NYSE Proposes Rule Changes to Exempt Registered Closed-End Funds from Requirement to Hold Annual Shareholder Meetings | Insights

Authors:

David C. Sullivan , Elizabeth J. Reza , Ali R. Olia

On June 6, 2024, the New York Stock Exchange LLC (“NYSE”), a national securities exchange, filed an application (the “Application”)¹ pursuant to Rule 19b-4 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with the Securities and Exchange Commission (the “SEC”) proposing amendments to Section 302.00 of the NYSE Listed Company Manual (the “Manual”).² Section 302.00 of the Manual currently requires closed-end management investment companies (“CEFs”) listed for trading on NYSE to hold an annual shareholder meeting during each fiscal year.³ If approved by the SEC, the proposed amendments would exempt CEFs listed on NYSE from the requirement to hold an annual shareholder meeting.

Background

Neither the Investment Company Act of 1940, as amended (the “1940 Act”), under which CEFs are registered, nor any other federal securities laws applicable to CEFs require CEFs to hold annual shareholder meetings. The laws of Delaware, Maryland and Massachusetts, where a vast majority of CEFs are organized, also do not require CEFs to hold annual shareholder meetings.⁴ The rules of the national securities exchanges on which listed CEFs trade, such as NYSE and Nasdaq,⁵ are currently the only authority requiring CEFs to hold annual shareholder meetings.

The 1940 Act does, however, require shareholder approval of various matters.⁶ Section 10 of the 1940 Act also requires at least 40 percent of the board of directors/trustees of a registered investment company, including CEFs, to be comprised of directors/trustees who are not “interested persons” of the CEF as that term is defined in Section 2(a)(19) of the 1940 Act; and the 1940 Act requires that a majority of a CEF’s non-interested directors/trustees approve various matters.⁷

NYSE’s Application

The Application states that, in light of the “significant statutory protections under the 1940 Act provided to shareholders of CEFs, for which there are no parallel legal protections for the shareholders of public operating companies, [NYSE] believes that it is appropriate to exempt CEFs from the annual shareholder meeting requirements of Section 302.00 [of the Manual].” The Application further provides that all other types of investment companies registered under the 1940 Act and listed on NYSE are exempt from the annual shareholder meeting requirements. According to the Application, NYSE believes the proposed changes are consistent with the protection of investors and the public interest.

Next Steps

Once a notice of the Application is available on the SEC’s website and on the Federal Register, it is expected that interested persons will have an opportunity to submit comments on the Application to the SEC. Within 45 days of the date of publication of such notice in the Federal Register, or within such longer period (up to 90 days, as the SEC may designate if it finds such longer period to be appropriate or as to which NYSE consents), the SEC will by order approve or disapprove the proposed rule change or institute proceedings to determine whether the proposed rule change should be disapproved. Section 19(b)(2) of the Exchange Act requires that, after initiating disapproval proceedings, the SEC issue an order approving or disapproving the proposed rule change within 180 days of the publication date of the notice of the proposed rule change. The SEC may extend the period for issuing such order by not more than 60 days if the SEC determines that a longer period is appropriate and publishes the reasons for such determination.

* * *

If you are interested in discussing the issues described in this Alert, please contact your regular Ropes & Gray contact.

The Application is available here.
The Manual is available here.
CEFs are listed on NYSE pursuant to Section 102.04 of the Manual.
Recommendations Regarding the Availability of Closed-End Fund Takeover Defenses, Investment Company Institute (Mar. 2020), available here.
Nasdaq Rule 5620 requires CEFs to hold annual shareholder meetings no later than one year after a CEF’s fiscal year-end. The Nasdaq Rulebook is available here.
Section 16(a) of the 1940 Act provides that no person shall serve as a director of a registered investment company, including a CEF, unless elected to that office by shareholders at an annual or special meeting, except that vacancies may be filled in any otherwise legal manner if immediately after filling any such vacancy at least two-thirds of the directors then holding office have been elected by shareholders at an annual or special meeting. Section 16(a) further requires that, in the event that at any time less than a majority of the directors of a registered investment company were elected by shareholders, the investment company hold, as promptly as possible and in any event within 60 days, a shareholder meeting. Other matters requiring shareholder approval under the 1940 Act include: (i) a new investment management agreement or a material amendment to an investment management agreement (Section 15); (ii) a change from closed-end to open-end status or vice versa (Section 13); (iii) a change from diversified company to non-diversified company (Section 13); (iv) a change in a policy with respect to borrowing money, issuing senior securities, underwriting securities that other persons issue, purchasing or selling real estate or commodities or making loans to other persons, except in each case in accordance with the recitals of policy contained in its registration statement in respect thereto (Section 13); (v) a deviation from a policy in respect of concentration of investments in any particular industry or fundamental investment policy (Section 13); and (vi) a change in the nature of the investment company’s business so as to cease to be an investment company (Section 13).
Matters requiring approval by a majority of a CEF’s non-interested directors/trustees under the 1940 Act include: (i) approval of investment management agreement and principal underwriter agreement (Section 15); (ii) selection of an independent public accountant (Section 32); (iii) certain purchase or sale transactions between an investment company and certain affiliated persons thereof (Rule 17a-7(e)); (iv) mergers of affiliated investment companies (Rule 17a-8(a)); (v) certain brokerage transactions on a securities exchange (Rule 17e-1(b)); and (vi) approval of fidelity bond coverage (Rule 17g-1(d)).