Published by Compliance Intelligence.

Apr 21, 2014 – – Peter Rawlings

The Securities and Exchange Commission has rejected a request for no-action relief that would have allowed the trust for a JPMorgan Chase municipal money market fund to exclude a shareholder’s proposal from the proxy materials for its next shareholder meeting.

A shareholder in the JPMorgan fund has submitted a proposal that would request that the fund’s board implement procedures to prevent the fund from investing in companies that “substantially contribute to genocide or crimes against humanity.” In a letter to the Commission, Frank Nasta, the trust’s secretary, asked for the SEC’s permission to exclude the proposal, arguing that it wasn’t relevant to the fund’s investments, which are limited to U.S. municipal securities.

Under Rule 14a-8(i)(5) of the Securities Exchange Act, a proposal may be excluded from the proxy materials of a shareholder meeting if it meets the following three conditions:

• The proposal relates to operations that account for less than 5% of the company’s total assets at the end of its most recent fiscal year
• The proposal relates to operations that account for less than 5% of its net earnings and gross sales for its most recent fiscal year
• The proposal is not otherwise significantly related to the company’s business

Nasta argued that the proposal met all of those conditions for exclusion, and provided the fund’s annual report to show that it had not held or generated earnings from investments covered by the proposal. Further, Nasta wrote, since money market fund rules limited the fund to investing in U.S. municipal securities and a small variety of short-term money market instruments, the proposal was otherwise irrelevant to its activity.

The SEC rejected that argument, stating, “We have considered your request and are unable to concur in your view that the proposal may be excluded pursuant to Rule 14a-8(i)(5).” The Commission did not elaborate on its reasoning, stating only that it could not assure JPMorgan that it wouldn’t recommend enforcement if the proposal were to be excluded from the fund’s proxy materials.

By requiring the fund to seek a vote on shareholders’ “politically motivated concerns, the staff is abetting the waste of investor assets,” Cadwalader Wickersham & Taft Partner Steven Lofchie said in a note on the request. “It is difficult to imagine the U.S. municipal securities in which the fund might possibly invest that would substantially contribute to genocide.”

William Rosenfeld, the shareholder behind the proposal and co-founder of the group Investors Against Genocide, told CI: “We’re glad that this particular JP Morgan money market fund will have to address the issue, but our primary interest is in seeing that JPMorgan itself address the issue.”

In Rosenfeld’s opinion, the SEC’s decision came down to weighing the fact that the fund may be unlikely to make such investments against the fact that such investments were still possible for the fund to make—with the SEC deciding that the very possibility of the fund investing required the proposal to be addressed at the shareholder meeting.

A spokeswoman for JPMorgan didn’t respond to a request for comment. An SEC spokeswoman declined to comment.