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If we don’t act quickly, 2024 could be a financially unstable year for retirees. Wall Street’s activist investors are poised to ramp up activity as Social Security benefit increases are expected to be much smaller than last year due to lower cost-of-living adjustments. This is especially bad news for Virginia retirees. Closed-end funds (CEFs), a type of fund similar to mutual funds that have traditionally been an important source of distribution income for seniors, can fall victim to profiteering by activist investors.
Taking advantage of regulatory loopholes in the Investment Company Act of 1940, billionaire investors will continue to undermine CEF stability in 2024 and threaten the retirement of thousands of Virginians unless Congress acts. They will follow a strategy that will put their later savings at risk. Please pass the Investor Opportunity Enhancement Act immediately.
These activist investors’ schemes involve identifying CEFs that trade at a discount to their net asset value. This means that his cost per share of the CEF is lower than the cumulative value of the underlying holdings that make up the fund. Wealthy investment groups then take advantage of these CEF vulnerabilities to launch hostile takeovers, acquiring significant stakes, becoming majority owners, and controlling board members to favor their own economic interests. The association can be reorganized. Finally, these newly appointed boards hand over management contracts to the same hedge fund managers. This often ranges from high-quality, reliable senior loans to virtual currencies and special purpose acquisition companies (shell companies established for the sole purpose of raising capital through initial public offerings for the purpose of acquiring or merging companies). ), leading to a shift in investment strategy to riskier assets such as Existing company.
The number of CEFs is already dwindling, in part due to an intensifying onslaught of activists. Activist influence over these funds inevitably results in changes in investment strategies, putting retirees’ savings at risk by introducing volatile assets that deviate from the stable distribution income retirees expect. become. The shift in focus to riskier assets not only puts retirees’ financial security at risk, but also exposes retirees to potential losses that were not what they signed up for when they first invested in these funds. It will be.
Activist investors may claim that they are taking over the fund for the better, but the results prove that they are in the fund solely for profit. They are building on the Investment Company Act of 1940, which has long served as a safeguard to prevent hedge fund billionaires from exploiting the kinds of funds Americans routinely invest in for their own gain. Continuing to ignore the basic principles outlined. It also emphasizes the fiduciary responsibility of fund boards to act in the best interests of all investors, not just those nominated by deep-pocketed activist investors.
We need to protect retirees, the primary victims, and demand immediate action from Congress. As a member of the Senate Banking Committee, this is an opportunity for Sen. Mark Warner (D-Va.) to support consumer protection by supporting the Senate companion bill to the Expanding Investor Opportunities Act. This bipartisan bill would help level the playing field for retail investors by imposing a 10% cap on hedge funds’ CEF holdings and preventing activists from securing control of CEFs. right. It also helps individual investors who are using her CEF to save for long-term financial goals do so without worrying about being derailed by professional short-term traders.
The Investor Opportunity Enhancement Act is essential to protecting Virginia retirees from the negative economic consequences of activist intervention. Urgent action is needed from Warner and the Legislature to address this pressing issue and protect the livelihoods of the people who have contributed to Virginia’s continued long-term growth.
Robert Kaltenschnee of Yorktown is a product specialist at Truist Wealth and has been in wealth management for 15 years.
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