by Pastor Michael Battle
For generations, millions of middle-class New Yorkers and other Americans have used a type of investment vehicle called closed-end funds (CEFs) to secure their financial future.
A close relative of better-known mutual funds and exchange-traded funds (ETFs), CEFs often deliver more reliable distribution income than other funds as a result of their holdings. This makes them very popular with seniors and folks planning for retirement.
However, all of the benefits CEFs provide are facing a grave threat. Activist investors on Wall Street have set their sights on these funds, planning hostile takeovers to enrich themselves at the expense of the regular Americans who have invested in the fund, and it’s time for New Yorkers to pay attention.
These activist investors have billion-dollar bankrolls and have discovered they can buy up shares of a CEF and wage a proxy campaign to change the adviser. Surprising no one, they appoint their own firm as the CEF’s adviser, completely shift the investment strategy to riskier assets, and then sell their position for a quick profit while continuing to earn management fees, leaving American retirees holding risky assets they never intended to have when they originally invested in the fund.
These billionaire activist investors are using a loophole in the Investment Company Act – a law passed in the wake of the Great Depression to protect investors and prevent fraud – when they buy up shares and orchestrate these hostile takeovers of CEF boards, the fund’s governing body.
Suddenly, American retirees who invested in the CEF because it provided reliable distribution income from safe assets may now be holding a highly speculative fund made up of assets like crypto and high-risk corporations. In many cases, these activist investors have taken control and made the changes before regular investors even realize what’s happening. Even worse, sometimes a CEF will be liquidated entirely as a result of an activist’s takeover, eliminating the income stream original investors were expecting to have for their retirement or other savings purposes.
Alarmingly, the billionaire activists are using this strategy increasingly often, which is why New Yorkers must start paying attention now and speaking up. Income New Yorkers were counting on in retirement may be at stake. On top of this, now fewer CEFs are being created in part because investment managers see activists preying on these funds. With fewer CEFs available for retirees and middle-class Americans to safely invest in, regular people are being left without this useful option.
While some may argue these hostile takeovers are simply the free market at work, that argument fails to recognize the legal intent of the Investment Company Act. For more than 80 years, the Investment Company Act has protected investors and ensured funds serve the best interests of shareholders. The law has allowed for the growth of CEFs, mutual funds, and ETFs that have generated billions of dollars in wealth for Americans saving for their retirement, college for their kids, or a downpayment on a new home. If activist investors with hostile intentions are allowed to exploit loopholes in the law to enrich themselves instead of long-term shareholders’ interests, millions of CEF investors will continue to suffer.
It’s time for robust action to protect American retirees who invested in CEFs long before activist investors started to prey on these funds. Thankfully, New York Congressman Gregory Meeks has proposed a bipartisan bill to protect CEF investors. His Increasing Investor Opportunities Act, would prevent hedge fund managers from exploiting the loopholes they use to take over CEFs, and it would expand opportunities for retail investors to participate in investment opportunities. With both Democrats and Republicans behind the bill, this should be a no brainer.
It’s time for Congress to help investors and retirees stand up to hedge fund bullies. New Yorkers deserve some peace of mind that rich activists won’t take over their investments and exploit them for personal gain. Passing the Increasing Investor Opportunities Act is the best way to do that.
