Registered Closed-End Funds May Exclude Investor’s Advisory Proposal to Declassify Board

In a February 16, 2024 no-action letter, the staff of the SEC’s Division of Investment Management assented to the request of three Nuveen closed-end funds not to recommend enforcement action if the funds exclude a shareholder proposal by a self-described “activist” investor, Saba Capital Management, L.P., from the funds’ proxy materials in reliance on Rule 14a-8(b)(1) under the Securities Exchange Act of 1934. Rule 14a-8(b)(1) governs who is eligible to submit a shareholder proposal, mandating that they be a shareholder of “securities entitled to vote” on any given proposal.

• Saba submitted a non-binding advisory proposal to the effect that each fund’s Board of Trustees “take all necessary steps in its power to declassify the Board so that all directors are elected on an annual basis starting at the next annual meeting of shareholders.”
• In their no-action request, the funds – which are organized as Massachusetts business trusts – relied on the facts that (i) the rights of shareholders of a Massachusetts business trust are defined primarily by its declaration of trust and bylaws, and (ii) each fund’s declaration of trust provides that shareholders are permitted to vote only on specific matters enumerated in the declaration. Because the declassification proposal is not among the enumerated matters for shareholder voting in the declarations of trust, the funds maintained, Saba is not a holder of securities entitled to vote on the proposal under Rule 14a-8(b)(1).
• The SEC staff agreed with the funds, stating that “there appears to be a basis for your view that the Proposal may be excluded in reliance on Rule 14a-8(b)(1).”

The funds’ request cited to several previous no-action letters in which the SEC staff reached the same conclusion under Rule 14a-8(b)(1) in analogous settings involving closed-end funds organized under the laws of various states. These precedents included the First Trust letter from 2020, in which the staff concurred that a declaration of trust of a closed-end fund organized as a Massachusetts business trust granted shareholders the right to vote only on enumerated matters and, therefore, the fund could exclude a board declassification shareholder proposal in reliance on Rule 14a-8(b)(1). Other cited precedents included shareholder proposals on topics such as tender offers, board voting standards, and appointment of new advisers.

In First Trust, Saba was the proponent of the declassification proposal, which was substantially identical to the current proposal. Saba argued in response to the Nuveen funds’ request that the SEC staff should “reconsider” its conclusion in First Trust and other precedents, and that it should decline to follow its prior reasoning. According to Saba, this interpretation of Rule 14a-8 provides closed-end funds too much discretion to limit the scope of shareholder proposals by enumerating specific voting rights in the funds’ governing documents.

The SEC staff was apparently unpersuaded by Saba’s arguments. In granting relief and embracing the principles reflected in its earlier no-action letters, the staff has reaffirmed the long-recognized flexibility of funds – especially those organized as Massachusetts business trusts – to craft the terms of the relationship with its shareholders with respect to voting matters.

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