Final Rule: S7-23-99Final Rule:
Role of Independent Directors of Investment Companies
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 239, 240, 270 and 274
[Release Nos. 33-7932; 34-43786; IC-24816; File No. S7-23-99]
RIN 3235-AH75
Role of Independent Directors of Investment Companies
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
SUMMARY: The Commission is adopting amendments to certain exemptive rules under the Investment Company Act of 1940 to require that, for investment companies that rely on those rules: independent directors constitute a majority of their board of directors; independent directors select and nominate other independent directors; and any legal counsel for the independent directors be an independent legal counsel. We also are adopting amendments to our rules and forms to improve the disclosure that investment companies provide about their directors. These amendments are designed to enhance the independence and effectiveness of boards of directors of investment companies and to better enable investors to assess the independence of those directors.
DATES: Effective Date: February 15, 2001, except that the rescission of § 270.2a19-1 under the Investment Company Act will become effective May 12, 2001.
Compliance Date: Section III of this release contains information on compliance dates.
FOR FURTHER INFORMATION CONTACT: For information regarding the Investment Company Act rule amendments, contact Jaea F. Hahn, Attorney, Martha B. Peterson, Special Counsel, or C. Hunter Jones, Assistant Director, Office of Regulatory Policy, (202) 942-0690, or regarding the disclosure amendments, contact Kimberly Browning, Attorney, Peter M. Hong, Special Counsel, or Kimberly Dopkin Rasevic, Assistant Director, Office of Disclosure Regulation, (202) 942-0721, at the Division of Investment Management, Securities and Exchange Commission, 450 5th Street, N.W., Washington, DC 20549-0506.
SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission (the "Commission") is adopting new rules 2a19-3 [17 CFR 270.2a19-3], 10e-1 [17 CFR 270.10e-1], and 32a-4 [17 CFR 270.32a-4] and amendments to rules 0-1 [17 CFR 270.0-1], 10f-3 [17 CFR 270.10f-3], 12b-1 [17 CFR 270.12b-1], 15a-4 [17 CFR 270.15a-4], 17a-7 [17 CFR 270.17a-7], 17a-8 [17 CFR 270.17a-8], 17d-1 [17 CFR 270.17d-1], 17e-1 [17 CFR 270.17e-1], 17g-1 [17 CFR 270.17g-1], 18f-3 [17 CFR 270.18f-3], 23c-3 [17 CFR 270.23c-3], 30d-1 [17 CFR 270.30d-1], 30d-2 [17 CFR 270.30d-2], and 31a-2 [17 CFR 270.31a-2] under the Investment Company Act of 1940 [15 U.S.C. 80a] ("Investment Company Act" or "Act"); amendments to Forms N-1A [17 CFR 274.11A], N-2 [17 CFR 274.11a-1], and N-3 [17 CFR 274.11b] under the Investment Company Act and the Securities Act of 1933 [15 U.S.C. 77a-aa] ("Securities Act"); and amendments to Schedule 14A [17 CFR 240.14a-101] under the Securities Exchange Act of 1934 [15 U.S.C. 78a-mm] ("Exchange Act"). The Commission also is rescinding rule 2a19-1 under the Investment Company Act [17 CFR 270.2a19-1].
TABLE OF CONTENTS
EXECUTIVE SUMMARY
I. BACKGROUND
II. DISCUSSION
III. EFFECTIVE DATE, COMPLIANCE DATES
IV. COST-BENEFIT ANALYSIS
V. EFFECTS ON EFFICIENCY, COMPETITION, AND CAPITAL FORMATION
VI. Paperwork Reduction Act
VII. Summary of Final Regulatory Flexibility Analysis
TEXT OF FINAL RULES AND FORMS
EXECUTIVE SUMMARY
The Commission is adopting new rules and amendments to rules and forms to enhance the independence and effectiveness of independent directors of investment companies ("funds"). First, we are adopting amendments to require, for funds relying on certain exemptive rules, that:
- independent directors constitute a majority of the fund's board of directors;
- independent directors select and nominate other independent directors; and
- any legal counsel for the fund's independent directors be an independent legal counsel.
Second, the rules and amendments:
- prevent qualified individuals from being unnecessarily disqualified from serving as independent directors;
- protect independent directors from the costs of legal disputes with fund management;
- permit us to monitor the independence of directors by requiring funds to keep records of their assessments of director independence;
- temporarily suspend the independent director minimum percentage requirements if a fund falls below a required percentage due to an independent director's death or resignation; and
- exempt funds from the requirement that shareholders ratify or reject the directors' selection of an independent public accountant, if the fund establishes an audit committee composed entirely of independent directors.
Finally, we are requiring that funds provide better information about directors, including:
- basic information about the identity and business experience of directors;
- fund shares owned by directors;
- information about directors that may raise conflict of interest concerns; and
- the board's role in governing the fund.
Together, these new rules and amendments 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.
I. BACKGROUND
Mutual funds are organized as corporations, trusts, or limited partnerships under state laws, and thus are owned by their shareholders, beneficiaries, or partners.1 Like other types of corporations, trusts, or partnerships, a mutual fund must be operated for the benefit of its owners.2 Unlike most business organizations, however, mutual funds are typically organized and operated by an investment adviser that is responsible for the day-to-day operations of the fund. In most cases, the investment adviser is separate and distinct from the fund it advises, with primary responsibility and loyalty to its own shareholders.3 The "external management" of mutual funds presents inherent conflicts of interest and potential for abuses that the Investment Company Act and the Commission have addressed in different ways.4
One of the ways that the Act addresses conflicts between advisers and funds is by giving mutual fund boards of directors, and in particular the disinterested directors,5 an important role in fund governance.6 In relying on fund boards to represent fund investors and protect their interests, Congress avoided the more detailed regulatory provisions that characterize other regulatory schemes for collective investments.7 The Commission has similarly relied extensively on independent directors in rules we have adopted that exempt funds from provisions of the Act.8
Millions of Americans are today invested in mutual funds, which have experienced a tremendous growth in popularity over the past twenty years.9 In light of this growth, and our growing reliance on independent directors to protect fund investors, last year we undertook a review of the governance of investment companies, the role of independent directors, our rules that rely on oversight by independent directors, and the information that funds are required to provide to shareholders about their independent directors.
We held a Roundtable discussion at which independent directors, investor advocates, executives of fund advisers, academics, and experienced legal counsel offered a variety of perspectives and suggestions.10 After evaluating the ideas and suggestions offered by Roundtable participants last year, we proposed a package of rule and form amendments that were 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 better information to assess the independence of directors.11
We received 142 comment letters on our proposals, including 86 letters from independent directors.12 Commenters generally commended our efforts to enhance the independence and effectiveness of fund directors, although many offered recommendations for improving portions of the proposals. Many of these letters were helpful to us in formulating the final rules and amendments, which we are today adopting.
We have reason to believe that our efforts to improve the governance of mutual funds on behalf of mutual fund investors have already borne fruit. Our Roundtable discussions and proposed rules have provoked a great deal of discussion among directors, advisers, counsel, and investors about governance practices and policies. After our Roundtable, an advisory group organized by the Investment Company Institute ("ICI") made recommendations regarding fund governance in a "best practices" report ("ICI Advisory Group Report").13 Many boards, we understand, have adopted the recommendations set forth in the ICI Advisory Group Report. Some groups of independent directors have hired independent counsel for the first time. Director nomination and selection procedures have been revised.
During the last year, Commissioners and members of the staff began meeting with independent directors and sharing ideas and concerns regarding the governance of mutual funds.14 Former Commission Chairman David Ruder established the Mutual Fund Directors Education Council, a broad-based group of persons interested in fund governance and operations,15 whose purpose is to foster the development of educational activities designed to promote the efficiency, independence, and accountability of independent fund directors. The American Bar Association formed a task force to examine the role of counsel to independent directors, and the task force released a report offering guidance to counsel and fund directors regarding standards of independence for counsel, and guidelines for reducing potential conflicts of interest ("ABA Task Force Report").16 All of these initiatives have focused attention on the important role of independent directors, and their importance in promoting and protecting the interests of fund shareholders.
II. DISCUSSION
A. Amendments to Exemptive Rules to Enhance Director Independence and Effectiveness
We are amending ten rules that exempt funds and their affiliates from certain prohibitions of the Act (the "Exemptive Rules").17 As discussed further below, the amendments add conditions to the Exemptive Rules to require that, for funds that rely on the rules, (i) independent directors constitute a majority of the board, (ii) independent directors select and nominate other independent directors, and (iii) any legal counsel for the independent directors be an independent legal counsel.18
Most commenters supported our goal of enhancing the independence and effectiveness of independent directors of funds that choose to rely on the Exemptive Rules.19 Some commenters questioned the need to amend the rules, because each rule already requires independent directors to separately approve some of the fund's activities under the rule. We selected these rules because they require the independent judgment and scrutiny of independent directors in overseeing activities that are beneficial to funds and investors, but involve inherent conflicts of interest between the funds and their managers.20 The amendments are designed to increase the ability of independent directors to perform their important responsibilities under each of these rules.
1. Independent Directors as a Majority of the Board
a) Board Composition Requirements
We are amending the Exemptive Rules to require that the boards of funds relying on the rules have a majority of independent directors.21 A majority requirement will permit, under state law, the independent directors to control the fund's "corporate machinery," i.e., to elect officers of the fund, call meetings, solicit proxies, and take other actions without the consent of the adviser.22 As a result, independent directors who comprise the majority of a board can have a more meaningful influence on fund management and represent shareholders from a position of strength.23 In short, a board with a majority of independent directors can be more effective in representing investors than a board with a majority of "inside" directors.24 Commenters were supportive of this proposal.25
We are allowing funds ample time to implement the new majority independence condition. The compliance date for the majority independence condition is July 1, 2002. Although most funds already have a majority of independent directors, the transition period will allow sufficient time for those that do not, to carry out the selection, nomination, and election of new independent directors in accordance with the amended rules.26
b) Suspension of Board Composition Requirements
We are adopting new rule 10e-1, which temporarily suspends the board composition requirements of the Act and our rules, if a fund fails to meet those requirements because of the death, disqualification, or bona fide resignation of a director. For a fund that relies on one or more of the Exemptive Rules, rule 10e-1 will provide relief if the fund no longer has a majority of independent directors because of the sudden loss of one or more directors.27
Rule 10e-1 suspends the board composition requirements for 90 days if the board can fill a director vacancy, or 150 days if a shareholder vote is required to fill a vacancy.28 We have extended the time period when only board action is required (from the 60 day period we proposed) in response to comments that additional time would be needed for independent directors to select and nominate candidates, and for the board to elect new directors.29
2. Selection and Nomination of Independent Directors
We are adopting, as a condition of the Exemptive Rules, a requirement that the independent directors of funds relying on those rules select and nominate30 any other independent directors.31 Commenters supported the proposal, and many specifically agreed that the self-selection and self-nomination of independent directors fosters an independent-minded board that focuses primarily on the interests of a fund's investors rather than its adviser.32
Several commenters asked that we clarify the extent to which fund shareholders or a fund's adviser may participate in the selection and nomination process under the amendments. Control of the selection and nomination process at all times should rest with a fund's independent directors.33 These amendments are not intended to supplant or limit the ability of fund shareholders under state law to nominate independent directors. The adviser may suggest independent director candidates if the independent directors invite such suggestions, and the adviser may provide administrative assistance in the selection and nomination process. Independent directors, however, should not view participation by shareholders and investment advisers in this process as precluding or excusing the independent directors from the responsibility to canvass, recruit, interview, and solicit independent director candidates.
3. Independent Legal Counsel
We are adopting amendments to each of the Exemptive Rules to require that any legal counsel for the fund's independent directors be an "independent legal counsel."34 We believe that the conflicts involved in the transactions and arrangements permitted by the Exemptive Rules make it critical that independent directors, when they seek legal counsel, be represented by persons who are free of significant conflicts of interest that might affect their legal advice.35
The Commission received many comments on this proposal. Most fund management companies, and a number of independent directors and their lawyers, opposed the proposed amendments. Many argued that the selection of counsel was a matter that should be left to independent directors. Some argued that the bar association rules of professional conduct are adequate to assure independence of counsel. Others argued that imposing the independent counsel requirement could deny independent directors competent counsel from larger law firms with many potential conflicts.
Given the vital role of independent directors in the resolution of conflicts between the fund and its investment adviser, it is important that they have access to counsel who is free from conflicting loyalties. This is particularly true when directors are called upon to exercise judgment in certain key areas of their responsibilities such as approving the advisory contract or a distribution plan, approving a merger, monitoring the allocation of fund brokerage, or valuing fund securities.36 Yet, as we observed in the Proposing Release, some independent directors have relied on counsel who has simultaneously represented the fund's adviser, or who does substantial legal work for the adviser or its affiliates.37 We continue to be concerned by these conflicts and how they affect the ability of directors to carry out their responsibilities under the Act and the Exemptive Rules.
Funds also should be concerned when counsel to the independent directors have these types of conflicts of interest. The appearance of a conflict undermines the confidence investors have in the independence of their fund's directors to represent investors' interests. Directors who accept these conflicts strengthen the argument that more drastic changes are necessary in the way mutual funds are governed.38 Fund advisers also should be concerned when independent directors engage counsel with substantial conflicts, because the adviser and the funds may be denied a significant defense in any lawsuit charging that its advisory fee or other payments or transactions are excessive or inappropriate.39
While we are persuaded that Commission rulemaking is necessary, we appreciate the concerns that the independent directors expressed in their comment letters on the proposed amendments. Many were concerned that the proposal did not afford them sufficient flexibility in selecting counsel. Some misunderstood our proposal as permitting counsel to have conflicts that are only extremely small or remote. That was not our intention, which we have clarified in revising the proposed amendments.
Under the final rule amendments, reliance on each of the Exemptive Rules would be conditioned on any legal counsel for a fund's independent directors being an "independent legal counsel."40 A person41 is considered an independent legal counsel if (i) the independent directors determine that any representation of the fund's investment adviser, principal underwriter, administrator (collectively "management organizations") or their control persons42 during the past two fiscal years is or was sufficiently limited43 that it is unlikely to adversely affect the professional judgment of the person in providing legal representation,44 and (ii) the independent directors have obtained an undertaking from the counsel to provide them information necessary for their determination, and to update promptly that information if the counsel begins, or materially increases, the representation of a management organization or control person.45
The final amendments rely on the independent directors to determine whether a person is an independent legal counsel. They must make this determination no less frequently than annually, and the basis for the determination must be recorded in the board's meeting minutes.46 If the independent directors obtain information that their counsel has begun to represent a management organization or control person, they must determine whether this new representation - together with any other representations of management organizations and control persons - is unlikely to adversely affect the counsel's professional judgment.47 In order to prevent the fund from losing the availability of the exemptions in these circumstances, the rule provides that counsel can still be considered "independent legal counsel" for up to three months, which will provide time for the independent directors to make a new determination about the counsel or to hire a new independent legal counsel.48
In determining whether a counsel is an "independent legal counsel" under the rule, the judgment of the directors is not unbounded; it must be reasonable.49 The independent directors should consider all relevant factors in evaluating whether the conflicting representations are "sufficiently limited."50 For example, independent directors should consider (i) whether the representation is current and ongoing; (ii) whether it involves a minor or substantial matter; (iii) whether it involves the fund, the adviser, or an affiliate, and if an affiliate, the nature and the extent of the affiliation; (iv) the duration of the conflicting representation; (v) the importance of the representation to counsel and his firm (including the extent to which counsel relies on that representation economically); (vi) whether it involves work related to mutual funds;51 and (vii) whether the individual who will serve as legal counsel was or is involved in the representation.52 Applying these factors, we do not believe that independent directors could ordinarily conclude that a lawyer whose firm simultaneously represents the fund's adviser and independent directors in connection with matters as important to fund shareholders as the negotiation of the advisory contract53 or distribution plan, or other key areas of conflict between the fund and its adviser, is an "independent legal counsel."54
We admonish directors to consider that your decision in selecting an independent counsel is not merely a matter of personal preference (as some commenters suggested), but an important exercise of your business judgment as an independent director.55 The final rule makes it clear, however, that you are entitled to rely on information provided by counsel in forming your judgment.56
B. Limits on Coverage of Directors under Joint Insurance Policies
We are adopting an amendment to rule 17d-1(d), which permits funds to purchase "errors and omissions" joint insurance policies for their officers and directors.57 Currently, many of these policies contain exclusions when parties sue each other. As a result, independent directors of funds may not be covered against lawsuits by the adviser and consequently may be reluctant to take actions necessary to protect fund investors, out of concern for personal liability. Under the amendment, which we are adopting as proposed, rule 17d-1(d) is available only if the joint insurance policy does not exclude coverage for litigation between the adviser and the independent directors.58 Commenters supported the proposed amendments, and agreed that they would allow independent directors to faithfully carry out responsibilities without concern for personal financial security.
C. Independent Audit Committees
We are adopting new rule 32a-4 exempting funds from the Act's requirement that shareholders vote on the selection of the fund's independent public accountant if the fund has an audit committee composed wholly of independent directors.59 The rule will permit continuing oversight of the fund's accounting and auditing processes by an independent audit committee, in place of the shareholder vote. Commenters agreed that the shareholder ratification has become largely perfunctory, and that an independent audit committee could exercise more meaningful oversight.
Under the new rule, a fund is exempt from having to seek shareholder approval of its independent public accountant, if (i) the fund establishes an audit committee composed solely of independent directors that oversees the fund's accounting and auditing processes,60 (ii) the fund's board of directors adopts an audit committee charter setting forth the committee's structure, duties, powers, and methods of operation, or sets out similar provisions in the fund's charter or bylaws,61 and (iii) the fund maintains a copy of such an audit committee charter.62 Some commenters questioned whether the proposed rule would require the audit committee to supervise a fund's day-to-day management and operations. The rule does not require, nor did we intend, that an audit committee perform daily management or supervision of a fund's operations.63
D. Qualification as an Independent Director
In addition to the amendments to enhance the independence of fund boards, we are adopting a new rule to prevent qualified individuals from being unnecessarily disqualified from being considered an independent director. We are also rescinding a rule that has become unnecessary.
1. Ownership of Index Fund Securities
We are adopting new rule 2a19-3, which conditionally exempts an individual from being disqualified as an independent director solely because he or she owns shares of an index fund that invests in the investment adviser or underwriter of the fund, or their controlling persons.64 As proposed, the exemption would have been available if the value of securities issued by the adviser or underwriter (or controlling person) did not exceed five percent of the value of any index tracked by the index fund. The purpose of this condition was to assure that an independent director's indirect interest in the adviser's securities would not be substantial enough to impair his or her independence and create a conflict of interest.65 In response to some commenters' concerns that monitoring the five percent limit would be very difficult, we revised the rule so that it provides relief if a fund's investment objective is to replicate the performance of one or more "broad-based" indices.66
2. Affiliation with a Broker-Dealer
We are rescinding rule 2a19-1, which provides relief from the section of the Act that defines when a fund director is considered to be independent.67 We had proposed to amend that rule to permit a slightly greater percentage of fund independent directors to be affiliated with registered broker-dealers, under certain circumstances. After our proposal, however, Congress passed the Gramm-Leach-Bliley Act, which amended section 2(a)(19) of the Investment Company Act and established new standards for determining independence under the circumstances we addressed in our proposal.68 These amendments to the Act obviate the need for the exemptive relief provided by rule 2a19-1, and therefore we are rescinding the rule.69
E. Disclosure of Information about Fund Directors
We believe that shareholders have a significant interest in knowing who the independent directors are, whether the independent directors' interests are aligned with shareholders' interests, whether the independent directors have any conflicts of interest, and how the directors govern the fund. This information helps a mutual fund shareholder to evaluate whether the independent directors can, in fact, act as an independent, vigorous, and effective force in overseeing fund operations.
In reevaluating our current disclosure requirements, we concluded that, while our fundamental approach has been sound, there are several gaps in the information that shareholders currently receive about directors. We therefore proposed amendments to close these gaps. The proposal would require funds to:
- Provide basic information about directors to shareholders annually so that shareholders will know the identity and experience of their representatives;
- Disclose to shareholders fund shares owned by directors to help shareholders evaluate whether directors' interests are aligned with their own;
- Disclose to shareholders information about directors that may raise conflict of interest concerns; and
- Provide information to shareholders on the board's role in governing the fund.
We are adopting the disclosure amendments with several modifications designed to tailor the amendments more closely to our goal of providing shareholders with better information to evaluate the independent directors.
1. Basic Information
We are adopting the requirement to disclose basic information about directors in an easy-to-read tabular format, as proposed.70 The table will be required in three places: the fund's annual report to shareholders, SAI, and proxy statement for the election of directors. The table will require for each director: (1) name, address, and age; (2) current positions held with the fund; (3) term of office and length of time served; (4) principal occupations during the past five years; (5) number of portfolios overseen within the fund complex; and (6) other directorships held outside of the fund complex.71 The table also requires for each interested director, as defined in Section 2(a)(19) of the Investment Company Act, a description of the relationship, events, or transactions by reason of which the director is an interested person.
Commenters generally supported the proposal, although several commenters opposed as unnecessary the requirement to describe in the table the relationships, events, or transactions that make certain directors "interested persons." Funds are currently required to disclose this information in the proxy statement for the election of directors, and we are adopting this requirement as proposed.72 We believe it is important that shareholders be provided with an explanation of why certain directors are "interested persons."73
2. Ownership of Equity Securities in Fund Complex
We are adopting with modifications the requirement to disclose the amount of equity securities of funds in a fund complex owned by each director.74 Commenters generally agreed with the Commission that disclosure of this information would be useful to shareholders in assessing whether directors' interests are aligned with those of shareholders.
a) Disclosure of Amounts Owned by Directors
Many commenters expressed concern about the proposed requirement that funds disclose the exact dollar amount of securities directors own in a fund complex. These commenters argued that this disclosure would discourage potential directors from agreeing to serve, in order to avoid intrusions into their privacy, and might cause existing directors to reduce or sell their holdings to avoid publicity about their investments. As an alternative, many suggested that we require funds to disclose directors' equity ownership using specified dollar ranges, rather than exact dollar amounts. These commenters noted that using dollar ranges would provide shareholders with sufficient information to assess whether directors' interests were aligned with their own, making disclosure of exact dollar amounts unnecessary.
We are persuaded by these comments and have modified the proposal to require disclosure of a director's holdings of securities using dollar ranges rather than an exact dollar amount. Funds will be required to disclose directors' equity ownership using the following ranges: None; $1-$10,000; $10,001-$50,000; $50,001-$100,000; or over $100,000. We believe that disclosure of directors' holdings using these dollar ranges will provide investors with significant information to use in evaluating whether directors' interests are aligned with their own, while protecting directors' legitimate privacy interests.
b) "Beneficial Ownership"
We received a number of comments requesting clarification about the types of director holdings that would be disclosed under the proposal. Based on these comments, we reevaluated our proposal to require disclosure of securities owned beneficially and of record by each director. Under the proposal, "beneficial ownership" would have been determined in accordance with rule 13d-3 of the Exchange Act, which focuses on a person's voting and investment power.75 In light of our objective of providing information about the alignment of directors' and shareholders' interests, we believe that disclosure of record holdings should not be required and that the focus of "beneficial ownership" should be on whether a director's economic interests are tied to the securities, rather than his ability to exert voting power or to dispose of the securities. Therefore, we are modifying the proposal to require disclosure of "beneficial ownership" in accordance with the definition contained in rule 16a-1(a)(2) under the Exchange Act.76 This definition, consistent with our goal, emphasizes the economic incidence of ownership.
c) Disclosure of Ownership in Funds the Director Oversees within the Same "Family of Investment Companies"
We proposed to require aggregate disclosure of a director's holdings in a fund complex, rather than separate disclosure of a director's holdings in a particular fund. We were concerned that fund-specific information might have limited meaning because of the many reasons that a director could have for not holding shares of any specific fund, e.g., that its investment objective did not fill a need in the director's portfolio. Several commenters recommended, however, that disclosure of a director's holdings should be made on a fund-by-fund basis, rather than a complex-wide basis, arguing that it would be more relevant to disclose to shareholders a director's ownership of the specific funds on whose board the director serves. Other commenters agreed that disclosure of a director's holdings should be on an aggregate basis as proposed, but recommended that the disclosure be limited to a director's aggregate ownership in the funds overseen by a director within a fund complex. These commenters argued that disclosure in this manner is more useful to investors than complex-wide disclosure in assessing whether a director's interests are aligned with their own.
We are persuaded by these comments and have modified the proposal to require disclosure of: (1) each director's ownership in each fund that he oversees; and (2) each director's aggregate ownership in any funds that he oversees within a fund family. We believe that a director's ownership in a particular fund provides the most direct indication of his alignment with the interests of shareholders in that fund. We continue to believe, however, that disclosure of a director's aggregate ownership will provide shareholders with relevant information about the director's alignment with shareholders. In addition, a director could have many reasons for not holding shares of a specific fund, e.g., that its investment objectives do not match the director's. Disclosure of aggregate ownership will help prevent any inappropriate negative inference about fund management that a fund shareholder could draw from the fact that a director does not hold shares of a particular fund.
For purposes of determining a director's holdings in a fund complex, the Commission proposed to define "fund complex" as two or more funds that (1) hold themselves out to investors as related companies for purposes of investment and investor services; or (2) have a common investment adviser or an investment adviser that is an affiliated person of the investment adviser of any of the other funds.77 Many commenters argued that this definition would result in disclosure of holdings in funds that are too remotely related to funds on whose board the director serves to demonstrate alignment with fund shareholders (e.g., for a director serving on the board of a fund with a sub-adviser, the director's ownership in any other funds that the sub-adviser serves would be disclosed, regardless of whether the funds are otherwise related). These commenters recommended that the Commission adopt a narrower definition of "family of investment companies," which includes only funds that share the same investment adviser or principal underwriter and hold themselves out to investors as related companies for purposes of investment and investor services.78 We agree with commenters that the proposed "fund complex" definition could result in disclosure of information having little bearing on a director's alignment with shareholders, and are adopting the narrower definition of "family of investment companies." 79
d) Date of Disclosure
The equity ownership information must be included in the SAI and any proxy statement relating to the election of directors. For the proxy statement, the equity ownership information must be provided as of the most recent practicable date, as proposed, in order to ensure that shareholders receive up-to-date information when they are asked to vote to elect directors. 80 For the SAI, we have modified the proposal to require that the equity ownership information be provided as of the end of the last completed calendar year.81 We believe that this modified time period requirement facilitates our goal that investors receive equity ownership information to evaluate whether directors' interests are aligned with their own, while imposing less of a burden on directors, especially those who serve multiple funds with staggered fiscal years.
3. Conflicts of Interest
We are adopting our proposals on conflicts of interest disclosure, with modifications that tailor the requirements more closely to our goals and address commenters' concerns that some aspects of the proposal were overbroad.82 We proposed to require funds to disclose in the proxy statement and SAI three types of circumstances that could affect the allegiance of fund directors to their shareholders: positions, interests, and transactions and relationships of directors and their immediate family members with the fund and persons related to the fund. The rules we adopt today follow this basic approach.
A number of commenters recommended alternatives to the proposed conflicts of interest disclosure requirements, including: (i) requiring funds to maintain records of potential conflicts of interest of directors; (ii) permitting independent directors to determine for themselves whether or not conflicts of interest exist that affect the "independence" of other independent directors; and (iii) limiting conflicts of interest disclosure to the proxy statement for the election of directors. After careful consideration of these alternatives, we have determined that they would not constitute an adequate substitute for disclosure to shareholders.
We continue to believe that shareholders have a significant interest in information concerning circumstances that may affect the directors' allegiance to shareholders. None of the alternatives suggested by commenters would provide this information to shareholders on a regular basis. The first two alternatives would completely exclude shareholders from the process of evaluating the independence of directors. The third alternative, limiting conflicts of interest disclosure to the proxy statement for the election of directors, ignores the fact that the proxy statement has become an ineffective vehicle for communicating information to fund shareholders on a regular basis because funds generally are no longer required to hold annual meetings.83
a) Modifications to Persons Covered
(1) Interested Directors
We are modifying our proposal to exclude interested directors from the conflicts of interest disclosure requirements in both the SAI and proxy statement.84 We are persuaded by the commenters' arguments that if the purpose of the conflicts of interest disclosure is to allow investors and the Commission staff to better evaluate the true independence of independent directors, this goal will not be achieved by requiring disclosure of interested directors' potential conflicts of interest. As previously discussed, however, funds will be required to describe the relationships, events, or transactions that make a director an interested person.85
(2) Immediate Family Members
We are narrowing the scope of "immediate family members" covered by the disclosure requirements to a director's spouse, children residing in the director's household, and dependents of the director.86 As proposed, "immediate family members" also included the director's parents, siblings, children not residing with the director, and in-laws.87
We received many comments on this definition, with the overwhelming majority of commenters arguing that the proposed extension of conflicts of interest disclosure to include a director's immediate family members, as defined in the proposal, was overly broad and too burdensome. Commenters noted that the definition, as proposed, would require directors to seek financial information from remote family members with whom they have little or no contact, and that the requirement could impose liabilities on directors without providing the means to enable directors to obtain the required information from reluctant relatives. We are persuaded by the commenters and have addressed their concerns by limiting the definition of "immediate family members" along the lines suggested by many commenters. The narrower definition ensures that disclosure will only be required with respect to family members from whom directors can reasonably be expected to obtain the required information.88
(3) Related Persons
The Commission proposed to require disclosure about circumstances involving directors, on the one hand, and the fund and persons related to the fund, on the other. We are modifying the proposal to exclude administrators from the persons related to the fund that are covered by the requirements. Several commenters expressed concern that inclusion of administrators that are not affiliated with the fund's adviser or principal underwriter would produce irrelevant and unnecessary information for shareholders because interactions between directors and unaffiliated administrators would not create conflicts of interest that could affect an independent director's judgment. We are persuaded by these commenters and note that administrators that control, are controlled by, or are under common control with the adviser or principal underwriter will be covered by the conflicts of interest disclosure.89
While some commenters also recommended excluding entities "under common control" with the adviser or principal underwriter, we believe that disclosure of interests, positions, and transactions and relationships with entities under common control is important and could highlight circumstances that potentially could affect the judgment of independent directors. We also note that the current proxy rules require disclosure with respect to commonly controlled entities.90
Although we are narrowing the scope of immediate family members and related persons in recognition of the overbreadth of our proposal in certain circumstances, we wish to emphasize that a fund's independent directors can vigilantly represent the interests of shareholders only when they are truly independent of those who operate and manage the fund. To that end, we encourage funds to examine any circumstances that could potentially impair the independence of independent directors, whether or not they fall within the scope of our disclosure requirements. There may, for example, be circumstances where an interest of a family member outside the ambit of our rules, or a director's interest in an administrator, impairs the director's ability to represent the interests of shareholders vigilantly.
b) Other Modifications
(1) Threshold for Disclosure of Interests, Transactions, and Relationships
We are adopting a $60,000 threshold for disclosure of interests, transactions, and relationships.91 Many commenters requested that the Commission establish a specific dollar threshold that would trigger the disclosure requirements to eliminate the need to make subjective "materiality" determinations. We are persuaded by these comments and are adopting the $60,000 threshold, a level recommended by many commenters and contained in the existing proxy rules.92
We have replaced a materiality test with the $60,000 threshold in order to facilitate compliance with the disclosure requirements that we adopt today. This change does not, however, reflect a determination that the $60,000 threshold may be equated with "materiality." We note that the antifraud provisions of the federal securities laws may obligate funds to disclose a material conflict of interest between a director and the fund or its shareholders without regard to the $60,000 threshold. For example, a transaction between a director and a fund's adviser may constitute a material conflict of interest with the fund or its shareholders that is required to be disclosed, regardless of the amount involved, if the terms and conditions of the transaction are not comparable to those that would have been negotiated at "arms-length" in similar circumstances.
(2) Time Periods
We are adopting, as proposed, a five-year time period for disclosure of positions and interests of directors and immediate family members in the proxy statement for the election of directors.93 We are, however, reducing the time period for disclosure of positions and interests in the SAI to two calendar years.94 We believe that, when a shareholder is asked to vote to elect directors, he is entitled to information about potential conflicts covering a significant period of time.95 We recognize, however, that providing five years of information annually in the SAI, would, as suggested by commenters, increase fund compliance burdens without commensurate benefits to shareholders.
We are adopting, as proposed, the requirement to disclose material transactions and relationships since the beginning of the last two completed fiscal years in the proxy statement for the election of directors.96 In the SAI, however, we have modified the proposal to require disclosure of transactions and relationships during the two most recently completed calendar years, rather than the last two fiscal years as proposed.97 Many commenters noted that a director may serve multiple funds with staggered fiscal years and that a requirement to disclose transactions and relationships for fiscal year time periods could require funds to obtain the information from directors as frequently as monthly, which would be overly burdensome. We have revised the proposal to require two calendar years of disclosure, rather than two fiscal years, in order to reduce this burden for funds with staggered fiscal years, while maintaining the requirement to include two years of disclosure.98
(3) Routine, Retail Transactions and Relationships
As proposed, the conflicts of interest disclosure provisions would not have required a fund to disclose routine, retail transactions and relationships, such as a credit card or bank or brokerage account, unless the director is accorded special treatment. At the request of commenters, we are clarifying that the exception for routine, retail transactions and relationships extends to residential mortgages and insurance policies.99 We also note that the exception for routine, retail transactions and relationships is not limited to the specific transactions and relationships enumerated (credit cards, bank or brokerage accounts, residential mortgages, and insurance policies), but extends to other routine, retail transactions and relationships where the director is not accorded special treatment.
4. Board's Role in Fund Governance
We are adopting, as proposed, disclosure requirements in the proxy rules and the SAI relating to a fund's committees of the board of directors, which commenters generally supported.100 We are also adopting, as proposed, the requirement to disclose in the SAI the board's basis for approving an existing investment advisory contract.101
A number of commenters argued that information about the board's basis for approving an existing advisory contract is not relevant to an investment decision and disclosure of this information will be "boilerplate" in nature. After careful consideration of these comments, we continue to believe that shareholders should receive information in the SAI to help them evaluate the board's basis for approving the renewal of an existing investment advisory contract. In approving an investment advisory contract, independent directors must review the level of fees charged. Mutual funds fees and expenses, including advisory fees, are extremely important to shareholders. We note that the United States General Accounting Office ("GAO"), in a recent report to Congress on mutual fund fees, stressed the importance of heightening "investors' awareness and understanding of the fees they pay."102 We believe that the rules we adopt today, which will ensure that shareholders receive specific information on how directors evaluate and approve fees on a regular basis, will help to address the GAO's concerns. In implementing this disclosure requirement, we remind funds that "boilerplate" disclosure is not appropriate. Funds are required to provide appropriate detail regarding the board's basis for approving an existing investment advisory contract, including the particular factors forming the basis of this determination.
5. Separate Disclosure
We are adopting, as proposed, the requirement that funds present all disclosure for independent directors separately from disclosure for interested directors in the SAI, proxy statements for the election of directors, and annual reports to shareholders.103 While several commenters argued that this requirement would confuse shareholders by overemphasizing the differences between independent and interested directors, we believe that the new disclosure format will assist shareholders in understanding information about directors, particularly in evaluating whether the independent directors can, in fact, act as an independent, vigorous, and effective force in overseeing fund operations.104
6. Technical and Conforming Amendments
The Commission is adopting, as proposed, the technical and conforming amendments to its schedules, forms, and rules.
F. Recordkeeping Regarding Director Independence
We are adopting as proposed the amendments to rule 31a-2, to require funds to preserve for a period of at least six years any record of: (i) the initial determination that a director qualifies as an independent director, (ii) each subsequent determination of whether the director continues to qualify as an independent director, and (iii) the determination that any person who is acting as legal counsel to the independent directors is an independent legal counsel.105 The rule amendments, which commenters supported, are designed to permit the Commission staff to monitor a fund's assessment of the independence of directors, and to ascertain whether a fund's assessment reflects diligent efforts to evaluate relevant business and personal relationships that might affect each director's independent judgment.106
III. EFFECTIVE DATE; COMPLIANCE DATES
A. Effective Date
The new rules and amendments to rules and forms that the Commission is adopting today will become effective February 15, 2001. The rescission of rule 2a19-1 will become effective on May 12, 2001, the effective date of section 213 of the Gramm-Leach-Bliley Act.
B. Compliance Dates for Investment Company Act Rule Amendments
1. February 15, 2001. Persons may begin to rely upon new rules 2a19-3, 10e-1 and 32a-4 on February 15, 2001, the effective date of these rules.
2. July 1, 2002. After July 1, 2002: (i) persons may rely upon any of the Exemptive Rules (rules 10f-3, 12b-1, 15a-4(b)(2), 17a-7, 17a-8, 17d-1(d)(7), 17e-1, 17g-1(j), 18f-3, and 23c-3) only if they comply with each of the three new conditions for use of each rule; (ii) persons may rely upon rule 17d-1(d)(7) only if any joint insurance policy then in effect does not exclude coverage of litigation between the independent directors and another insured person under the amended rule;107 and (iii) funds must begin to comply with the recordkeeping requirements of amended rule 31a-2.
C. Compliance Date for Disclosure Amendments
January 31, 2002. All new registration statements and post-effective amendments that are annual updates to effective registration statements, proxy statements for the election of directors, and reports to shareholders filed on or after January 31, 2002 must comply with the disclosure amendments. Based on the comments, we believe that this will provide funds with sufficient time to make the necessary changes to disclosure documents. We note that a post-effective amendment that is filed for any purpose other than those specifically enumerated in paragraph (b)(1) of rule 485 is required to be filed pursuant to rule 485(a).108 We would not, however, object if existing funds file their first annual update complying with the amendments pursuant to rule 485(b), unless information is included in response to the new conflicts of interest disclosure requirements, provided that the post-effective amendment otherwise meets the conditions for immediate effectiveness under the rule.109 Thereafter, funds must make their own determination as to whether their annual updates should be filed pursuant to rule 485(a) or may be filed pursuant to rule 485(b) under the Securities Act.110
IV. COST-BENEFIT ANALYSIS
The Commission is sensitive to the costs and benefits imposed by its rules. In the Proposing Release, we requested comments and specific data regarding the costs and benefits of the proposed amendments to the Exemptive Rules111 and the proposed new rules. Six commenters responded to our request for comments on the cost-benefit analysis. The commenters focused on a number of issues, particularly the independent counsel proposal and the disclosure proposals. These comments are addressed below.
A. Amendments to the Exemptive Rules
The Commission is adopting the proposed amendments to the Exemptive Rules and the proposed new rules, with certain changes (together, the "Amendments"). The Amendments require that, for funds relying on those rules: (i) independent directors constitute a majority of their boards; (ii) independent directors select and nominate other independent directors; and (iii) any legal counsel for the fund's independent directors be an independent legal counsel. The Amendments are designed to enhance the independence and effectiveness of independent directors, who are charged with overseeing the fund's activities and transactions under the Exemptive Rules. Boards that meet these conditions should be more effective at exerting an independent influence over fund management. Their independent directors should be more likely to have their primary loyalty to the fund's shareholders rather than the adviser, and should be better able to evaluate the complex legal issues that are often faced by fund boards with an independent and critical eye. The Amendments, therefore, should provide substantial benefits to shareholders by helping to ensure that independent directors are better able to fulfill their role of representing shareholder interests and supplying an independent check on management. While these benefits are not easily quantifiable in terms of dollars, we believe that they are real, and that the Amendments will strengthen the hand of independent directors to the advantage of shareholders.
The Amendments may impose some costs on funds that choose to rely on the Exemptive Rules. These costs are discussed below. Funds that do not rely on an Exemptive Rule, however, will not be subject to the new conditions and should not incur any costs associated with those conditions.112
Independent directors as a majority of the board. The Amendments require funds to have independent directors constitute a simple majority of their boards in order to rely on the Exemptive Rules. Because, as noted above, most mutual funds today have boards with independent majorities,113 it appears that the Amendments will not impose substantial costs on funds as a group.
Funds that currently do not have a majority of independent directors on their boards and that would like to rely on the Exemptive Rules may incur some costs. The Commission, however, has no reasonable basis for estimating those costs. Those funds could come into compliance with the majority requirement of the Amendments in a number of ways. For example, funds could: (i) decrease the size of their boards and allow some inside directors to resign; (ii) maintain the current size of their boards and replace some inside directors with independent directors; or (iii) increase the size of their boards and elect new independent directors.
If new independent directors are elected in order to comply with the Amendments, the fund would incur the costs of preparing a proxy statement and holding a shareholder meeting to elect those independent directors, as well as the costs of compensating those directors.114 The Commission, however, has no reasonable basis for determining how many funds that currently do not have independent directors as a majority of their boards will choose to comply with the Amendments by electing new independent directors.
Independent director self-selection and self-nomination. The Amendments require independent directors to select and nominate any other independent directors. This change should not impose significant new costs on funds, because many funds already have adopted this practice.115 Although some funds do not currently follow this practice and will need to adopt it in order to rely on the Exemptive Rules, we are not aware of any costs that would result from requiring a fund's incumbent independent directors to select and nominate other independent directors.
Independent legal counsel. Lastly, the Amendments require any legal counsel to a fund's independent directors to be an independent legal counsel.116 The Amendments do not require independent directors to retain legal counsel, but do require any person that acts as counsel to the independent directors to qualify as an independent legal counsel. Independent directors who are represented by counsel who does not meet the new definition of "independent legal counsel" thus may have to retain different counsel if their fund chooses to rely on any of the Exemptive Rules. If a substitution of counsel is necessary, it may lead to an increase in costs as described below.
B. Definition of Independent Legal Counsel
Rule 0-1 defines certain terms for purposes of the rules and regulations under the Investment Company Act. The Commission is amending this rule to add a definition of the term "independent legal counsel." Under the new definition, a person is an independent legal counsel if a majority of the fund's independent directors determine, in the exercise of their business judgment, based on information obtained from such person, that any representation of the fund's adviser, principal underwriter, administrator, 117 or any of their control persons118 since the beginning of the fund's last two completed fiscal years is unlikely to adversely affect the professional judgment of the person in providing legal representation to the independent directors. The basis of the independent directors' determination is required to be recorded in the minutes of the directors' meeting.
The new definition of "independent legal counsel" should help to ensure that independent directors' counsel is able to provide objective legal advice concerning the complex legal issues faced by those directors. This change thus should benefit both shareholders and independent directors by helping those directors to better carry out their responsibilities as shareholder representatives. Shareholders also will benefit from the requirement that the independent directors' determinations be recorded in the minute books of the fund, because this requirement will enable the Commission staff to review independent directors' determinations that their counsel qualifies as independent legal counsel.
The new definition will impose costs on some funds that rely on the Exemptive Rules.119 We assume that approximately 3,200 funds rely on at least one of the Exemptive Rules annually.120 We further assume that the independent directors of approximately one-third of those funds (1,065) would be required to make the specified determination in order for their counsel to meet the definition of "independent legal counsel."121 We estimate that each of these 1,065 funds would be required to spend, on average, 0.75 hours annually to comply with the proposed requirement that this determination be recorded in the fund's minute books,122 for a total annual burden of approximately 799 hours. Based on this estimate, the total annual cost to funds of this new definition would be approximately $70,505.123 We estimated in the Proposing Release that the cost of the new definition would be approximately $70,505, and one commenter argued that the actual cost of the proposed definition would "far exceed" that amount.124 Another commenter stated that "there are likely to be substantial costs incurred by funds if they are forced to hire new counsel to independent directors because counsel has also represented the adviser."125 We do not believe the cost will "far exceed" the estimated amount. The rule relies solely on the independent directors to make a good faith determination that a person is an independent counsel. We are unable to predict with any certainty how many independent directors will obtain new counsel because they determine that their current counsel is not "independent." Each evaluation of counsel will be fact-specific, and each board will have to make its own determination with respect to its counsel. Some independent directors may choose not to hire their own legal counsel. The costs of obtaining new counsel also may be partially offset by savings generated by reductions in payment to current counsel, once they cease providing their services to the independent directors.
C. Suspension of Board Composition Requirements
New rule 10e-1 will increase the periods for which the independent director minimum percentage requirements of the Act, and of the rules under the Act, are temporarily suspended if the death, disqualification, or bona fide resignation of an independent director causes the representation of independent directors on the board to fall below that required by the Act or our rules. The new rule will benefit funds by helping to ensure that if a fund's board falls below the independent director minimum percentage requirements in these circumstances, the fund will not immediately face the severe consequences of losing the availability of the Exemptive Rules.
One commenter stated its opinion that there will be significant costs imposed on funds if the time periods suggested in the Proposing Release were not increased. We extended one of the proposed time periods for rule 10e-1 in response to concerns voiced by commenters, and we believe that the periods for which the rule would suspend the independent director minimum percentage requirements are consistent with concerns for investor protection. As amended, the new rule appears not to have any costs for investors or funds.
D. Limits on Coverage of Directors under Joint Insurance Policies
Rule 17d-1(d)(7) under the Act permits funds to purchase joint liability insurance policies without first obtaining a Commission order permitting this joint arrangement, provided that certain conditions are met. The Commission is amending this rule to make it available only for joint liability insurance policies that do not exclude coverage for independent directors' litigation expenses in the event that they are sued by the fund's adviser. This change should benefit shareholders by making it possible for independent directors to engage in the good faith performance of their responsibilities under the Act and our rules without concern for their personal financial security. For the same reasons, the rule change also should benefit independent directors.
Because obtaining this type of coverage may cause the premiums charged by some insurance providers for joint liability insurance policies to increase, this amendment may have some costs for funds.126 The Commission, however, has no reasonable basis for estimating the possible increase in premiums that may result from this proposal.
E. Independent Audit Committees
Section 32(a)(2) of the Act requires that the selection of a fund's independent public accountant be submitted to shareholders for ratification or rejection. New rule 32a-4 exempts a fund from this requirement if the fund has an audit committee consisting entirely of independent directors to oversee the fund's auditor. The new rule could provide significant benefits to shareholders. Many believe shareholder ratification of a fund's independent auditor has become a perfunctory process, with votes that are rarely contested. As a consequence, we believe that the ongoing oversight provided by an independent audit committee can provide greater protection to shareholders than shareholder ratification of the choice of auditor. In addition, funds that rely on section 32(a)(2) will no longer have to obtain shareholder ratification or rejection of their auditor on an annual basis, and this change should save some printing costs with respect to proxy materials.
New rule 32a-4 may impose certain costs on those funds that choose to rely on the exemption. It appears that these costs will likely be minimal and will be justified by the relief provided by the exemption. To rely on the exemption, among other things, a fund's board of directors must adopt an audit committee charter that sets forth the committee's structure, duties, powers, and methods of operation, or similar audit committee provisions must appear in the fund's charter or bylaws. The fund also must preserve that charter, and any modifications to the charter, permanently in an easily accessible place.127 We estimate that there are approximately 3,490 investment companies that may rely on the proposed rule.128 We assume that approximately 15 percent (524) of those funds are likely to rely on the exemption. For each of those funds, we estimate that the adoption of the audit committee charter would require, on average, 2 hours of director time and 2 hours of professional time,129 for a total one-time burden of approximately 2,096 hours, and a total one-time cost of approximately $655,000.130 We also estimate that each of the funds relying on the rule would be required to spend approximately 0.2 hours annually to comply with the proposed requirement that they preserve permanently their audit committee charters,131 for an additional total annual hour burden of 105 hours, and an additional total annual cost of approximately $5,425.132
In addition, some funds pay their directors an extra fee for each committee on which they serve.133 Those funds may incur the additional costs of audit committee fees if they establish an audit committee in order to rely on the proposed exemption. Of those funds likely to rely on the exemption, however, we have no basis for determining the number that would pay their independent directors a separate fee for service on the audit committee, or the likely amount of those fees.134
F. Qualifications as an Independent Director
New rule 2a19-3 should benefit shareholders, funds, and independent directors by working to prevent qualified individuals from being unnecessarily disqualified from serving as independent directors. New rule 2a19-3 will benefit both funds and their independent directors by clarifying the status of independent directors who own shares of index funds.
The Commission is not aware of any costs to funds that would result from the new rule. There also should be no costs to investors because, consistent with concerns for investor protection, the new rule will not permit individuals who have affiliations or business interests that could impair their independence to serve as independent directors. The new rule applies to funds that replicate a broad-based index or indices, and does not include the five percent threshold of the proposed rule, and therefore funds will not have to monitor the percentage of an index that is made up of the securities of the fund's adviser, lead underwriter, or their controlling persons.135
G. Disclosure of Information about Fund Directors
In the Proposing Release, we analyzed the costs and benefits of our proposals and requested comment and data regarding the costs and benefits of the disclosure amendments. A few commenters specifically addressed the Commission's estimates, and they generally argued that the Proposing Release underestimated the costs to be incurred in connection with the proposed amendments. The commenters, however, did not provide specific cost or benefit data in response to the Proposing Release. As discussed above, after careful consideration of the comments we received in response to our Proposing Release, we have tailored the disclosure requirements to better achieve our goals and also addressed the concerns of commenters by modifying the scope of the proposed disclosure amendments.
The amendments to the proxy rules and Forms N-1A, N-2, and N-3 will provide fund investors with improved information about directors. Because independent directors are the shareholders' representatives and advocates, shareholders have a significant interest in knowing who the independent directors are, whether the independent directors' interests are aligned with shareholders' interests, whether the independent directors have any conflicts of interest, and how the directors govern the fund. This information will help a fund shareholder evaluate whether his designated representatives can, in fact, act as independent, vigorous, and effective representatives.
We believe that the amendments benefit investors in several ways. The requirement that mutual funds disclose basic information about directors in an easy-to-read tabular format in the fund's annual report to shareholders, SAI, and proxy statements for the election of directors benefits shareholders by ensuring that shareholders receive information about the identity and experience of their directors both annually and whenever they are asked to vote to elect directors. Moreover, this information benefits prospective investors who may obtain the information, without charge, upon request.
The amendments require that funds disclose: (1) each director's ownership in each fund that he oversees; and (2) each director's aggregate ownership in any funds that he oversees within a fund family. This information benefits shareholders and prospective investors by making available in the SAI information that may show the alignment of director interests with those of shareholders. In addition, shareholders also benefit by receiving this information in the proxy statements whenever they are asked to vote to elect directors.
Our amendments regarding circumstances that may raise conflict of interest concerns for directors benefit investors by enabling investors to decide for themselves whether an independent director would be an effective advocate for shareholders. Disclosure of this type of information also results in its public dissemination, bringing these circumstances to the attention of fund shareholders, and encouraging the selection of independent directors who are independent in the spirit of the Act. Finally, this information assists the Commission in determining whether to exercise its authority under section 2(a)(19) of the Act to find that a person is an interested person of a fund by reason of having had, at any time since the beginning of the last two completed years of the fund, a material business or professional relationship with the fund and certain persons related to the fund.
The modifications to the disclosure requirements of matters related to the board's role in governing a mutual fund benefit shareholders by allowing them to determine more readily whether the directors are effectively representing shareholders' interests, independent of fund management.
The amendments impose certain costs on the fund industry. The costs associated with the proposed amendments include the resources expended by funds in collecting the information and preparing the disclosure documents.136 Although we have tailored the proposal to better achieve our goals and to address the concerns of commenters, we do not believe that the overall cost burden of the amendments was materially affected.
Proxy Statements
The hour burden for preparing proxy statements at the time of the Proposal Release was 96.2 hours per proxy statement, and we estimated that approximately 1/3 of those hours -- or 32 hours -- are expended collecting and disclosing information about directors and nominees.137 We estimated the additional burden hours that would be imposed by the proposed disclosure requirements to be 10 hours per proxy statement.138
We estimate the annual industry cost of the proposed amendments to the proxy statements to be 10,000 hours, or $1.25 million, based on an estimated 1,000 proxy statements that are filed annually.139
Registration Statements
Because the information to be disclosed in the registration statements is the same as in the proxy statements, we believe that the hour burden for the amendments per registration statement will be approximately the current hour burden for collecting and disclosing director information under the current proxy rules plus the hour burden for the proposed amendments to the proxy rules. As stated above, we estimated the current hour burden for collecting and disclosing information about directors and nominees in proxy statements to be 32 hours per proxy statement and the burden hours for collecting and disclosing the enhanced information about directors and nominees to be 10 hours per proxy statement, for a total of 42 hours.
Form N-1A
The hour burden for Form N-1A is on a per portfolio basis and not per registration statement filed with the Commission. Based on the staff's experience with Form N-1A, we estimate that there are approximately 1.75 portfolios per registration statement filed on Form N-1A. The average hour burden per portfolio for disclosing the information about directors will be the hour burden per registration statement (42) divided by the average number of portfolios per registrant (1.75), or 24 hours per portfolio.140 Because mutual funds only have to update information in post-effective amendments, we expect the hour burden to be 1/6 of the hours expended for the initial registration statement, or 4 hours per portfolio for post-effective amendments.141
In the Proposing Release, we estimated that 280 portfolios file initial registration statements and 7,875 portfolios file post-effective amendments annually on Form N-1A.142 Thus, we estimate the annual industry cost of the amendments to Form N-1A to be 38,220 hours, or $4.78 million.143
Form N-2
The hour burden for Form N-2 is on a per registration statement basis because funds registering on Form N-2 register one portfolio per registration statement. Because the disclosure will be the same for Form N-2 as for Form N-1A, except that it would be for one portfolio per registration statement, we estimated the additional hour burden for the proposed amendments to be 42 hours for each initial registration statement. Because funds only have to update information in post-effective amendments, we expect that the hour burden to be approximately 1/6 of the hours expended for the initial registration statement, or 7 hours per post-effective amendment.144
In the Proposing Release, we estimated that 110 funds file initial registration statements and 20 file post-effective amendments annually on Form N-2.145 Thus, we estimate the annual industry cost of the amendments to Form N-2 to be 4,760 hours, or $595,000.146
Form N-3
The hour burden for Form N-3 is on a per portfolio basis and not per registration statement filed with the Commission. Based on the Commission staff's experience with Form N-3, we estimate that there are approximately 4 portfolios per investment company registering on Form N-3. The average hour burden per portfolio for disclosing the information about directors will be the hour burden per registration statement (42) divided by the approximate number of portfolios per registrant (4), or 10.5 hours per portfolio. Because funds only have to update information in post-effective amendments, we expect that the hour burden would be 1/6 of the hours expended for the initial registration statement, or 1.75 hours per portfolio for post-effective amendments.147
In the Proposing Release, we estimated that 20 portfolios file initial registration statements and 40 portfolios file post-effective amendments annually on Form N-3.148 Thus, we estimate the annual industry cost of the amendments to Form N-3 to be 280 hours, or $35,000.149
Shareholder Reports
Because the disclosure of basic tabular information, which is required in annual shareholder reports, is a subset of the information that would be required in the initial registration statement of a fund and any post-effective amendments, we expect that the annual burden for complying with the proposed amendments to the shareholder report requirements would be minimal. Based upon the amount of information to be disclosed, we estimate that the hour burden would be one-half hour per investment company for each annual shareholder report. In the Proposing Release, we estimated that there were 3,490 management investment companies that are subject to the annual report requirements.150 Thus, we estimate the annual industry cost of the proposed amendments for annual shareholder reports to be 1,745 hours, or $218,125.151
H. Recordkeeping Regarding Director Independence
The Commission also is amending rule 31a-2 under the Act, which requires funds to preserve certain records for specified periods of time. The amendments to rule 31a-2 require funds to preserve for a period of at least six years any record of: (i) the initial determination that a director qualifies as an independent director; (ii) each subsequent determination of whether the director continues to qualify as an independent director; and (iii) the determination that any person who is acting as legal counsel to the independent directors is an independent legal counsel. These amendments should benefit both shareholders and the Commission by enabling the Commission's staff to monitor the independent directors' determination of whether their counsel is independent.
The amendments will impose certain minimal costs on funds. The Commission staff estimates that each fund currently spends about 27.8 hours per year complying with the record preservation requirements of rule 31a-2.152 Approximately 3,490 funds would be affected by the proposal to amend the rule to require funds to preserve records regarding the independence of their directors.153 The Commission staff estimates that each of those funds would be required to spend an additional 0.2 hours annually to comply with the proposed amendment,154 for a total additional burden for all funds of approximately 698 hours. Based on this estimate, the total annual cost for all funds of the proposed amendment to rule 31a-2 would be $36,100.155 The estimated costs related to the determination of counsel's independence are discussed above in section IV.B. The Commission is not aware of any other costs that would result from the proposed amendments to rule 31a-2.
V. EFFECTS ON EFFICIENCY, COMPETITION AND CAPITAL FORMATION
Section 2(c) of the Investment Company Act, section 2(b) of the Securities Act, and section 3(f) of the Exchange Act require the Commission, when engaging in rulemaking that requires it to consider or determine whether an action is consistent with the public interest, to consider, in addition to the protection of investors, whether the action will promote efficiency, competition and capital formation.156 The Commission has considered these factors.
Independent directors have significant responsibilities under the Investment Company Act and the Exemptive Rules. The new rules and amendments are intended to enhance the independence and effectiveness of independent directors so that they can perform these responsibilities capably and well. The new rules and rule amendments should promote capital formation by bolstering investors' confidence in the ability of independent directors to represent their interests effectively. When investors are confident that their interests are duly considered by those responsible for the operation of the mutual funds in which they invest, they are more likely to continue to rely on mutual funds as a vehicle for savings and investment. The new rules and rule amendments should promote efficiency and competition by enhancing the ability of fund independent directors to scrutinize fund operations and protect funds from inefficiencies inherent when a fund is operated to promote the interests of persons other than those who have invested in the fund.
As discussed above, shareholders have a significant interest in knowing who the independent directors are, whether the independent directors' interests are aligned with shareholders' interests, whether the independent directors have any conflicts of interest, and how the directors govern the fund. This information helps a fund shareholder to evaluate whether the independent directors can, in fact, act as an independent, vigorous, and effective force in overseeing fund operations. The disclosure amendments were designed to ensure that shareholders have the information necessary to make such evaluations.
It is unclear whether the disclosure amendments will promote the efficiency of funds since the disclosure amendments do not change the operation of funds. The disclosure amendments, however, may promote competition among funds since shareholders will now be better equipped to evaluate the effectiveness of fund boards among various funds before making their investment decisions. The disclosure amendments also may promote capital formation as the disclosure amendments may provide potential investors greater confidence to invest in funds knowing that the interests of the independent directors overseeing the funds are aligned with their own.
VI. PAPERWORK REDUCTION ACT
As explained in the Proposing Release, certain provisions of Forms N-1A, N-2, and N-3, and rules 0-1, 20a-1, 30e-1, 31a-2, and 32a-4 under the Investment Company Act, and Schedule 14A under the Exchange Act contain "collection of information" requirements within the meaning of the Paperwork Reduction Act of 1995 [44 U.S.C. 3501-3520.]. We published notice soliciting comments on the collection of information requirements in the Proposing Release and submitted these requirements to the Office of Management and Budget ("OMB") for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11.
As discussed above, we are adopting the disclosure amendments with several modifications designed to tailor the amendments more closely to our goal of providing shareholders with better information to evaluate the independent directors. Specifically, we are adopting disclosure amendments that will require funds to disclose: (1) basic information about directors in an easy-to-read tabular format; (2) fund shares owned by directors; (3) conflicts of interest information regarding independent directors; and (4) information on the board's role in governing the fund.
A few commenters specifically addressed the burden hours the Commission estimated funds would incur to satisfy the proposed disclosure requirements, generally stating that these estimates were too low. These commenters, however, did not provide the Commission with any specific quantitative data regarding burden hours.157 As discussed in the Proposing Release, the Commission staff estimated the burden hours that would be necessary under the proposed disclosure amendments by assessing a variety of factors.158 After careful consideration of these comments, as well as the modifications made to the amendments as proposed, we continue to believe that our estimates are appropriate.159
The rule amendments we are adopting in this Release include amendments to the Exemptive Rules that are designed to enhance the independence and effectiveness of fund independent directors.160 The changes also include new rules and rule amendments that will prevent qualified individuals from being unnecessarily disqualified from serving as independent directors, protect independent directors from the costs of legal disputes with fund management, permit the Commission to monitor the independence of directors by requiring funds to preserve records of their assessments of director independence, and temporarily suspend the independent director minimum percentage requirements if a fund falls below the required percentage due to an independent director's death or resignation. In addition, the Commission is exempting funds from the requirement that shareholders ratify or reject the directors' selection of an independent public accountant, if the fund establishes an audit committee composed entirely of independent directors.
In the Proposing Release, the Commission estimated the burden hours that would be necessary for the collection of information requirements under the proposed amendments to the rules under the Act. Although no commenters specifically addressed the burden estimates for the collection of information requirements, a few commenters responding to the cost-benefit analysis in the Proposing Release generally stated that we had underestimated the burden hours. These commenters, however, did not provide an estimate of the burden hours associated with the proposed rule changes. We continue to believe that the estimates of the burden hours contained in the Proposing Release are appropriate.161
OMB approved the collection requirements contained in the forms and rules. Forms N-1A (OMB Control No. 3235-0307), N-2 (OMB Control No. 3235-0026), and N-3 (OMB Control No. 3235-0316) were adopted pursuant to section 8(a) of the Investment Company Act [15 U.S.C. 80a-8] and section 5 of the Securities Act [15 U.S.C. 77e]. Rule 0-1 was adopted pursuant to section 38(a) of the Investment Company Act [15 U.S.C. 80a-37(a)]. Rule 20a-1 (OMB Control No. 3235-0158) and rule 30e-1 (OMB Control No. 3235-0025) were promulgated under sections 20(a) and 30(e) [15 U.S.C. 80a-20 and 80a-29], respectively, of the Investment Company Act. Rule 31a-2 (OMB Control No. 3235-0179) was adopted under sections 31 [15 U.S.C. 80a-30] and 38(a) of the Investment Company Act. Rule 32a-4 (Control No. 3235-0530) was adopted under sections 6(c) [15 U.S.C. 80a-6(c)] and 38(a) of the Investment Company Act.
An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number. Compliance with the disclosure requirements is mandatory. Responses to the disclosure requirements will not be kept confidential.
VII. SUMMARY OF FINAL REGULATORY FLEXIBILITY ANALYSIS
A Final Regulatory Flexibility Analysis ("FRFA") has been prepared in accordance with 5 U.S.C. 604. The Commission proposed new rules 2a19-3, 10e-1 and 32a-4, and amendments to rules 0-1, 2a19-1, 10f-3, 12b-1, 15a-4, 17a-7, 17a-8, 17d-1, 17e-1, 17g-1, 18f-3, 23c-3, 30d-1, 30d-2, and 31a-2, and requested comments on the new rules and amendments in the Proposing Release. The Commission prepared an Initial Regulatory Flexibility Analysis ("IRFA") in accordance with 5 U.S.C. 603 in conjunction with the Proposing Release, which was made available to the public. The Proposing Release summarized the IRFA and solicited comments on it. No comments specifically addressed the IRFA.
A. Need for the Rules and Rule Amendments
1. Amendments to Exemptive Rules
Fund boards of directors have significant responsibilities to protect investors under state law, the Investment Company Act, and many of our rules. Independent directors, in particular, represent the interests of fund shareholders. They serve as "independent watchdogs," guarding investor interests. We are amending certain Exemptive Rules to require that, for funds relying on those rules:
- independent directors constitute a majority of the fund's board of directors;
- independent directors select and nominate other independent directors; and
- any legal counsel for the fund's independent directors be an "independent legal counsel."162
We also are adopting rules and rule amendments that will prevent qualified individuals from being unnecessarily disqualified from serving as independent directors, protect independent directors from the costs of legal disputes with fund management, permit us to monitor the independence of directors by requiring funds to keep records of their assessments of director independence, and temporarily suspend the independent director minimum percentage requirements if a fund falls below the required percentage due to an independent director's death or resignation. In addition, we are exempting funds from the requirement that shareholders ratify or reject the directors' selection of an independent public accountant, if the fund establishes an audit committee composed entirely of independent directors.
2. Disclosure Requirements
In reevaluating our current disclosure requirements about fund directors, we concluded that, while our fundamental approach has been sound, there are several gaps in the information that shareholders currently receive about directors. We are, therefore, requiring that funds provide better information about directors, including:
- basic information about the identity and business experience of directors;
- fund shares owned by directors;
- information about directors that may raise conflict of interest concerns; and
- the board's role in governing the fund.
We are adopting the disclosure amendments with several modifications designed to tailor the amendments more closely to our goal of providing shareholders with better information to evaluate the independent directors.
B. Significant Issues Raised by Public Comment
The Commission requested comment on the IRFA, but we received no comments specifically addressing the analysis. Several commenters, however, asserted that the financial costs of the amendments to the rules under the Act would have a greater impact on funds that are small entities. Those commenters did not, however, provide an estimate of the costs to small entities. A few commenters stated that the disclosure amendments, as proposed, would disadvantage smaller funds.
Two commenters argued that the proposed fund ownership disclosure would disadvantage directors of smaller funds as these funds are more likely to be stand-alone funds or part of a fund complex with fewer funds, thereby reducing the likelihood that such funds would meet directors' particular investment objectives. We have addressed this concern by modifying the proposal to require that funds disclose each director's ownership in each fund that he oversees and each director's aggregate ownership in any funds that he oversees within a fund family. Although we understand that directors of smaller funds will still have fewer funds from which to choose, limiting fund ownership disclosure to those funds that a director oversees within the same complex should help reduce the disadvantage to directors of smaller funds and still provide investors with information to assess whether a director's interests are aligned with their own.
We also narrowed the scope of immediate family members and related persons in recognition of the overbreadth of our proposal in certain circumstances, which should alleviate concerns that the conflicts of interest disclosure requirements would discourage directors from serving on fund boards.
C. Small Entities Subject to the Rules
As of December 1999, approximately 299 funds met the Commission's definition of small entity for purposes of the Investment Company Act.163
The amendments to the Exemptive Rules will affect funds, including any small entities that rely on the Exemptive Rules and do not already meet the new conditions to those rules. Although it appears that funds may incur certain costs in complying with those conditions, the Commission does not have a reasonable basis for estimating those costs. Other rule amendments are not expected to have a significant economic impact on funds, including those that are small entities.
As discussed above, we are adopting the disclosure amendments with several modifications designed to tailor the amendments more closely to our goal of providing shareholders with better information to evaluate the independent directors. In doing so, we have narrowed the scope of the disclosure requirements that were proposed and that would have applied to small entities.
D. Projected Reporting, Recordkeeping, and Other Compliance Requirements
1. Investment Company Act Rule Amendments
The amendment to rule 17d-1(d)(7), and new rules 10e-1 and 2a19-3, will not impose any new reporting, recordkeeping or compliance requirements. The amendments to the Exemptive Rules also will not impose any new reporting or recordkeeping requirements, but will impose three new compliance requirements. For funds relying on the Exemptive Rules, the amendments require that: (i) independent directors constitute a majority of the fund's board of directors; (ii) independent directors select and nominate other independent directors; and (iii) any legal counsel for the fund's independent directors be an independent legal counsel. Although it appears that there may be certain costs to funds, including those that are small entities, associated with complying with these requirements, the Commission does not have a reasonable basis for estimating those costs.
2. Disclosure Amendments
As noted in our Paperwork Reduction Act Analysis, a few commenters argued that we had underestimated the costs of complying with the proposed rules and amendments.164 In addition, several commenters stated that compliance with the proposed rules and amendments would have a greater impact on small entities. However, none of the commenters provided an estimate of the impact on small entities, and how it would differ from the impact on larger entities.
E. Agency Action to Minimize Effects on Small Entities
1. Investment Company Act Rule Amendments
With respect to the amendments to the rules under the Act, we believe that establishing different requirements that are applicable specifically to small entities is inconsistent with the protection of investors. We also believe that adjusting the new rules and rule amendments to establish different compliance requirements for small entities could undercut the purpose of the changes: to enhance the effectiveness of independent directors of all funds, and thus better enable those directors to fulfill their role of protecting shareholder interests.
2. Disclosure Amendments
With respect to the disclosure requirements, the Commission believes that special compliance or reporting requirements for small entities would not be appropriate or consistent with investor protection. The disclosure amendments give shareholders and the public greater access to information about directors. Different disclosure requirements for small entities, such as reducing the level of disclosure that small entities would have to provide shareholders, would create the risk that shareholders would not receive adequate information about their independent directors. The Commission believes it is important for shareholders and the public to receive this information about directors for all funds, not just for funds that are not considered small entities. Shareholders in small funds should have information about their directors and would benefit from this information as much as shareholders in larger funds.
Consolidating or simplifying compliance requirements for small entities or exempting small entities from any or all of the disclosure requirements would be inconsistent with the Securities Act, the Exchange Act, the Investment Company Act, and investor protection. If we do not require certain information for small entities, this could create the risk that investors in small funds might not receive important information about their directors. The Commission also notes that current disclosure requirements in the proxy statements and registration statements do not distinguish between small entities and other funds. In addition, the Commission believes it would be inappropriate to impose a different timetable on small entities for complying with the requirements.
The Commission believes that the amendments will not adversely affect small entities. The new disclosure requirements modify the existing disclosure requirements in proxy statements and registrations statements. In addition, the Commission believes that any additional impact on small entities will be outweighed by the benefits to shareholders and the public of having greater access to the information. Further consolidation or simplification of disclosure requirements for small entities, or use of performance standards to specify different requirements for small entities would not be consistent with the objectives of the Investment Company Act.
The FRFA is available for public inspection in File No. S7-23-99, and a copy may be obtained by contacting Peter M. Hong, Special Counsel, at (202) 942-0721, Office of Disclosure Regulation, Division of Investment Management, Securities and Exchange Commission, 450 5th Street, N.W., Washington, D.C. 20549-0506.
VIII. STATUTORY AUTHORITY
The Commission is adopting rules 2a19-3, 10e-1, and 32a-4, and amendments to rules
0-1, 2a19-1, 10f-3, 12b-1, 15a-4, 17a-7, 17a-8, 17d-1, 17e-1, 17g-1, 18f-3, 23c-3, 30d-1, 30d-2, and 31a-2 pursuant to authority set forth in sections 6(c), 10(e), 30(e), 31, and 38(a) of the Investment Company Act [15 U.S.C. 80a-6(c), 80a-10(e), 80a-29(e), 80a-30, 80a-37(a)]. The Commission is adopting amendments to Schedule 14A pursuant to authority set forth in sections 14 and 23(a)(1) of the Exchange Act [15 U.S.C. 78n, 78w(a)(1)] and sections 20(a) and 38 of the Investment Company Act [15 U.S.C. 80a-20(a), 80a-37]. The Commission is adopting amendments to Forms N-1A, N-2, and N-3 pursuant to authority set forth in sections 5, 6, 7, 10, and 19(a) of the Securities Act [15 U.S.C. 77e, 77f, 77g, 77j, 77s(a)] and sections 8, 24(a), 30, and 38 of the Investment Company Act [15 U.S.C. 80a-8, 80a-24(a), 80a-29, 80a-37].
TEXT OF FINAL RULES AND FORMS
For the reasons set out in the preamble, Title 17, Chapter II of the Code of Federal Regulations is amended as follows:
PART 240 - GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934
1. The authority citation for Part 240 continues to read, in part, as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d), 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
2. Section 240.14a-101 is amended as follows:
a. Redesignating paragraphs (e) and (d) of Item 7 as paragraphs (d) and (e) of Item 7;
b. In newly redesignated paragraph (d)(1) of Item 7, removing the third and fourth sentence;
c. In newly redesignated paragraph (d)(3)(iv)(A)(2) of Item 7, revise the phrase "paragraph (e)(3)(iv)(A)(2)" to read "paragraph (d)(3)(iv)(A)(2)";
d. In newly redesignated paragraphs (d)(3)(v), (d)(3)(vi) and (d)(3)(vii) of Item 7, revise the phrase "paragraph (e)(3)" to read "paragraph (d)(3)";
e. Revising newly redesignated paragraph (e) of Item 7;
f.In Item 8(d), before the Instruction, revising "Item 22(b)(6)" to read "Item 22(b)(13)";
g.In the Instruction following Item 10(a)(2)(ii)(A), revising "Item 22(b)(6)" to read "Item 22(b)(13)";
h.In the Instruction following Item 10(b)(1)(ii), revising "Item 22(b)(6)(ii)" to read "Item 22(b)(13)";
i. Revising paragraph (a)(1)(i) of Item 22;
j. In Item 22, redesignating paragraphs (a)(1)(iv), (v), (vi), (vii), and (viii) as paragraphs (a)(1)(v), (vi), (ix), (x), and (xii);
k. In Item 22, adding new paragraphs (a)(1)(iv), (vii), (viii), and (xi);
l. In Item 22, revising newly designated paragraph (a)(1)(x); and
m. Revising paragraph (b) of Item 22.
These additions and revisions read as follows:
§ 240.14a-101 Schedule 14A. Information required in proxy statement.
* * * * *
Item 7. Directors and executive officers.
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(e) In lieu of paragraphs (a) through (d)(2) of this Item, investment companies registered under the Investment Company Act of 1940 (15 U.S.C. 80a) must furnish the information required by Item 22(b) of this Schedule 14A.
* * * * *
Item 22. Information required in investment company proxy statement.
(a) * * *
(1) * * *
(i) Administrator. The term "Administrator" shall mean any person who provides significant administrative or business affairs management services to a Fund.
* * * * *
(iv) Family of Investment Companies. The term "Family of Investment Companies" shall mean any two or more registered investment companies that:
(A) Share the same investment adviser or principal underwriter; and
(B) Hold themselves out to investors as related companies for purposes of investment and investor services.
* * * * *
(vii) Immediate Family Member. The term "Immediate Family Member" shall mean a person's spouse; child residing in the person's household (including step and adoptive children); and any dependent of the person, as defined in section 152 of the Internal Revenue Code (26 U.S.C. 152).
(viii) Officer. The term "Officer" shall mean the president, vice-president, secretary, treasurer, controller, or any other officer who performs policy-making functions.
* * * * *
(x) Registrant. The term "Registrant" shall mean an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a) or a business development company as defined by section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48)).
(xi) Sponsoring Insurance Company. The term "Sponsoring Insurance Company" of a Fund that is a separate account shall mean the insurance company that establishes and maintains the separate account and that owns the assets of the separate account.
* * * * *
(b) Election of Directors. If action is to be taken with respect to the election of directors of a Fund, furnish the following information in the proxy statement in addition to the information (and in the format) required by paragraphs (f) and (g) of Item 7 of Schedule 14A.
Instructions to introductory text of paragraph (b). 1. Furnish information with respect to a prospective investment adviser to the extent applicable.
2. If the solicitation is made by or on behalf of a person other than the Fund or an investment adviser of the Fund, provide information only as to nominees of the person making the solicitation.
3. When providing information about directors and nominees for election as directors in response to this Item 22(b), furnish information for directors or nominees who are or would be "interested persons" of the Fund within the meaning of section 2(a)(19) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(19)) separately from the information for directors or nominees who are not or would not be interested persons of the Fund. For example, when furnishing information in a table, you should provide separate tables (or separate sections of a single table) for directors and nominees who are or would be interested persons and for directors or nominees who are not or would not be interested persons. When furnishing information in narrative form, indicate by heading or otherwise the directors or nominees who are or would be interested persons and the directors or nominees who are not or would not be interested persons.
4. No information need be given about any director whose term of office as a director will not continue after the meeting to which the proxy statement relates.
(1) Provide the information required by the following table for each director, nominee for election as director, Officer of the Fund, person chosen to become an Officer of the Fund, and, if the Fund has an advisory board, member of the board. Explain in a footnote to the table any family relationship between the persons listed.
(1)
|
(2)
|
(3)
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(4)
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(5)
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(6)
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Name, Address, and Age
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Position(s) Held with Fund
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Term of Office and Length of Time Served
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Principal Occupation(s) During Past 5 Years
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Number of Portfolios in Fund Complex Overseen by Director or Nominee for Director
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Other Directorships Held by Director or Nominee for Director
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Instructions to paragraph (b)(1). 1. For purposes of this paragraph, the term "family relationship" means any relationship by blood, marriage, or adoption, not more remote than first cousin.
2. No nominee or person chosen to become a director or Officer who has not consented to act as such may be named in response to this Item. In this regard, see Rule 14a-4(d) under the Exchange Act (§ 240.14a-4(d)).
3. If fewer nominees are named than the number fixed by or pursuant to the governing instruments, state the reasons for this procedure and that the proxies cannot be voted for a greater number of persons than the number of nominees named.
4. For each director or nominee for election as director who is or would be an "interested person" of the Fund within the meaning of section 2(a)(19) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(19)), describe, in a footnote or otherwise, the relationship, events, or transactions by reason of which the director or nominee is or would be an interested person.
5. State the principal business of any company listed under column (4) unless the principal business is implicit in its name.
6. Include in column (5) the total number of separate portfolios that a nominee for election as director would oversee if he were elected.
7. Indicate in column (6) directorships not included in column (5) that are held by a director or nominee for election as director in any company with a class of securities registered pursuant to section 12 of the Exchange Act (15 U.S.C. 78l), or subject to the requirements of section 15(d) of the Exchange Act (15 U.S.C. 78o(d)), or any company registered as an investment company under the Investment Company Act of 1940 (15 U.S.C. 80a), as amended, and name the companies in which the directorships are held. Where the other directorships include directorships overseeing two or more portfolios in the same Fund Complex, identify the Fund Complex and provide the number of portfolios overseen as a director in the Fund Complex rather than listing each portfolio separately.
(2) For each individual listed in column (1) of the table required by paragraph (b)(1) of this Item, except for any director or nominee for election as director who is not or would not be an "interested person" of the Fund within the meaning of section 2(a)(19) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(19)), describe any positions, including as an officer, employee, director, or general partner, held with affiliated persons or principal underwriters of the Fund.
Instruction to paragraph (b)(2). When an individual holds the same position(s) with two or more registered investment companies that are part of the same Fund Complex, identify the Fund Complex and provide the number of registered investment companies for which the position(s) are held rather than listing each registered investment company separately.
(3) Describe briefly any arrangement or understanding between any director, nominee for election as director, Officer, or person chosen to become an Officer, and any other person(s) (naming the person(s)) pursuant to which he was or is to be selected as a director, nominee, or Officer.
Instruction to paragraph (b)(3). Do not include arrangements or understandings with directors or Officers acting solely in their capacities as such.
(4) Unless disclosed in the table required by paragraph (b)(1) of this Item, describe any positions, including as an officer, employee, director, or general partner, held by any director or nominee for election as director, who is not or would not be an "interested person" of the Fund within the meaning of section 2(a)(19) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(19)), or Immediate Family Member of the director or nominee, during the past five years, with:
(i) The Fund;
(ii) An investment company, or a person that would be an investment company but for the exclusions provided by sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 (15 U.S.C. 80a-3(c)(1) and (c)(7)), having the same investment adviser, principal underwriter, or Sponsoring Insurance Company as the Fund or having an investment adviser, principal underwriter, or Sponsoring Insurance Company that directly or indirectly controls, is controlled by, or is under common control with an investment adviser, principal underwriter, or Sponsoring Insurance Company of the Fund;
(iii) An investment adviser, principal underwriter, Sponsoring Insurance Company, or affiliated person of the Fund; or
(iv) Any person directly or indirectly controlling, controlled by, or under common control with an investment adviser, principal underwriter, or Sponsoring Insurance Company of the Fund.
Instruction to paragraph (b)(4). When an individual holds the same position(s) with two or more portfolios that are part of the same Fund Complex, identify the Fund Complex and provide the number of portfolios for which the position(s) are held rather than listing each portfolio separately.
(5) For each director or nominee for election as director, state the dollar range of equity securities beneficially owned by the director or nominee as required by the following table:
(i) In the Fund; and
(ii) On an aggregate basis, in any registered investment compa
