[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