Ropes & Gray Alert Discusses Closed-End Funds Ruling

In a recent asset management industry update, Ropes & Gray lawyers discussed a recent court case from the Southern District of New York which held that control share provisions for closed-end funds were impermissible. In that case, Saba Capital sued certain Nuveen funds in response to a control share bylaw amendment adopted by the funds’ trust. The Ropes & Gray alert noted that in May 2020, the staff of the SEC’s Division of Investment Management published a statement that it would not recommend enforcement action to the SEC against a closed-end fund under Section 18(i) of the 1940 Act for opting in to and triggering a control share statute, provided the fund’s board decision to opt in was “taken with reasonable care on a basis consistent with other applicable duties and laws and the duty to the fund and its shareholders generally.” Under the control share amendment adopted by the Nuveen funds, a “control shareholder” is blocked from voting its stock acquired after the amendments’ enactment, unless authorized by an “affirmative vote of the holders of a majority of all of the Shares entitled to vote. . . excluding [any shares owned by a control shareholder],” according to Ropes’ summary of the case. The district court focused principally on the definition of “voting security” under the 1940 Act to inform its decision. “Based on how the ICA defines ‘voting security,’ Saba has the better of the argument on Section 18(i)’s requirement that all stock be ‘voting stock,’” the court wrote. The 1940 Act “defines ‘voting security’ as ‘any security presently entitling the owner or holder thereof to vote for the election of directors of a company.’ … (emphasis added by court). Within the same section defining terms throughout the Act, the ICA defines ‘security’ to include stock. ... The control share amendment thus violates Section 18(i)’s requirement that every stock issued be voting stock.” The district court also stated that the funds’ reliance on the IM Staff’s no-action position was unpersuasive and that the staff statement “by its own terms, has ‘no legal force or effect.’”  The IM staff statement “does not provide any persuasive authority for the Trusts' position,” the court wrote.