April 17, 2003
Mr. Jonathan G. Katz
Re: Compliance Programs for Investment Companies and Investment Advisers
Dear Mr. Katz:
We are writing as members of the Compliance and Shareholder Communications Committee of the Board of Directors of American Century Mutual Funds, Inc., American Century World Mutual Funds, Inc., American Century Capital Portfolios, Inc., American Century Variable Portfolios, Inc. and American Century Strategic Asset Allocations, Inc. (collectively, the "American Century funds").1 Each of the undersigned is an independent director of the American Century funds.
The charter of our committee includes oversight of the compliance programs of the American Century funds and their service providers and issues related to communications to and from fund shareholders. We believe that the formation of a committee dedicated to compliance issues affords us the opportunity to better serve fund shareholders in this regard.2 The Committee appreciates this opportunity to comment on the Commission's proposed rulemaking.
Specifically, we would like to express our concerns regarding the Commission's rulemaking proposal entitled "Compliance Programs of Investment Companies and Investment Advisers" (the "Proposing Release").3 American Century has a strong record of supporting shareholder issues and protecting shareholder interests. We are supportive of efforts by the Commission to improve mutual fund and investment adviser compliance programs. However, we believe that certain portions of the current proposal are impractical and overly burdensome.
Adoption of Policies and Procedures
It is our interpretation that the proposed rules would require mutual fund boards of directors to adopt all of the written compliance policies and procedures of a fund's investment adviser and other service providers (to the extent applicable to the fund) and review each of these written policies and procedures at least annually. We believe these requirements would change the role of the mutual fund board of directors from one of oversight to one of active management of the operations of the fund's investment adviser and other service providers.
We believe the mutual fund board of director's role with respect to compliance is to provide independent oversight of the compliance programs of the funds and their service providers - not to engage in their administration. We recommend that the rule be revised to require the fund's investment adviser and other service providers (to the extent applicable to the fund) to adopt and implement written compliance policies and procedures reasonably designed to promote compliance with and detect violations of the federal securities laws. It should also require the adviser and other service providers to present a written report to the board of directors at least annually regarding the sufficiency of these policies and procedures. In addition, we would suggest that the board of directors determine annually, based on these reports, that the fund and its service providers maintain reasonably designed compliance programs.
In its report "Protecting Investors: A Half Century of Investment Company Regulation," the Commission's Division of Investment Management stated its belief that "independent directors are unnecessarily burdened. . . when required to make determinations that call for a high level of involvement in day-to-day activities."4 Likewise, in a keynote address to new fund directors, Division Director Paul Roye stated that mutual fund directors must be focused on their "broad oversight responsibilities" and not become mired in day-to-day activities.5 We agree with the Division and its Director and support the revision of the proposed rule in this regard.6
Chief Compliance Officer
In light of the foregoing, we support the revision of the proposed rule to eliminate the requirement of each fund to appoint a single chief compliance officer. Rather, we support a rule that requires a fund's investment adviser and other service providers to designate, initially and in the annual report to the mutual fund board, the person or persons in their organization primarily responsible for each specified compliance area. In this manner, the mutual fund board would be fully informed of parties responsible for the ongoing management of compliance activities. We would suggest that the designation of these persons not require mutual fund board approval.
Private Sector Involvement
In the Proposing Release, the Commission seeks comment on the advisability of leveraging government resources by involving the private sector in reviews of mutual fund and investment adviser compliance. Specifically, the Commission seeks comment on the advisability of (1) requiring each fund and adviser to undergo periodic compliance reviews by a third party; (2) expanding the role of independent public accountants that audit fund financial statements to include an examination of fund compliance controls; and (3) forming a self-regulatory organization to oversee the fund and/or investment advisory industry. We do not support this increase in private sector involvement.
We believe the determination of whether third party compliance reviews are cost-effective and generally in the interest of fund shareholders is best made by the mutual fund board of directors. It is also our opinion that the instigation of private sector compliance reviews may be premature given the potential effectiveness of the rules contained in the Proposing Release; the potential effectiveness of recent initiatives put in place by the Division's Office of Compliance Inspections and Examinations; an anticipated increase in Commission funding; and a solid history of compliance by mutual funds and their service providers.
In addition, it is our opinion that the best answer to the Commission's resource restriction is full-funding by Congress, not an increase in the cost to investors. Mutual fund investors and other registrants currently pay filing fees more than adequate to fully fund the operations of the Commission. We support the full funding of the Commission and not the engagement of private sector compliance examiners.
Thank you for consideration of our comments on the Proposing Release. We request your careful consideration of this letter in assisting the Commission with adoption of final rules and regulations applicable to our industry and the American Century funds.