SEC Division of Investment Management staff letter: Calvert Group

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
. -WASHINGTON. D.C. 20S49
DIVISION OF

INVESTMENT MANAGEMENT
Janua 7, 1993
. iAct ..__...:-e-.~t~ ~Ol - /f , ..'I~ /S(tL) :~ Wilam M. Taroff, Geera Counsel ¡section

Beth-an Roth, Associate Genera Coun~Ule
The Calvert Group l;~; b' 1 (' . ~ 1
J,
4550. Montgomery Avenue C;a~labil1t
Bethesda, MD 20814-, '- . y l/í!f3___
~.ll. 'ì.,~,,,,,~";l ,
Re: Obligation of Management Investment Companes to Comply with

Undertg to Conduct Public Sharholder Meeting
Dea Mr. Tarikoff and Ms. Roth:
In a letter dated November 6, 1992, I advised Matthew P. Fin at the Investment

Company Institute that the Division wil no longer ask management investment companes to

include in their registration statements an undertg to hold a shareholders' meetig to elect a board of directors, to approve the fund's investment advisory contract and role 12b-1 plan, ü any, or to ratüy the board of director's selection of the fund's independent public

accountats. By letter dated December 17, 1992, you request that I reconsider the Division's position that a fund with an effective registration statement in which it undertes to conduct a meeting of its shareholders to vote upon these matters remais obliged to act in accordace with that undertg. The Division reiterates that it caot relieve funds, either individualy or generay, of any obligation to their sharholders to conduct a shareholder meeting that may exist by vire of the undertg. Upon further consideration, however, the Division believes that it canot determine the materialty of these undertgs and the extent to which sharholders

may have relied upon them. Rather, individual funds should make these determinations based upon their particular circumstaces. Furthermore, a fund may attempt to liit its

liabilty to future shareholders ü it does not hold a meeting by filg a post-effective amendment deleting the undertg. In the Division's view, however, such an amendment

would have no effect upon the rights of existing sharholders.
The Division is not unmindful of the costs associated with. sharholder meetigs. These costs, in fact, prompted the Division to revisit the shareholder votig reuirements. Rather than causing funds "to be the burden and expense of holding an initial shareholder meeting," as you suggest, the Division acted to relieve funds of the expense of conductig shareholder meetings as far as consistent with the rights of sharholders. Thus, in determing to cese requirg the undertg, the Division was wilg to presume that,

absent the undertg, investors who purchase shares wil "vote with their dollars" to acct the fund's existing advisory and other argements. Ths is far diferent, however, from determining that investors who purchased shares of a fund that has underten to conduct a shareholder meeting did not thi the undertg signifcant and did not rely

upon it.

Wilam M. Taroff

Betn-an Roth

The Calvert Group
Januar 7, 1993

Whether the undertg is material and whether public investors relied upon it ar questions of fact to be resolved on a case-by-case basis. The staff has permitted funds with effective registration statements to withdrw their undertgs by filg a post-effecve amendment ü they have not sold shares to the public. Where a fund has sold its shas to the public pursuant to a registration statement that contaed (albeit in Pa C) an undertg to conduct a sharholder meeting, however, we caot know the extent to which investors purchasing those shars may have considere signicat the opportnity to vote

upon the fund's dirtors, role 12b-1 pla and advisory argements.
For this reson, the Division anounced that it would not consider no-action reuests for relief from this obligation. Nor did the Division believe it appropriate, as you suggest, to anounce generally that funds are no longer obligated to comply with the undertg, essentialy absolving funds of their obligation by adminstrative fiat. Nevertheless, upon further reflection, the Division now reognies that there may be circumstaces that would enable a paricular fund to determine, upon advice of counsel, that its undertg is not material or that its sharholders did not rely upon it and, on that basis, forego conductig the meeting. Sincerely, ~e~s1;; Dirtor

= Calvert

== Group

4550 Montgomery Avenue
Bethesda, Maryland 20814

(301) 951-4800
December 17, 1992
HAND DELIVERED
Marianne K. Smythe

Director

Division of Investment Management

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549
Re: Division statement that funds with effective registration statements must hold initial meeting of shareholders notwithstanding finding that such meetings are not required

PETITION FOR RECONSIDERATION
Dear Ms. Smythe:

The undersigned mutual fund groups 1 respectfully request that you reconsider a portion of your November 6, 1992 letter to Matthew P. Fink, President of the Investment Company

Institute. Your letter stated that the Division wil no longer require funds to undertake to hold

an initial shareholder meeting - to elect a board of directors, approve the investment advisory contract and Rule 12b-1 plan, and ratify the selection of independent accountants -- in order for the Commission to declare effective the fund's registration statement. We agree with the Division's determination that funds need not undertke to hold an initial shareholder meeting, and appreciate the staff's prompt decision on this matter. We share your view that shareholders effectively vote to accept existing arrangements by investing in the fund. However, we take issue with the decision that funds with effective registration statements must comply with their undertaking to hoiå an initiai meeting in light of the Division's recognition that such meetings are not required by law. As stated in your letter to Mr. Fink, the Division previously interpreted sections 15(a)

and 16 and Rule 12b-1 to require a vote by the public shareholders. The result of this interpretation was that the Division would not declare a registration statement effective without 1 The mutual fund groups joining in this petition represent over $300 bilion of the industry's assets under management. A member of The Acacia Group'" Printed on Recycled Paper

Marianne K. Smythe, Director
Division of Investment Management
Page 2- ----
an undertaking by the fund that it would hold an initial meeting of shareholders within sixteen months of its effective date. The Division has now reversed its position, so that undertakings to hold an initial shareholder meeting are no longer required. We believe it is inappropriate for funds and their affilated companies to bear the burden and expense of holding an initial shareholder meeting because of an undertking previously required by the Division, without which the Division would not declare the funds effective, and which the Division has now publicly stated is not required by law. This position appears contrary to the substance of your revised interpretation of the applicable law. It is not satisfactory to argue that funds are bound to hold initial meetings because they undertook to do so under compulsion by the Division. This elevates form over substance. Your letter to Mr. Fink acknowledged that shareholders do not rely on such undertkings since they -have voted with their dollars to accept the fund's existing- contracts. And if there has been no reliance on the undertakings, then there can be no rationale for demanding adherence to their meaningless requirement. By your own analysis, the undertaking to hold a shareholder meeting would not likely have been material to an investor's decision to purchase shares of the fund. This action arguably amounts to substantive rulemaking not conforming to the notice and comment requirements of the Administrative Procedures Act. Moreover, any such rule would, for the reasons discussed above, be arbitrary and capricious and not in accordance with law. It is costly to hold meetings, and it is a waste of resources to hold meetings that serve no purpose. The undersigned are aware of at least 80 portolios affected by this ruling, representing approximately $18 bilion in shareholder investments. Hundreds of thousands of dollars in needless meeting costs wil be borne by shareholders or affilates of the funds if the ruling is allowed to stand. Added to this are additional expenses incurred if a quorum is not initially attained and subsequent mailngs are necessitated. If the Division is not persuaded to acquiesce in funds not complying with their undertakings in view of the Division's subsequent determination that such meetings are not required by lay¡, we suggest less costly alternatives that would not compromise the rights shareholders already have. ,The Division could issue a public statement that initial meetings are no longer required, and that funds wil not be obligated to hold meetings notwithstanding prior

undertakings. Alternatively, funds could notify shareholders explaining the change of interpretation by the Division. In our experience this is substantially less costly than conducting a shareholder meeting.

For these reasons we request that the Division reverse its decision to require funds to act in accordance with their prior undertakings to hold an initial shareholder meeting. As

Marianne K. Smythe, Director
Division of Investment Management ... .PS§63 .. .. HUd preparations for shareholder meetings begin several months before the meeting is held, work must begin shortly for many of the funds impacted by the Divisions' decision. We therefore request that you issue your decision on this petition as soon as possible. Respectfully yours,

\
Wi-~vi¡. JdLf
\ l' ~
Wiliam M. Tartikoff Beth-ann Roth
General Counsel Associate General Counsel
Joined by:
The AIM Family Funds
The Benham Group

The Boston Company

Colonial Management Associates, Inc.

Delaware Group of Funds
Eaton Vance Management
The Evergreen Group
The First Investors Family of Funds

Gradison McDonald Funds

John Hancock Mutual Funds

John Nuveen and Co. Inc.

Massachusetts Financial Services Company

National Securities and Research Corporation

NationsFund

Pioneer Mutual Funds

Sanford C. Bernstein Fund, Inc.
SchwabFunds
Shearson Lehman Brothers Family of Funds

StronglCorneliuson Capital Management, Inc.

SunAmerica
T. Rowe Price Associates, Inc.
T.N.E. Fund Group Peter O. Torvik, Chief Executive Oficer of the Great Hall Investment Fund United Group of Funds Waddell & Reed Funds