only so long as such continuance is specifically approved at least annually by the board of directors or by a vote of a majority of the outstanding voting securities of such company.” In addition, Section 15(b) of the 1940 Act establishes an identical requirement for a principal underwriting contract for a fund. Section 32(a)(1) and Rule 32a-3 thereunder effectively require board approval of the selection of an independent public accountant for a fund at least annually. Under Sections 15(c) and 32(a), respectively, the annual renewal of an advisory or principal underwriting contract or approval of the selection of an independent public accountant is required to include the vote of a majority of the fund’s independent directors “cast in person at a meeting called for the purpose of voting” on such approval (each of the above three scenarios being a “Required Approval”).

The no-action relief granted with respect to the 1940 Act’s in-person requirement would only apply under two specific circumstances:

  • Relief #1 applies when the fund directors needed for the Required Approval cannot meet in person due to unforeseen or emergency circumstances, provided that (i) no material changes to the relevant contract, plan and/or arrangement are proposed to be approved, or are approved, at the meeting, and (ii) such directors ratify the applicable approval at the next in-person board meeting.  As described in the incoming letter requesting no-action relief (the “Incoming Letter”), unforeseen or emergency circumstances include any circumstances that, as determined by the board, could not have been reasonably foreseen or prevented and that make it impossible or impracticable for the fund’s directors to attend a meeting in-person.  Such circumstances would include, but not be limited to, illness or death, including of family members, weather events or natural disasters, acts of terrorism and travel disruptions that prevent some or all directors from attending the meeting in person.
  • Relief #2 applies when fund directors needed for the Required Approval previously fully discussed and considered all material aspects of the proposed matter at an in-person meeting, but did not vote on the matter at that time, provided that no director requests another in-person meeting. The Incoming Letter described this specific scenario further and explained that it could arise, for example: (i) if a fund’s directors prefer to wait to vote until after a contingent event takes place, such as the vote of shareholders of the investment adviser (or its parent company) with respect to a proposed change of control of the adviser (or its parent company); (ii) if a majority of independent directors have selected the independent public accountant for certain funds in a fund complex and subsequently select the same independent public accountant at a later date for other funds in the same fund complex that have different fiscal years and a majority of the independent directors have concluded that no additional information is needed from the independent public accountant; or (iii) if the directors wish to wait to vote on a matter until further requested information is provided or previously-provided information is confirmed, and they determine at the in-person meeting that the nature of the information to be provided or confirmed would not be likely to change the vote of any director needed for the Required Approval.

In addition, Relief #1 or Relief #2 would only apply to Required Approvals for the following specified board actions:

  1. renewal (or approval or renewal in the case of Relief #2) of an investment advisory contract or principal underwriting contract pursuant to Section 15(c) of the 1940 Act;
  2. approval of an interim advisory contract pursuant to Rule 15a-4(b)(2) under the 1940 Act (with respect to Relief #2 only);
  3. selection of the fund’s independent public accountant pursuant to Section 32(a) of the 1940 Act (with respect to Relief #1, such accountant must be the same accountant as selected in the immediately preceding fiscal year); and
  4. renewal (or approval or renewal in the case of Relief #2) of a fund’s 12b-1 plan.

In the letter granting no-action relief, the SEC staff noted that the requested relief “would remove significant or unnecessary burdens for funds and their boards” and that the SEC staff did not believe that the relief “would diminish the board’s ability to carry out its oversight role or other specific duties.”

[1] Independent Directors Council, SEC No-Action Letter (Feb. 28, 2019), available at https://www.sec.gov/divisions/investment/noaction/2019/independent-directors-council-022819.

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