The Investment Company Institute (ICI) has come out in support of legislation introduced in the U.S. House of Representatives that would amend the rules for closed-end funds.
The Increasing Investor Opportunities Act (H.R. 4262), introduced by U.S. Reps. Gregory Meeks (D-NY) and Anthony Gonzalez (R-OH), would eliminate a loophole that allows activist investors, many of which are hedge fund investors, to harm the interests of long-term shareholders.
In recent years, professional activist investors have been targeting CEFs, ICI officials said. They acquire large positions in a fund at a discount to the fund’s net asset value and subsequently try to force the fund to take actions that will allow the activists to sell their shares at prices at or near net asset value. Through this strategy, the activists may cause the portfolio manager to sell portfolio securities or take other measures to provide the liquidity necessary to cash them out. These actions hurt shareholders who choose to remain or want to remain in the fund.
The SEC currently prohibits a CEF from investing more than 15 percent of its net assets in privately offered funds unless the CEF sells shares to accredited investors who make minimum initial investments of at least $25,000. This bill would restrict the amount of CEF shares activist investors and their affiliates could acquire to no more than 10 percent. This, in turn, would allow retail investors to gain greater exposure to private investments.
“This bipartisan bill will help expand opportunities for Main Street investors to access private investments through closed-end funds while maintaining the important protections for investors that only regulated funds provide pursuant to the Investment Company Act,” ICI President and CEO Eric Pan said. “This bill also will strengthen the closed-end fund structure by eliminating a loophole that activist investors have used to extract short-term profits at the expense of retail investors. ICI is grateful for Representatives Meeks and Gonzalez’s leadership in providing retail investors greater access to these investment opportunities while strengthening investor safeguards.”