Independent Investment Company Directors:
Open Commission Meeting,
October 13, 1999
The Commission is proposing new rules and rule amendments that are designed to enhance the effectiveness of fund independent directors. The Commission also is issuing a release that provides its views on the Commission's role in disputes between independent directors and fund management, and the views of its staff on interpretive issues related to independent directors. These initiatives are designed to reaffirm the important role that independent directors play in protecting fund investors, strengthen their hand in dealing with fund management, reinforce their independence, and provide investors with greater information to assess the directors' independence.
The proposed rule amendments would require that, for funds relying on any of ten commonly used exemptive rules (including the rule that permits funds to charge distribution fees (or "12b-1 fees")):
- Independent directors constitute at least a majority of the fund's board of directors, rather than the 40 percent currently required by the Investment Company Act. The Commission is requesting comment on whether it should adopt a simple majority requirement (as recommended by a 1992 Commission staff report) or a two-thirds super-majority requirement (as recommended by the recent Investment Company Institute Advisory Group Report).
- Independent directors select and nominate other independent directors.
- Any legal counsel for the fund's independent directors be an independent legal counsel, i.e., it does not also represent the fund's management or close affiliates.
Fund Disclosure Changes
The proposed disclosure amendments would require funds to provide better information about directors, including:
- Basic information about the identity and business experience of directors.
- Fund shares owned by directors.
- Information about directors' potential conflicts of interest.
- The board's role in governing the fund's operations.
Other Rule Changes
The proposed new rules and rule amendments also would:
- Prevent qualified individuals from being unnecessarily disqualified from serving as independent directors because they invest in index funds that hold shares of the fund's adviser or other affiliates.
- Protect the independence of independent directors by requiring that joint "errors and omissions" insurance policies cover lawsuits against them brought by investment advisers.
- Encourage the development of independent audit committees by exempting funds that have these committees from seeking shareholder approval of the fund's auditor.
- Require funds to keep any records they rely on to assess the independence of independent directors.
Interpretive Matters Related to Independent Directors
The Commission is issuing an Interpretive Release expressing the views of the Commission's staff on interpretive matters related to independent directors. The Interpretive Release would:
- Provide guidance about the types of material business and professional relationships that might disqualify a director from serving as an independent director of a fund.
- Clarify that actions taken by fund directors in their capacities as directors generally would not be "joint transactions" that require prior Commission approval.
- Provide guidance regarding when funds may advance legal fees to their directors.
- Provide guidance concerning the circumstances under which funds may compensate fund directors with fund shares.
The Interpretive Release also would provide the Commission's views regarding its role and response in disputes between fund independent directors and fund management when there are allegations of violations of the federal securities laws.
Comment Period and Effectiveness
Comments on the rule proposals would be due January 28, 2000. The views discussed in the Interpretive Release would be effective when it is published.