SEC plan to scrap Rule 14a-8 would make activism at closed-end funds costlier

Only one half of this shift is settled law. The Supreme Court decided FS Credit v. Saba in June ^[3]. The SEC's rule changes are still proposals ^[1]. Debevoise partner Vadim Avdeychik and his co-authors wrote that, if adopted, they "could meaningfully change the dynamics of activist campaigns at listed Funds" ^[12][13]. A fund board can rely on Saba this quarter. For now, it can only plan around the proxy rules.

Debevoise argues that the two moves together return leverage from activists to fund boards and sponsors ^[18]. Saba narrowed the litigation route. The proposals would narrow what the memo calls "a second set of tools" ^[4], meaning the low-cost ways of putting a proposal in front of shareholders. The Rule 14a-4(c) amendment is the less visible part. Under the current rule, a proponent can submit a proposal on time outside Rule 14a-8 and solicit holders of enough shares to carry it. When that happens, the fund loses discretionary authority to vote the proxy cards it receives on that proposal ^[16]. According to the memo, leaving that rule unchanged would give proponents a route around the rescission ^[11].

The SEC's case for scrapping Rule 14a-8 rests on the limits of its own authority. Its principal rationale is that the rule exceeds its powers under Section 14(a) of the Exchange Act and, for registered closed-end funds, the parallel Section 20(a) of the 1940 Act ^[8]. In the SEC's reading, those powers cover the solicitation process but not the substance of shareholder voting rights ^[8]. Without the rule, state law and each fund's governing documents would decide whether a proposal must be included ^[9]. Since the SEC first adopted Rule 14a-8, only Texas has passed a law on shareholder proposals, and no state today makes inclusion mandatory ^[9]. I'd expect the next round of fund governance disputes to be fought over those governing documents.

The memo itself says activists keep their core rights. They could still nominate directors, solicit proxies and invoke state law or rights written into the 1940 Act ^[5]. What changes is the cost of winning. They "would have to spend more, mobilize more shareholders and obtain more affirmative voting instructions to succeed," the Debevoise lawyers wrote ^[17]. "In a retail-heavy Fund, that shift can be outcome determinative," they wrote ^[6]. The memo ran under the headline "A Welcome Development for Listed Closed-End Funds and BDCs" ^[14].

The sponsors' side of the argument rests on a shrinking market. According to the memo, the number of listed closed-end funds has fallen 42% since 2007, and there have been only four new CEF IPOs since 2023 ^[7]. The authors say the proposals could improve the calculus for sponsors considering a listed fund ^[19]. The memo does not measure how much of the decline came from activism. A sponsor that files this quarter does so with Saba already in force. Whether its fund trades under the new proxy rules depends on what the SEC adopts ^[1].