SEC Staff Denies No-Action Relief to Fund Requesting to Exclude Shareholder Proposal

Who may be interested: Boards of Directors of registered funds seeking to exclude shareholder proposals pursuant to Rule 14a-8 under the Exchange Act.

Quick Take: The SEC staff declined—twice—to grant no-action relief to a closed-end fund seeking to exclude a shareholder proposal on the basis that (i) the proposal related to ordinary business operations, and (ii) the fund had substantially implemented the proposal.

On August 26, 2022, the staff of the SEC’s Division of Investment Management (the Staff) declined to grant no-action relief to a registered, closed-end investment company (the Fund) seeking to exclude a shareholder proposal from the Fund’s annual proxy materials. The Fund sought to exclude the proposal on the basis that the proposal addressed “ordinary business operations” of the Fund’s management, making the proposal excludable from proxy materials pursuant to Rule 14a-8(i)(7).

On October 19, 2022, the Staff again declined to grant no-action relief to the Fund, which re-submitted its request on the ground that the Fund had “substantially implemented” the proposal, making it excludable under Rule 14a-8(i)(10).

The shareholder proposal requests that the Fund’s board of directors (the Board) form a special committee of independent directors to investigate suitable alternatives to replace the Fund’s current investment manager (the Adviser). The shareholder submitting the proposal has a history of submitting proposals to public companies, often relating to corporate governance issues.

After the Staff initially denied no-action relief, the Board acted on the recommendation of its governance and compliance committee by establishing a special committee comprised of all the independent directors of the Board (the Committee) with the purpose of evaluating suitable alternative investment managers to replace the Adviser. The Fund again sought the Staff’s assurance of no-action relief, stating that the formation of the Committee substantially implemented the shareholder’s proposal.

Shortly thereafter, the proposing shareholder’s designated proxy—another notable activist investor with a history of making similar proposals—submitted a series of letters to the Fund and the Staff responding to the Fund’s request for reconsideration of no-action relief. The Fund responded by reaffirming its stance that establishing the Committee substantially implemented the shareholder proposal.

After considering the Fund’s renewed request, the Staff again declined to grant assurance that it would not recommend enforcement action to the SEC if the Fund excluded the shareholder proposal from its proxy materials in reliance on Rule 14a-8.

The latest letter denying no-action relief can be found here.

The Fund’s renewed requests for relief can be found here and here.