Despite America’s political divide, most of us agree that the right to vote is sacred. The right to participate in a democratic process, like next week’s presidential election, is something we don’t expect to be attacked. Similar values have long applied to public companies. If you own shares in a company, you have the right to be heard at the annual general meeting.
But now that right is being challenged by the New York Stock Exchange and CBOE Global Markets. Their first battleground is the roughly $550 billion closed-end fund (CEF) market. They asked the Securities and Exchange Commission to not require these publicly traded funds to hold annual meetings and deny shareholders the ability to elect directors. To the surprise of many, the SEC has now exempted NYSE- and CBOE-listed CEFs registered under the Investment Company Act of 1940 from annual stockholder meeting requirements that have existed for more than 100 years. The proposal is being considered. Additionally, the proposed rule changes would allow the CEF to remove the ability of shareholders to elect directors annually or otherwise participate in the board of directors.
Why would exchanges want to deprive shareholders of this fundamental right? Follow the money and you’ll find the answer.
The annual fees paid by CEFs for listing are the main source of income for exchanges. To protect that, exchanges seek to insulate CEFs’ hand-picked boards from elections that investors can hold accountable. While activists like Saba certainly have a vested interest in protecting our company’s right to vote for directors to represent us and have a say in corporate governance matters, the impact of these proposals will be All shareholders will feel the same. If approved, these proposals would allow CEF managers to maintain obedient boards, thereby reducing exorbitant management despite empirical evidence suggesting that stronger governance improves fund performance. You’ll be able to keep your fees and expenses in your pocket.
Because fees are tied to asset levels, not revenues, it is no secret that misaligned CEF managers will do almost anything to preserve capital and protect themselves and board members from liability. is. Some executives even went so far as to strip CEF shareholders of their votes before the annual meeting. This is, of course, a plan that a federal court has ruled to be against the law. Other executives employ unattainable majority voting standards as a ploy to keep their companies on the board even in the event of a crushing election loss.
Shareholders are increasingly voting to reform poorly governed CEFs, and major exchanges and fund managers are now hoping the SEC will step in to rescue them. But they seem to have missed the irony of asking defenders of investor protection to violate the interests of the shareholder community, which includes countless individuals and families.
As the Commission evaluates the impact of these proposals, it has already taken the first step toward recognizing that they would be detrimental to the very shareholders the SEC is charged with protecting. . In an order filed this month, the commission raised several concerns about the NYSE’s proposal, particularly whether it would actually “protect investors and the public interest” as required by law. He pointed out whether or not it was designed.
As it considers the proposal further, the committee should consider other important questions that shareholders have been asking for months. Among them: Why aren’t the NYSE and CBOE assessing the benefits CEF investors can derive from contested elections? Why not address the unique investor protections required of CEF investors as opposed to ETF investors? And most importantly, why don’t they acknowledge the harm this proposal would cause to shareholders through a decline in stock prices?
To answer these questions, the Committee needs to take a closer look at the facts. CEF investors have already made it abundantly clear that they value the right to participate in annual general meetings. In fact, hundreds of retail investors opposed this proposal and submitted comments to the SEC arguing that the right to an annual meeting is a benefit, not a burden. In contrast, support for this proposal appears to be limited to only a handful of proponents, including CEF managers, their employees, and lobbyists.
With CEFs included in the portfolios of millions of individual investors and retirees, the threat posed by these proposals becomes even more dire when considering the exit options for these investors. CEF investors, many of them retirees, had their CEFs sold to them by brokers who took large commissions, unaware that their money would be locked up in funds trading at deep discounts. Unlike ETFs and mutual funds, CEFs do not leave investors with the option to redeem their shares at net asset value. This means that the annual general meeting is the only opportunity for investors to express their opinions without taking a big financial hit.
Without an annual meeting, CEF investors would lose the power to hold underperforming boards accountable, allowing funds to trade at deep discounts, potentially resulting in billions of dollars in losses. occurs. One need only take a quick look at the trajectory of funds that have abolished annual meetings to understand the harm these proposals could cause investors.
In 2020, Dividend and Income Fund was delisted from the New York Stock Exchange because the board said it “wanted to avoid governance burdens.” Since delisting, DNI’s discount has understandably ballooned, with the company’s shares currently trading at around a 35% discount to their holding value. Similarly, since Foxbee was delisted in 2008, the discount rate on its trading price has widened to 40% of its stock holdings. These examples make clear that when corporate democracy is lost, so are ordinary shareholders.
Annual elections are a right investors have relied on in CEFs for more than a century. Without this, investors lose the important ability to elect board members annually and have a say in the future of the fund. The SEC has heard the concerns expressed by shareholders, and it is the SEC’s responsibility to act quickly to reject these proposals in order to protect one of the most fundamental rights of public market investors.
Boaz Weinstein is the founder and chief investment officer of Saba Capital Management, the single largest investor in closed-end funds.
Opinion articles represent the views of the authors and do not necessarily reflect the views of institutional investors.
