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Amended Rule Requires Boards to Examine the Effect of Merger on Funds’ Interests
Washington, DC, July 25, 2002 - The SEC has adopted amendments to Rule 17a-8 under the Investment Company Act of 1940, the rule that permits mergers and other business combinations between affiliated investment companies. The adopted amendments, which essentially codify the relief provided in prior SEC exemptive orders, permit reliance on Rule 17a-8 subject to several conditions that relate to board determinations, shareholder voting, and recordkeeping requirements.
As amended, Rule 17a-8 permits affiliated funds to engage in mergers and other business combinations provided that each fund’s board (including a majority of disinterested directors) determines that the merger is in the best interests of the fund and will not dilute the interests of shareholders. Fund boards are required to consider, if relevant, several factors, including:
- any fees or expenses that will be borne directly or indirectly by the fund in connection with the merger;
- any effect of the merger on annual fund operating expenses and shareholder fees and services;
- any change in the fund’s investment objectives, restrictions, and policies that will result from the merger; and
- any direct or indirect federal income tax consequences of the merger to fund shareholders.
The SEC has also adopted a requirement that an acquiring fund’s board must approve procedures for the valuation of the securities (or other assets) that certain unregistered entities would convey to the fund in a merger. These procedures must provide for the preparation of a report by an independent evaluator that sets forth the fair market value of any such assets for which market quotations are not readily available.