SEC Provides No-Action Relief from Certain Fund Director In-Person Meeting Requirements

February 28, 2019

The Staff of the SEC’s Division of Investment Management (Staff) has issued a no-action letter permitting a registered fund’s board of directors (board) in certain circumstances to meet telephonically, by video conference or by other means by which all participating directors may participate and communicate with each other simultaneously, where the board would otherwise be required to meet in person under the Investment Company Act of 1940 (1940 Act) and certain rules thereunder. As described below, these circumstances relate to cases where directors are unable to meet in person because of unforeseen or emergency situations, or where directors have met previously in person to discuss all material aspects of the proposed matter, but did not vote on the matter during the previous in-person meeting.

In the Incoming Letter, the IDC requested the no-action position from the Staff in an effort to modernize and improve the “roles and responsibilities of fund directors . . . to better allow directors to dedicate their time and attention to ‘areas where director oversight is most valuable.’”2 The IDC argued that, under certain circumstances, a board’s inability to timely meet in person as required could result in unintended harm to shareholders and that such “costs . . . would greatly outweigh any benefits to shareholders.”

The no-action position is the second recent no-action position issued by the Staff at the request of the IDC and after Director Blass’s speech indicating the Staff’s willingness to modernize board oversight of mutual funds and reduce unnecessary burdens imposed on funds and their boards that provide little benefit to fund shareholders.3


Sections 15 and 32 of the 1940 Act and Rules 15a-4(b)(2) and 12b-1 under the 1940 Act have each been interpreted to require a registered fund’s board to approve certain items while physically in person at a meeting.

Sections 15(a)(2) and 15(b) relate to the approval of a fund’s investment advisory contract and principal underwriting contract, respectively. Together with these Sections, Section 15(c) requires, initially and annually after an initial two-year period from the date of its execution, each advisory agreement and principal underwriting agreement with a fund to be approved at least annually by the vote of a majority of the fund’s independent directors4 “cast in person at a meeting called for the purpose of voting” on such approvals. Rule 15a-4 relates to the approval of an interim investment advisory contract, and Rule 15a-4(b)(2) permits a fund’s adviser to operate under an interim contract where the adviser received an economic benefit in connection with the assignment of the previous advisory contract only if the board, including a majority of the independent directors, approves the interim contract in person before the termination of the previous contract.5

Section 32 and Rule 32a-3 thereunder relate to a board’s annual approval of the selection of an independent public accountant for a fund. Section 32(a) contains the same in-person voting requirement as Section 15(c).

Finally, Rule 12b-1 relates to the approval and continuance of a fund’s 12b-1 Plan and requires that such 12b-1 Plan be approved by a vote of the fund’s board, including the fund’s independent directors, “cast in person at a meeting called for the purpose of voting on such plan.” The board must also approve the continuance of the 12b-1 Plan annually in the same manner as its initial approval.

No-Action Relief: Non-In-Person Approvals are Permitted under Certain Circumstances

In the IDC Letter, the Staff stated that it “would not recommend enforcement action to the Commission for violations of Sections 12(b), 15(c) or 32(a) of the Act or Rules 12b-1 or 15a-4(b)(2) under the [1940] Act” if a fund’s board took certain actions “without adhering to the in-person voting requirements, in circumstances described in the Incoming Letter,” in cases where:

1. the directors needed for the Required Approval6 cannot meet in person due to unforeseen or emergency circumstances, provided that (i) no material changes to the relevant contract, plan and/or arrangement are proposed to be approved, or approved, at the meeting, and (ii) such directors ratify the applicable approval at the next in-person board meeting (Relief 1); or

2. the directors needed for the Required Approval previously fully discussed and considered all material aspects of the proposed matter at an in-person meeting, but did not vote on the matter at that time, provided that no director requests another in-person meeting (Relief 2).

The board actions outlined in the IDC Letter for which a board may take advantage of this relief include:

a) renewal (or approval or renewal in the case of Relief 2)7 of an investment advisory contract or principal underwriting contract pursuant to Section 15(c) of the 1940 Act;

b) approval of an interim advisory contract pursuant to Rule 15a-4(b)(2) under the 1940 Act (with respect to Relief 2 only);

c) selection of the fund’s independent public accountant pursuant to Section 32(a) of the 1940 Act (with respect to Relief 1, the accountant must be the same accountant as selected in the previous year); or 

d) renewal (or approval or renewal in the case of Relief 2) of the fund’s 12b-1 Plan. 

In issuing the no-action position, the Staff took into consideration “existing director responsibilities” and considered “whether they are appropriate and are carried out in a manner that serves the shareholders’ best interests.” Further, the Staff stated that “[w]e appreciate that . . . the position you are requesting from us would remove significant or unnecessary burdens for funds and their boards. We also do not believe the position would diminish the board’s ability to carry out its oversight role or other specific duties.”


The IDC Letter is another positive development for fund directors and demonstrates the Staff’s willingness to work with fund boards to reduce unnecessary burdens that may no longer serve to meaningfully protect fund shareholders. By taking into account current technological capabilities, the IDC Letter modernizes the responsibilities of fund directors and provides relief from the rigid application of the in-person voting requirements in cases where the burdens on funds and their boards outweigh any benefits to fund shareholders.


1) Independent Directors Council, SEC Staff No-Action Letter (February 28, 2019) (IDC Letter).Dechert represented the Independent Directors Council in connection with the request for no-action relief. See letter from IDC to Paul G. Cellupica, dated February 28, 2019 (Incoming Letter). All factual statements herein are based solely on publicly-available information.The Incoming Letter notes that the term "fund" includes registered management investment companies or separate series thereof. See Incoming Letter at n. 2. The Staff indicates in the IDC Letter, however, that its no-action position would also apply to business development companies, as defined under Section 2(a)(48) of the 1940 Act. See IDC Letter at n. 1.

2) See Incoming Letter (quoting Dalia Blass, Director, Division of Investment Management, SEC, Keynote Address: ICI Securities Law Developments Conference (Dec. 7, 2017)). 

3) See IDC, SEC Staff No-Action Letter (pub. avail. Oct. 12, 2018) (permitting boards to rely on written representations from fund compliance officers regarding affiliate transactions effected in reliance on Rules 10f-3, 17a-7 or 17e-1 under the 1940 Act).

4) The term “independent directors” refers to directors who are not “interested persons” of the fund, as such term is defined in Section 2(a)(19) of the 1940 Act.  Section 15(c) also requires that these independent directors not be parties to the contract or agreement. Rule 12b-1, as discussed below, also requires that these independent directors have no direct or indirect financial interest in the operation of the fund’s 12b-1 Plan. For purposes of this Newsflash, the term “independent directors” includes directors who also meet these qualifications, as the context requires.

5) Under the 1940 Act, the term “investment advisory contract” is interpreted to include an investment sub-advisory contract, regardless of whether the fund is a party to the sub-advisory contract.

6) The Incoming Letter defined “Required Approvals” as the in-person votes required for approvals under Sections 15(c) and 32(a) of the 1940 Act and Rules 12b-1 and 15a-4(b)(2) thereunder.

7) The IDC did not request relief for situations where a change in control of an investment adviser to a fund results in the termination of the prior contract. Rather, as the IDC noted that funds have done in the past, funds and fund boards would be able to seek individualized relief from the Staff under such circumstances.

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