Alert April 09, 2013

SEC Staff Grants No-Action Relief for Blanket Shareholder Approval of Successor Advisory Agreements Resulting from Restructuring by Fund Advisers’ Ultimate Parent

The staff of the SEC’s Division of Investment Management (the “Staff”) granted no-action relief permitting the registered investment companies in a fund complex (the “Funds”) to obtain shareholder approval of a series of new investment advisory and sub-advisory agreements (the “New Agreements”) with the Funds’ investment advisers and affiliated subadvisers (collectively, the “Advisers”) at a single meeting of shareholders prior to the commencement of a series of related divestiture transactions by the Advisers’ ultimate parent (each a “Transaction”) that could cause successive terminations of then current investment advisory and sub-advisory agreements for the Funds to the extent that the divestiture transactions result in one or more “assignments,” as such term is defined in the Investment Company Act of 1940, as amended (the “1940 Act”), of those agreements.

Advisory Agreement Termination in the Event of Assignment

Consistent with Section 15(a)(4) of the 1940 Act, the Funds’ advisory agreements provide that they terminate automatically in the event of an “assignment,” which is defined by Section 2(a)(4) of the 1940 Act to include “any direct or indirect transfer… of a controlling block of the assignor’s outstanding voting securities by a security holder of the assignor.”  Though “controlling block” is not defined by the 1940 Act or the regulations thereunder, Section 2(a)(9) of the 1940 Act provides a rebuttable presumption of “control” when a person owns 25% or more of the voting securities of a company.  Thus, a direct or indirect transfer of 25% of the voting securities of an Adviser, e.g., through the transfer of voting securities of a direct or indirect parent of the Adviser to a third party, may be deemed a transfer of a “controlling block” of the Adviser’s outstanding voting securities, and as such, an “assignment” terminating the Adviser’s advisory agreements with the Funds.  Section 15(a) of the 1940 Act generally provides that no person may serve as an investment adviser to a registered investment company except pursuant to a written contract that, among other things, has been approved by the vote of a majority of the company’s outstanding voting securities.  Accordingly, to the extent that one or more Transactions are deemed to be an “assignment,” multiple shareholder approvals of successor advisory agreements could be required.

Restructuring by Advisers’ Ultimate Parent

Each Adviser is an indirect wholly-owned subsidiary of the U.S. holding company subsidiary (the “US Parent”) of a publicly-held non-U.S. global financial services company (the “Parent”).  In connection with the receipt of government-backed financial assistance during the financial crisis of 2008-09, the Parent agreed to a restructuring plan (the “Plan”), which includes, among other things, a requirement that it divest itself of its U.S.-based insurance operations, including its U.S.-based investment management business by year-end 2016 (the “Divestiture”).  The Parent has announced that it intends to accomplish the Divestiture in stages through the Transactions, which will include an initial public offering of the common stock of the US Parent in 2013 (the “IPO”), and a series of one or more additional public offerings of ING US, through which the Parent will divest its entire ownership interest in the US Parent over time.  Recognizing that the Transactions could result in one or more terminations of then current advisory agreements, because the Transactions could cause the “assignment” of those contracts within the meaning of the 1940 Act, the Advisers propose to seek approval of each New Agreement from the Funds’ board, but seek only a single blanket approval from Fund shareholders of all New Agreements that may result from the Transactions.  Additionally, until the Plan is complete, the Advisers undertake that the prospectuses for each open-end Fund and the shareholder reports for each closed-end Fund will disclose the relevant facts associated with the Plan and disclose that the Fund’s shareholders have approved the New Agreements.

In support of their request for no-action relief, the Advisers stated that there are reasonable arguments that the Plan may not result in any “assignment,” and therefore no New Agreements may be necessary.  In this regard, the Advisers noted that, both before and after the implementation of the Plan, the Advisers will be held, directly or indirectly, by a broadly dispersed group of public shareholders.  The Advisers represented that this is consistent with the relief provided in Dean Witter, Discover & Co.; Morgan Stanley Group Inc., SEC No-Action Letter (publ. avail. April 18, 1997), in which the Staff stated that “[t]he transfer of or issuance of a block of stock in connection with a merger involving two issuers generally would not by itself cause an assignment of the advisory contracts of their advisory subsidiaries, for purposes of the [1940 Act] or the Advisers Act, unless (1) a person who had control of either issuer prior to the transaction does not have control of the surviving entity after the transaction, (2) a person who did not have control of either issuer prior to the transaction gains control of the surviving entity, or (3) the transaction results in an advisory subsidiary being merged out of existence.”

Representations Regarding the Divestiture

The Staff based its decision not to recommend enforcement action with respect to the Adviser’s proposal regarding blanket shareholder approval of the New Agreements in particular on the Advisers’ representations that (i) the Parent is required under the Plan to complete the Divestiture prior to year-end 2016 and that the multiple offerings necessary to complete the Divestiture will all be related and, in essence, part of a single plan for Parent to divest its stake in the US Parent, and (ii) following the Divestiture, shares of the US Parent will be broadly distributed, without the acquisition of more than 25% of the US Parent by a single “person,” as such term is defined in Section 2(a)(28) of the 1940 Act.

ING Investments, LLC, Directed Services LLC and ING Investment Management Co. LLC, SEC No-Action Letter (publ. avail. March 27, 2013).