SEC Brief Argues for Expansion of Shareholder Approval of Concentration Changes
Filing a “friend of the court” brief in a class action litigation, the SEC has argued that a Fund’s Board may not change industry classifications for purposes of defining concentration policies without shareholder approval. In the case, a class of investor plaintiffs sued a fund for over-concentrating in MBS securities. The Fund had defined MBS as an industry class for purposes of the 25% concentration limit, which could not be changed without shareholder approval. The Fund, with Board approval, determined that MBS was not an industry classification and therefore could invest more than 25% of fund assets in mortgage-backed securities. The SEC argues in its brief that the Fund could not make this change without shareholder approval. As support for its argument, the SEC cites its own 1983 guidelines about how to define industry concentration as relying on the “primary economic characteristics.” In a related brief, the ICI argues that the Board retained this discretion.
OUR TAKE: We believe the SEC is indicating that any concentration in excess of 25% may not be changed without shareholder approval, whether or not it is described as “fundamental.”