(Article from Registered Funds Regulatory Update, October 2022)
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In June 2022, the Investment Company Institute filed an Amicus brief (a so-called “friend of the court” brief) in a case involving Saba Capital. The brief argues that the U.S. Court of Appeals for the Second Circuit should reverse the decision of the lower District Court and hold that the board of directors of certain Nuveen closed-end funds did not violate Section 18(i) of 1940 Act when it adopted bylaw provisions restricting the ability of shareholders, including appellee Saba Capital, to freely vote more than 10% of its shares of the fund’s voting power.
The ICI argued that the lower court misapplied Section 18(i), which states that “[e]xcept . . . as otherwise required by law, every share of [fund] stock . . . shall be a voting stock and have equal voting rights with every other outstanding voting stock.” Specifically, the ICI stated that the District Court’s holding is inconsistent with the text and purpose of the 1940 Act and would empower activist shareholders to harm other shareholders.
The ICI highlighted that the purpose of the 1940 Act is to protect all shareholders even against concentrated shareholders that would likely constitute “affiliated persons” holding 5 percent or more of the outstanding voting securities of the fund. Such affiliated persons, the ICI noted, could pursue objectives to their benefit and the detriment of all other shareholders. This “self-interested” behavior was precisely the behavior Congress anticipated in adopting the 1940 Act. In fact, the ICI argued that the 1940 Act permits a board of directors to protect shareholders by adopting provisions, such as anti-takeover provisions, that limit concentrated shareholders from voting in a manner counter to the interests of all other shareholders.
Finally, the ICI noted that the District Court’s decision, if upheld, could empower activist shareholders to cause harm to closed-end funds and their shareholders. Specifically, the ICI referenced historical behavior of activists that could have detrimental effects on other shareholders, including activists seeking short-term profits at the expense of long-term investors, liquidating closed-end funds, forcing tender offers that effectively increase fund expense ratios, and converting closed-end funds to open-end funds.
Brief of Investment Company Institute as Amicus Curiae Supporting Appellants, Saba Capital CEF Opportunities 1, Ltd, et al. v. Nuveen Floating Rate Income Fund, et al., 2022 WL 2268209 (June 17, 2022).