[Federal Register Volume 78, Number 157 (Wednesday, August 14, 2013)]
[Notices]
[Pages 49555-49556]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-19693]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 30647; File No. 811-07528]
Special Opportunities Fund, Inc.; Notice of Application
August 8, 2013.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application for a declaratory order under Section
554(e) of the Administrative Procedure Act of 1946 (``APA'') concerning
a proxy voting procedure under Section 12(d)(1)(F) of the Investment
Company Act of 1940 (``Act'').
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SUMMARY OF APPLICATION: Applicant requests an order declaring that its
proxy voting procedure does not cause the applicant to be in violation
of Section 12(d)(1) of the Act.
APPLICANT: Special Opportunities Fund, Inc. (``SPE'' or ``Fund'').
FILING DATES: The application was filed on December 13, 2011 and
amended on November 5, 2012.
HEARING OR NOTIFICATION OF HEARING: Interested persons may request a
hearing by writing to the Commission's Secretary and serving applicant
with a copy of the request, personally or by mail. Hearing requests
should be received by the Commission by 5:30 p.m. on September 3, 2013,
and should be accompanied by proof of service on applicants, in the
form of an affidavit or, for lawyers, a certificate of service. Hearing
requests should state the nature of the writer's interest, the reason
for the request, and the issues contested. Persons who wish to be
notified of a hearing may request notification by writing to the
Commission's Secretary. Absent a request for a hearing that is granted
by the Commission, the Commission intends to issue an order under
Section 554(e) of the APA declaring that applicant's proxy voting
procedure does not satisfy Section 12(d)(1)(F) of the Act.
ADDRESSES: Elizabeth M. Murphy, Secretary, Securities and Exchange
Commission, 100 F Street NE., Washington, DC 20549-1090; Applicant, 615
East Michigan Street, Milwaukee, Wisconsin 53202.
FOR FURTHER INFORMATION CONTACT: Adam Glazer, Senior Counsel, at (202)
551-6825, Division of Investment Management, Office of Chief Counsel.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's Web site at http://www.sec.gov/rules/ic/2012/special-opportunities-fund-application.pdf or by calling (202) 551-8090.
Applicant's Representations
1. SPE is organized as a Maryland corporation and is registered
under the Act as a closed-end management investment company. Brooklyn
Capital Management, LLC (``Adviser''), a Delaware limited liability
company, is an investment adviser registered under the Investment
Advisers Act of 1940 and currently serves as investment adviser to SPE.
SPE seeks to rely on Section 12(d)(1)(F) of the Act to invest its
assets in securities of other investment companies registered under the
Act (``underlying funds'') that are closed-end investment companies, in
excess of the limits in Section 12(d)(1)(A) of the Act.
2. On December 7, 2011, SPE's shareholders approved a proposal to
``instruct the Adviser to vote proxies received by the Fund from any
[underlying fund] on any proposal (including the election of directors)
in a manner which the Adviser reasonably determines is likely to
favorably impact the discount of such [underlying fund's] market price
as compared to its net asset value'' (``Voting Procedure''). SPE
requests a declaratory order pursuant to Section 554(e) of the APA
stating that the Voting Procedure ``does not cause it to be in
violation of Section 12(d)(1) of the Act.''
Applicant's Legal Analysis
1. Section 12(d)(1)(A) of the Act provides, in relevant part, that
it shall be unlawful for any registered investment company (``acquiring
fund'') to purchase or otherwise acquire any security issued by an
underlying fund if immediately after such purchase or acquisition: (i)
the acquiring company owns more than 3% of the underlying fund's total
outstanding voting stock; (ii) securities issued by the underlying fund
have an aggregate value in excess of 5% of the value of the acquiring
fund's total assets (``5% limit''); or if such securities, together
with the securities of other investment companies, have an aggregate
value in excess of 10% of the value of the acquiring fund's total
assets (``10% limit'').
2. Section 12(d)(1)(F) of the Act provides a conditional exemption
from the 5% and 10% limits in Section 12(d)(1)(A). Section 12(d)(1)(F)
permits an acquiring fund to purchase or otherwise acquire shares of an
underlying fund if, immediately after the purchase or acquisition, the
acquiring fund and all of its affiliated persons would not own more
than 3% of the underlying fund's total outstanding stock, and if
certain sales load restrictions are met. Section 12(d)(1)(F) further
provides that the underlying fund is not obligated to redeem, during
any period of less than 30 days, securities held by the acquiring fund
in an amount exceeding 1% of the underlying fund's outstanding
securities. Finally, Section 12(d)(1)(F) provides that the acquiring
fund ``shall exercise voting rights by proxy or otherwise with respect
to any security purchased or acquired pursuant to [Section 12(d)(1)(F)]
in the manner prescribed by [Section 12(d)(1)(E)].'' Section
12(d)(1)(E)(iii), in turn, provides, in relevant part, that ``the
purchase or acquisition is made pursuant to an arrangement with the
issuer of, or principal underwriter for, the issuer of the security
whereby [the acquiring fund] is obligated either to seek instructions
from its security holders with regard to the voting of all proxies with
respect to such security and to vote such proxies only in accordance
with such instructions, or to vote the shares held by it in the same
proportion as the vote of all other holders of such security.'' The
first alternative is referred to as ``Pass-Through Voting Condition.''
The second alternative is referred to as ``Mirror Voting.''
3. SPE asserts that its Voting Procedure satisfies the Pass-Through
Voting Condition. SPE states that it has been ``unable to find anything
in the legislative history of Section 12(d)(1) that provides any clue
as to the reason for the [Pass-Through Voting Condition].'' SPE further
asserts that ``there are good reasons for interpreting the [Pass-
Through Voting Condition] to allow an acquiring fund to seek standing
instructions to vote on proposals regarding acquired funds.'' In this
regard, SPE asserts that it is not cost effective for an acquiring fund
to obtain voting instructions for a particular
[[Page 49556]]
underlying fund after it receives a proxy. SPE also states that ``there
is almost never sufficient time for an acquiring fund to seek and
actually obtain instructions from its own shareholders as to how to
vote a specific proxy solicited by a particular acquired fund.'' SPE
further states that ``SPE has no such relationship with any fund and it
would be futile for SPE to try to persuade an unrelated acquired fund
to transmit its proxy materials to SPE's stockholders.''
4. SPE requests an order under section 554(e) of the APA declaring
that the Voting Procedure ``does not cause it to be in violation of
Section 12(d)(1) of the Act.'' Section 554(e) of the APA provides that
``[t]he agency, with like effect as in the case of other orders, and in
its sound discretion, may issue a declaratory order to terminate a
controversy or remove uncertainty.'' SPE states that, if the Commission
issues the requested declaratory order, SPE intends to submit the
Voting Procedure for shareholder approval on an annual basis ``to
insure that its standing proxy voting instructions do not become
stale.''
The Commission's Preliminary Views
1. Section 12(d)(1)(F) of the 1940 Act provides a conditional
exemption from the restrictions in Section 12(d)(1)(A) on an acquiring
fund purchasing or otherwise acquiring a security issued by an
underlying fund. The legislative history of Section 12(d)(1)(A)
suggests that these restrictions were designed, in part, to address the
concern that an acquiring fund could be used by an investment adviser,
among others, as a vehicle to control or unduly influence, through
voting, threat of redemption or otherwise, an underlying fund for its
own benefit and to the detriment of the shareholders of both funds.\1\
The conditions contained in the exemption provided by Section
12(d)(1)(F), and in particular the condition requiring voting in
accordance with Section 12(d)(1)(E)(iii), attempts to minimize the
influence that an acquiring fund may exercise over an underlying fund
through voting.\2\
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\1\ See U.S. Securities and Exchange Commission, Investment
Trusts and Investment Companies, H.R. Doc No. 279, 76th Cong., 1st
Sess., pt. 3, at 2721-95 (1939).
\2\ See Fund of Funds Investments, Investment Company Act
Release No. 27399 (June 20, 2006) at n.11 and accompanying text.
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2. Shortly after Section 12(d)(1)(F) was enacted in 1970, the
Commission issued a release providing guidance on the various
provisions enacted by the new legislation, including specifically the
Pass-Through Voting Condition.\3\ The 1971 Release stated that the
Pass-Through Voting Condition in Section 12(d)(1)(F) ``in effect,
requires the fund holding company to make an arrangement with the
issuer or principal underwriter of the issuer whereby sufficient proxy
solicitation or other material may be transmitted to the fund holding
company's security holders so that their instructions may be
obtained.'' \4\ This approach addresses the concern underlying the
restrictions in Section 12(d)(1)(A)--that the fund of funds' investment
adviser or another affiliate not exercise undue influence over the
management or policies of an underlying fund--by placing the voting of
the underlying fund's proxies in the hands of the fund of funds'
shareholders (rather than its investment adviser). Consistent with the
Commission's analysis in the 1971 Release, the Commission interprets
Section 12(d)(1)(F), through the incorporation of the requirement in
Section 12(d)(1)(E)(iii), to require SPE, if it chooses the Pass-
Through Voting Condition, to have an arrangement with each underlying
fund or its principal underwriter whereby SPE will pass through the
proxies to SPE's shareholders and vote according to their instructions.
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\3\ Changes in the Investment Company Act of 1940 Made by the
Investment Company Amendments Act of 1970 (Pub. L. 91-547) Relating
to the Repeal and Modification of Exemptions for Certain Companies;
The Pyramiding of Investment Companies and the Regulation of Fund
Holding Companies; and Rescission of Rule 11b-1 under the Investment
Company Act, Investment Company Act Release No. 6440 (Apr. 6, 1971)
(``1971 Release'').
\4\ Id. at 4.
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3. In the Commission's preliminary view, SPE's Voting Procedure
does not appear to be consistent with the purposes and policies behind
Section 12(d)(1)(F) of the Act, or with the guidance that the
Commission articulated in the 1971 Release. The Voting Procedure gives
the Adviser broad discretion in voting the underlying funds' proxies
and thus presents the potential for the Adviser to exercise undue
influence over the management and policies of the underlying funds. As
to SPE's assertion that soliciting proxies as described in the 1971
Release is ``prohibitively expensive and logistically impractical,'' we
note that Section 12(d)(1)(E) requires there to be ``an arrangement''
between the acquiring fund and an underlying fund concerning the voting
of proxies, which suggests that at least the logistics of the Pass-
Through Voting Condition could be addressed as part of ``the
arrangement.'' We also note that funds of funds similar to SPE existed
at the time the 1971 Release was issued and the Pass-Through Voting
Condition was enacted as an alternative to Mirror Voting, yet Congress
nevertheless determined the statutory conditions to be appropriate.\5\
To the extent that SPE finds making ``an arrangement'' with an
underlying fund under the Pass-Through Voting Condition ``futile,'' SPE
has the option of using Mirror Voting. Therefore, absent a request for
a hearing that is granted by the Commission, the Commission intends to
respond to SPE's application by issuing an order under Section 554(e)
of the APA declaring that the Voting Procedure does not satisfy Section
12(d)(1)(F) of the Act.
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\5\ See Mutual Fund Legislation of 1967: Hearings on S. 1659
Before the Senate Comm. on Banking and Currency, 90th Cong., 1st
Sess. 882-891 (1967) (statement of Milton Mound, President, First
Multifund of America, Inc.).
By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-19693 Filed 8-13-13; 8:45 am]
BILLING CODE 8011-01-P