Directed Voting No-Action Relief for Registered Funds and BDCs: Practical Takeaways

Summary

On September 29, 2026, the staff of the SEC’s Division of Investment Management (IM Staff) issued a no-action letter to the Mutual Fund Directors Forum (MFDF) allowing a registered investment company or business development company (each, a Fund) to implement an investor voting program that permits retail shareholders to give standing instructions to have their shares voted automatically at future shareholder meetings in line with the recommendations of the Fund’s board of directors. The relief extends to Funds a version of the “Retail Voting Program” framework that the staff of the SEC’s Division of Corporation Finance (CorpFin Staff) had previously granted to operating companies but imposes materially different conditions and carve-outs that reflect a distinct set of policy judgments applicable to Funds.¹

Background

The letter confirmed that the IM Staff would not recommend enforcement action under Rules 14a-3(a), 14a-4(d)(2), 14a-4(d)(3), 14a-4(f), 14a-6(o), 14a-10, and 14a-12(a) under the Exchange Act, each of which is made applicable to the registered Funds through Rule 20a-1 under the 1940 Act, if a Fund implements the Directed Voting Program consistent with the parameters and conditions set forth in the incoming letter from the MFDF (together with the no-action letter, the MFDF Letter).²

Under the Directed Voting Program as described in the incoming letter, a Fund shareholder may give a revocable standing voting instruction directing that, on an ongoing basis, the shareholder’s shares be voted in favor of recommendations approved by the Fund’s board of directors, including all of the Fund’s directors who are not “interested persons” as defined in Section 2(a)(19) of the 1940 Act (Independent Directors).

The Directed Voting Program Mechanics

• Board Approval. The program must be approved by the Fund’s Board, including unanimously by the Independent Directors, and subject to renewal at least every three years.
• Eligibility. The program must be offered to all “retail” shareholders at no cost, and participation is entirely voluntary. “Retail” shareholders are defined as any registered or beneficial owner that has, or is entitled to have, voting authority with respect to the shares of a Fund, regardless of whether the shares are held via a bank, broker, or other financial intermediary. The no-action relief itself does not extend to the Advisers Act, meaning the MFDF Letter does not address, and the relief does not resolve, how the Advisers Act might apply where a registered investment adviser exercises voting authority on a client's behalf.
• Scope of voting instructions. Participating shareholders may choose between two voting scopes for their standing voting instructions: (1) all matters except contested director elections and changes to the Fund’s primary advisory agreement that require a shareholder vote (the Exclusions); or (2) all matters except the Exclusions plus (i) fund mergers requiring a shareholder vote and (ii) increases to Rule 12b-1 fees (items (i) and (ii) being the Opt-Out Items).
• Opt-out and overrides. Shareholders can opt out of the program to cancel their standing voting instruction at any time for future meetings (i.e., prior to the filing of a definitive proxy statement or N-14 registration statement), and can override their standing instruction for a pending meeting, including after a definitive proxy statement or N-14 is filed, by voting in the ordinary course as all shareholders must continue to receive all proxy materials irrespective of participation in the program.
• Reminders. Participants would receive annual reminders of their enrollment and opt-out rights during the period when a Fund is not soliciting votes, plus an additional reminder before any meeting involving an Opt-Out Item for shareholders who did not exclude those items. The annual reminder would also include a notice that, subject to the Fund’s organizational documents, state law, and any applicable exchange listing standards, shareholders that do not opt out of the program prior to the filing of the relevant proxy statement will be deemed to be present at the relevant meeting for purposes of establishing a quorum.
• Disclosure. A Fund must publicly file a description of the program on Schedule 14A pursuant to Rule 14a-12, disclose details regarding the program prominently in each proxy statement and on its website, and file material changes to the program materials in the same manner.

How the Relief Differs from the CorpFin Staff Framework

The Directed Voting Program builds on prior no-action letters issued by the CorpFin Staff addressing “Retail Voting Programs” for operating companies.³ While the MFDF Letter adopts the same basic mechanics—a revocable standing instruction to vote in line with board recommendations, annual reminders, opt-out rights, and the ability to override at the meeting—IM Staff layered on several conditions that have no counterpart in the CorpFin Staff letters:

• Carve-out for contested director elections. The Directed Voting Program cannot be used for a “contested director election,” defined as an election in which the number of nominees exceeds the number of board seats. CorpFin Staff’s Retail Voting Programs, by contrast, do not exclude contested director elections, meaning an operating company facing a proxy contest can use its program even as to the contested slate.
• Carve-out for the primary advisory contract. The program also cannot apply to changes to a Fund’s investment advisory agreement with its primary adviser that require a shareholder vote—including material amendments, a new primary adviser, or an increase in advisory fees. There is no analogous exclusion for comparable matters (such as executive compensation or other related-party arrangements) in the CorpFin Staff letters.
• Unanimous Independent Director approval. The Directed Voting Program must be approved by the Fund’s board, including unanimously by all Independent Directors, before implementation, and standing instructions apply only to matters the board recommends and the Independent Directors unanimously approve. The CorpFin Staff letters do not impose any analogous unanimity requirement tied to a subset of directors.
• Three-year renewal. The Fund’s board must reexamine and reapprove the program at least every three years based on a determination that it remains in shareholders’ best interests. The CorpFin Staff letters contain no periodic renewal requirement.

Practical Takeaways

The relief provides Funds with a mechanism to boost retail participation in proxy campaigns and address low retail shareholder turnout. Whether Funds will actually build and maintain a Directed Voting Program is a separate question and one that we expect to include cost/benefit analyses, including the cost of establishing the opt-in architecture, proxy solicitation agent integration, and ongoing disclosure and reminder obligations against the carve-out of the Exclusions (i.e., primary advisory contract votes and contested director elections).

Even with the Exclusions, the Directed Voting Program may be most valuable where shareholder apathy, rather than active opposition, has historically caused Funds to avoid or struggle with proxy campaigns, including to obtain shareholder authorization for: (1) changes to a Fund’s fundamental investment policies, including with respect to diversification status (a common shareholder turnout weak point for Funds); (2) adoption of, or changes to, a Fund’s Rule 12b-1 plan (for shareholders who have not separately excluded this as an Opt-Out Item); (3) Fund mergers requiring shareholder approval (again, absent an Opt-Out election); (4) updating outdated Fund organizational documents; and (5) uncontested director elections for business development companies. Certain of these approvals require the “majority of the outstanding voting securities” voting standard under the 1940 Act, which makes the Directed Voting Program particularly useful.⁴

The MFDF Letter identifies most of these categories, along with approval of sub-advisory agreements, issuance of securities below net asset value, auditor ratifications, and certain other items specific to business development companies, as matters it believes present less risk of self-dealing or management entrenchment than the Exclusions, because they generally do not affect corporate governance or confer meaningful benefits on the adviser or board.

Notably, changes to a Fund’s primary advisory agreement were excluded from the program altogether, rather than, for example, being made an optional Opt-Out Item that individual shareholders could choose to exclude (like certain mergers and 12b-1 fee increases). This is a meaningful gap for Funds and advisers seeking to modernize legacy contractual arrangements, restructure fee schedules, or otherwise obtain shareholder approval of a new or amended primary advisory contract.

The contested election carve-out reflects a clear policy choice by IM Staff that Funds should not be able to use the program in activist or contested campaigns, in direct contrast with the CorpFin Staff relief provided to operating companies. In addition, Funds must structure the Directed Voting Program to apply only to matters recommended by the Fund’s board and unanimously approved by all of the Fund’s Independent Directors. This unanimity requirement itself may pose a limitation on the ability of a Fund to utilize the relief in the event of activist challenges even where a significant majority of the Board determines it is in the best interests of shareholders. For example, if even one activist-aligned Independent Director sits on a Fund board, that director’s dissent would prevent the standing-instruction mechanism from applying to a board recommendation at all.

The MFDF Letter notes that a Fund would need to comply with applicable state law, its organizational documents, and any applicable exchange listing standards in connection with a shareholder granting a standing voting instruction under the Directed Voting Program. Funds considering a Directed Voting Program must independently confirm that a revocable standing voting instruction of indefinite or multi-year duration is valid under the law of the Fund’s state of organization and organizational documents, and that provision is made for such standing voting instruction in the instrument granting the voting authority, if necessary. The MFDF incoming letter separately observes, by way of example, that Delaware law permits a proxy to remain valid for up to three years, or longer if the proxy instrument itself so provides.⁵ The MFDF Letter likewise notes that whether a participating shareholder will be deemed present for quorum purposes is ultimately a state-law question that depends on the Fund’s organizational documents and the law of its state of domicile. Funds and their counsel should confirm the proxy duration and quorum rules of the Fund’s state of organization and review the Fund’s charter and bylaws before relying on the no-action relief to implement a Directed Voting Program.

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