A recent SEC Staff position has the effect of invalidating a key provision used by some closed-end funds as a defensive measure against hostile takeover tactics. The decision of the SEC staff in Boulder Total Return Fund, Inc. states that the Maryland Control Share Acquisition Act is not consistent with section 18 of the Investment Company Act, which governs the voting rights of fund shareholders. The Maryland Control Share Acquisition Act is a piece of legislation into whose protection Maryland closed-end funds may opt. The act provides that a shareholder owning ten percent or greater of the corporation's shares is incapable of voting the shares unless two thirds of the disinterested shareholders vote to restore those voting rights.
In response to Boulder Total Return Fund's request to the SEC for permission to opt into the protection of the Maryland Control Share Acquisition Act, the SEC staff ruled that the provisions of the Maryland Control Share Acquisition Act are inconsistent with the protections of section 18 of the Investment Company Act, and in fact, constitute just the kind of voting limitations and potential abuses section 18 was designed to prevent.
This interpretation also puts in to doubt the use of similar protections used by closed-end funds registered in other states than Maryland. The Dechert law firm has published a fuller discussion of the SEC's interpretation and its potential effects.
The full text of the Dechert analysis is avaialble at: http://www.dechert.com/library/FS_2_02-11_SEC_Staff_Indicates_the_Maryland_Control.pdf
The SEC's November 15, 2010 letter to Boulder Total Return Fund is available at: http://www.sec.gov/divisions/investment/noaction/2010/bouldertotalreturn111510.htm
Boulder Total Return Fund's November 12, 2010 request for interpretation is available at: http://www.sec.gov/divisions/investment/noaction/2010/bouldertotalreturn111510-incoming.pdf