[14137]
November 13, 2001
TO: SEC RULES COMMITTEE No. 90-01
CLOSED-END INVESTMENT COMPANY COMMITTEE No. 20-01
RE: SEC PROPOSED AMENDMENTS TO RULE 17A-8 UNDER THE INVESTMENT
COMPANY ACT
The Securities and Exchange Commission has proposed amendments to Rule 17a-8
under the Investment Company Act of 1940, the rule that permits mergers and other business
combinations between affiliated investment companies.1 The proposed amendments would
expand the types of business combinations exempted by the rule, largely codifying the relief
provided in prior Commission exemptive orders. The proposed amendments also would make
the rule available for mergers between registered investment companies and certain
unregistered entities. Under the Commission’s proposal, reliance on Rule 17a-8 would be
subject to various conditions that relate to: (1) board determinations; (2) shareholder voting;
(3) echo voting; and (4) recordkeeping. The Commission’s release is available from the SEC’s
website at http://www.sec.gov/rules/proposed/ic-25259.htm, and it is summarized below.
Comments on the proposed amendments to Rule 17a-8 are due to the Commission by
January 18, 2002. We will hold a conference call to discuss issues to be addressed in the
Institute’s comment letter on Monday, December 3rd at 2:00 p.m. Eastern time. If you would like
to participate on this call, please notify Stephanie Holly by sending an email to sholly@ici.org
that includes your name, firm, telephone number, and email address. Otherwise, please provide
any comments you may have to Barry Simmons at 202/326-5823 (phone), 202/326-5827 (fax), or
bsimmons@ici.org (email), no later than Friday, November 30th.
A. MERGERS OF REGISTERED FUNDS
1. Board Determinations
Currently, Rule 17a-8 permits affiliated funds to engage in mergers and other business
combinations provided that the board (including a majority of independent directors) of each
participating fund determines that the merger is in the best interests of the fund and that it will
not dilute the interests of the merging fund’s shareholders. Under the Commission’s proposal,
1 SEC Release No. IC-25259 (November 8, 2001).
2
this condition would be modified to require fund boards to consider several factors, if relevant,
in making this determination. Such factors include:
a. any direct or indirect federal income tax consequences of the merger to the
shareholders of the merging company;
b. any fees or expenses that the merging company will pay (directly or indirectly) in
connection with the merger;
c. any change in fees or expenses to be paid or borne by shareholders of the merging
company (directly or indirectly) after the merger;
d. any change in services to be provided to shareholders of the merging company after
the merger; and
e. any change in investment objectives, restrictions, and policies after the merger.
As is presently the case, the amended rule would continue to require documentation of
the board’s determination in the fund’s books and records.
Comment is requested on whether the rule should include a list of factors for consideration, or
whether instead of listing them in the rule, they should be discussed in the adopting release. Also, the
Commission seeks comment on whether any of the above factors should be omitted or modified, or whether
any other factors should be added.
2. Shareholder Voting
Rule 17a-8 does not presently impose a shareholder voting requirement. The Release
explains that historically, the Commission has assumed that in an affiliated merger the acquired
fund’s shareholders would have an opportunity to vote on the merger.2 This is based in part on
state corporation statutes, which typically impose such a requirement. The Release points out,
however, that increasingly, funds have organized or reorganized as business trusts, which may
not require shareholder approval for merger transactions. In light of this trend, the
Commission is proposing to require that the shareholders of a fund that will not survive the
merger to approve its participation in the merger.
Comment is requested on this proposal and whether there are instances in which such a vote
should not be required. Comment is also requested on whether this provision would be inconsistent with
certain state laws, and whether it would be more appropriate to defer to state law. In addition, the
Commission seeks comment on whether approval by independent directors would be sufficient to protect
merging fund shareholders, and whether, in the absence of such a vote, shareholders would receive
sufficient advance notice of the change in their investment. Finally, comment is sought on whether
shareholders of the surviving fund should be required to approve the merger.
2 The Commission explains that when funds have sought exemptive orders for affiliated mergers, they have typically
represented in their applications that shareholder approval would be obtained by the target fund before the merger
was consummated.
3
3. Echo Voting
The proposed amendments impose an “echo voting” requirement. Specifically, the
amendments would require that if an owner of more than five percent of the shares of the fund
(“owner affiliate”) holding the vote is another merging fund, or an investment adviser,
principal underwriter, or owner affiliate of another merging fund (“related shareholder”), then
the related shareholder must vote its shares in the same proportion as non-related shareholders.
The Release explains that this requirement is intended to provide protection in a situation
where a fund affiliate otherwise would have both the ability and pecuniary incentive to affect
the terms of the merger.
The Commission has proposed two exceptions to the echo voting requirement. First, a
related shareholder’s securities could be voted in accordance with instructions received from
the beneficial owner of the securities, provided that the beneficial owner is not also a related
shareholder. Second, a related shareholder’s securities could be voted in accordance with
instructions received from a person appointed to provide guidance on the voting securities by a
fiduciary of a plan under the Employee Retirement Income Security Act (“ERISA”).
Comment is requested on whether the echo voting proposal raises any issues under state law.
Comment is also requested on whether any protections in addition to the echo voting proposal are needed
to ensure that shareholders and their affiliates do not improperly influence the merger process. Also, the
Commission seeks comment on whether the two exceptions to the proposal are appropriate, and whether
any other exceptions are needed.
4. Recordkeeping
The Release provides that as a condition of Rule 17a-8, the surviving fund must preserve
written records that document the merger and its terms. Such records would include, among
other things, the minute books setting forth the board’s determinations and the bases for those
determinations, and any supporting documents provided to the directors in connection with the
merger, the independent evaluator’s report, in the case of a merger with an unregistered entity
(see below), and documentation of the prices at which securities were transferred in the merger.
B. MERGERS OF REGISTERED FUNDS AND CERTAIN UNREGISTERED ENTITIES
Currently, Rule 17a-8 is available only for registered funds. The Commission is
proposing to amend the rule to exempt mergers of registered funds with bank common trust
funds or bank collective trust funds, as long as the survivor of the merger is a registered fund.
In order to rely on this exemption, however, funds merging with affiliated common and
collective trust funds would be subject to a special pricing condition. Specifically, the board of a
registered fund that is merging with an affiliated unregistered entity would have to approve
procedures for the valuation of that entity’s assets. Those procedures would have to provide
for an “independent evaluator” (as defined in the proposed amendments) to prepare a report
setting forth the current fair market value of each asset to be transferred to the registered fund
in the merger. The Release notes that this condition will protect against potential mispricing of
4
assets of affiliated unregistered entities which, unlike registered funds, may not calculate NAV
on a daily basis or in accordance with well-established procedures.
Comment is requested on the proposal to expand the rule to include mergers with common and
collective trust funds. Comment is also requested on the proposal to require directors of a registered fund
merging with an unregistered entity to approve procedures for the valuation of the assets of the
unregistered entity and on the use of an independent evaluator to value the assets of unregistered entities.
The Commission also seeks comment on whether such mergers should be subject to any other special
conditions, and whether the rule should permit mergers with other types of unregistered entities.
C. SCOPE OF THE RULE
1. Proposed Expansion of Rule 17a-8
Rule 17a-8 currently is limited to mergers of funds that are affiliated solely because they
share a common investment adviser, officer or director. The proposed amendments would
expand the rule to cover mergers of affiliated funds regardless of the nature of their affiliation.
Comment is requested on this change and on whether the proposed conditions for relief under the
expanded rule are sufficient to protect investors, or whether any of them are unnecessary.
2. Prohibition on Evading Section 17(a)
The Release notes the Commission’s concern that non-merger affiliated transactions that
otherwise would be prohibited under Section 17(a) of the Investment Company Act could be
structured as mergers under Rule 17a-8. Accordingly, the Commission proposes to add as a
condition for relief that a merger cannot be part of a plan or scheme to evade the affiliated
transactions prohibitions of Section 17(a).
Comment is requested on whether this provision is necessary in light of Section 48(a) of the
Investment Company Act, which prohibits a person from doing indirectly through another person what
the person is prohibited from doing directly. The Commission also seeks comment on whether the
provision would create uncertainty and whether, as an alternative, the rule should prohibit specific
improper transactions that are structured as mergers.
Barry E. Simmons
Associate Counsel
Barry E. Simmons
Assistant Counsel