NYSE seeks to end closed-end fund meeting rule, opening divide with investors: Ross Kerber
The opinions expressed here are those of the author, a columnist for Reuters.
By Ross Kerber
Aug 7 (Reuters) -Corporate annual meetings provideone of the great rituals of business reporting, a rare chance to watch executives and directors speak directly with investors.
But mutual fund shareholder meetings are much more obscure. Most top funds only stage them every few years such as when they need a bylaw tweak. Few investors bother to show up.
So initially I wasn't so excited when a colleague pointed out a rule change the New York Stock Exchange put forward to eliminate required annual meetings for closed-end funds. I changed my mind when I saw the proposal generated pushback from academics and investors who understandit as a bid to prop up underperformers.
Unlike many well-known mutual funds like Fidelity's Magellan FMAGX.N or the Vanguard 500, VOO.P closed-end funds issue a fixed number of shares that can then be bought or sold on exchanges. A funds' trading price can vary above or below its net asset value (NAV).
A recent U.S. trade group report found closed-endfunds generally trade below their NAV due to factors like investors' concerns for tax exposure. As of the end of last year traditional closed-end funds held $249 billion, compared to $33 trillion in open-end mutual funds and ETFs.
NYSE, owned by Intercontinental Exchange,ICE.N says it has the largest share of closed-end fund listings. The discounted share prices have led to challenges from activists looking to put their own directors in place to improve performance, notably the efforts of hedge fund manager Boaz Weinstein's Saba Capital Management against closed-end funds of BlackRock.BLK.N
Now the NYSE's efforts could change both sides' calculations. In a July 3 notice the NYSE proposed to include closed-end funds "among the categories of issuers that are exempt" from the requirement to hold a shareholder meeting each year. Trade group the Investment Company Institute supports the idea, calling the meeting requirement superfluous and expensive.
Yet whatcould be seen as a routine and obscure rule change proposal has Saba and others up in arms. The idea "represents a destruction ... of the very rights shareholders were told they had when they bought these funds" Saba wrote in a comment letter.
The key issue for Saba is that doing away with the regular meetings means investors would have to call a special meeting to replace directors, leaving shareholders "powerless to effect change," Saba's letter states.
Other groups including theSecurities Industry and Financial Markets Association alsosupported the rule change in a comment letter, saying the current system gives a minority investor too much power as the annual meetings "frequently have limited retail investor participation" - a polite way of saying mom-and-pop shareholders don't vote.
But that sort of activism is good for investors, said a group of academic economists, by creating opportunities to sell shares close to a fund's NAV and not at a discount.
The proposal "can be viewed as akin to a request by NYSE to grant all listed CEFs (closed-end funds)a takeover defense" that would be harmful to investors, wrote the group led by Wharton School Professor Daniel Taylor.
NYSE's proposal needs approval from the U.S. Securities and Exchange Commission, as does a similar proposal from Cboe BZX Exchange.CBOE.Z An SEC representative declined to comment.
(This column is part of the Reuters Sustainable Finance newsletter. To receive the newsletter every Wednesday you can sign up here.)
NYSE dominates closed-end fund market https://reut.rs/3WCyA5v
Reporting by Ross Kerber; Editing by David Gregorio
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