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SEC Proposes Rule Easing Fund Mergers
Increases in mergers seen likely, with freeing of SEC Staff resources
The SEC has proposed amendments to Rule 17a-8 under the Investment Company Act of 1940 that would increase the number of mergers and other business combinations permitted between affiliated investment companies. Investment Company Mergers, Release No. IC-25259 (Nov. 8, 2001). Rule 17a-8 at present allows affiliated investment companies to merge only if they are affiliated solely by reason of having a common investment adviser, common directors, and/or common officers. In many cases, however, investment companies have other affiliations and cannot rely on the rule. The SEC can and does issue exemptive orders allowing mergers of affiliated investment companies, and there have been a large number of these in recent years. But the exemptive order requirement introduces substantial delay and expense, making fund mergers more difficult and more costly. The proposed amendments, if adopted, will substantially reduce the number of SEC exemptive orders, easing fund mergers and freeing SEC staff resources.
The proposed amendments would require the acquired company to approve the merger with a shareholder vote, in which certain affiliate must employ echo voting (i.e., vote their securities in the same proportion as the securities voted by shareholders who are not related shareholders). In addition, the directors of each merging company must determine that participation in the merger is in the best interests of the company and that the interests of its existing shareholders will not be diluted. The directors should consider at least the following factors:
(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.
The proposed amendments would also allow mergers with common trust funds and collective trust funds, if an independent evaluator is retained to value the trust fund’s assets.
Comments on the proposal are due January 18, 2002.
The SEC release is available online at http://www.sec.gov/rules/proposed/ic-25259.htm
Copyright 2001, John M. Baker, Esq., Stradley, Ronon, Stevens & Young, LLP, 1220 19th Street, N.W., Suite 700, Washington, DC 20036 – (202) 822-9611- Fax (202) 822-0140 This article was originally posted to the FundLaw List, http://www.egroups.com/group/fundlaw. To subscribe to FundLaw, send a blank e-mail to firstname.lastname@example.org
Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.
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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.