Commercial Litigation and Arbitration

Securities Laws — Issue of First Impression — Silence of the SEC

The issue of first impression in Neuberger Berman Real Estate Income Fund, Inc. v. Lola Brown Trust No. 1B, 2007 U.S. Dist. LEXIS 34054 (D. Md. May 8, 2007), was whether a closed end investment company was precluded from issuing a series of shareholder rights plans (poison pills) — each under 120 days in duration — by Section 18(d) of the Investment Company Act, which limits the duration of any subscription right issued by a closed-end investment company to "not later than one hundred and twenty days after [the] issuance" of such right. 15 U.S.C. § 80a-18(d). The offeror argued that the target transgressed this prohibition by issuing a series of rights plans, one after another, for about three years. Analyzing the statutory language and purpose, District Judge Andre M. Davis upheld that this defensive tactic because none of the serially-issued rights plans exceeded the 120-day statutory limit. An interesting part of the decision is the Court’s footnoted reliance on the SEC’s failure to intervene in the action or to preclude the defensive tactic in the exercise of its statutory powers:

It also bears mention that, despite vigorous lobbying by counsel for all parties to this case, the SEC has stood by calmly on the sidelines throughout this dispute. Indeed, the SEC declined an offer communicated to it directly by the court to file an amicus brief in this case, which the parties describe repeatedly as a case of first impression in the closed-end fund industry.... In light of its overarching regulatory role in protecting shareholders, it would be curious for the SEC to maintain its inactivity if it thought violations of federal securities laws were manifest.“

Equally interesting, but more technical, is the Court’s distinction, on textual and statutory intent grounds, of SEC v. Sloan, 436 U.S. 103 (1978), in which the Supreme Court found the SEC had transgressed 15 U.S.C. § 78l(k) — which authorized the SEC ‛summarily to suspend trading in any security (other than an exempted security) for a period not exceeding ten days“ — by imposing a series of summary 10-day trading suspension orders that remained in effect for more than one year.

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