August 9, 2006
August 9, 2006
Dear Honorable Chairman and Commissioners:
I am David Lerner, the Chairman of the Board of Directors of Spirit of America Investment Fund, Inc. (Spirit of America or the Funds) located in Syosset, New York. Spirit of America is comprised of two Funds and has approximately 14,000 total fund shareholders.
The following responds to the request for comments by the United States Securities and Exchange Commission (SEC) 17 CFR Part 270 Release No. IC-27395, File No. S7-03-04 concerning the proposed amendment to require that mutual fund companies operating under the provisions of the Investment Company Act of 1940 (the 1940 Act) have an independent chairman of the board of directors. For the following reasons, I believe that the proposed amendment requiring an independent chairman would be antithetical to the interests of Spirit of America mutual fund shareholders and Spirit of America mutual fund company management alike. (See Footnote 1). The proposal is particularly objectionable as it seeks to: a) unilaterally deprive mutual fund shareholders of the benefits and advantages of an interested chairman and b) impose an independent chairman upon a smaller mutual fund company which, given its size and history, would not benefit from an independent chairman. While the goal of protecting fund shareholder interests is laudable and necessary, the proposed amendment (as it relates to the proposed independent chairman) will potentially impede Spirit of Americas continuing mission to deliver shareholder value.
I do not take issue with the requirement that the mutual fund board of directors consist of 75% independent directors. In my view, while potentially cumbersome and unnecessary (as opposed to the majority independent director requirement), the 75% requirement is appropriately geared towards providing the desired checks and balances to a mutual fund board where the Chairman is not independent.
In January 1998, I launched the Spirit of America Real Estate Income and Growth Fund (SOA Real Estate Fund). The SOA Real Estate Fund invests primarily in Real Estate Investment Trust (REIT) stocks and is designed to provide investors with income and growth potential via investments in what we consider the bricks and mortar of this Country. The SOA Real Estate Fund, currently retailed exclusively by securities broker/dealer David Lerner Associates, Inc.(DLA)(See Footnote 2),as a proprietary fund, was designed to provide investors with an opportunity to augment/compliment their existing investment portfolios-- which, in our experience, frequently consist of tax free municipal bonds, CMOs, non-publicly traded REITs and other fixed income vehicles.
While the SOA Real Estate Fund experienced several unprofitable years during the start-up period, by 2002, the Fund became profitable. During the period of unprofitability, I personally loaned the Fund capital in order to subsidize its operations.
As of June 30, 2006, the SOA Real Estate Fund had net assets of $207,423,868 and had returned to investors: 0.56% (one year) 15.15% (three years) 13.44% (five years) and 9.92% (since inception).
Similarly, in August 2002, I launched another mutual fund, the Spirit of America Large Cap Value Fund (SOA Value Fund). Also designed as a proprietary fund, SOA Value Fund invests primarily in value stocks with market capitalizations in excess of $5 billion. The SOA Value Fund was conceived as a vehicle by which investors at DLA could seek appreciation through equity market participation, while hopefully avoiding the frequently significant gyrations of less stable, less established and more thinly capitalized companies. As with the SOA Real Estate Fund, the SOA Value Fund experienced an unprofitable start-up period but became profitable in September 2003. During the period of unprofitability, I also personally loaned the Value Fund capital in order to subsidize its operations. As of June 30, 2006, the SOA Value Fund had net assets of $39,655,204 and had returned to investors: -0.93% (one year) 7.70% (three years) and 6.64% (since inception).
I am also president of David Lerner Associates, Inc. (DLA), a regional broker-dealer located in Syosset, New York, founded in 1976. As of June 30, 2006, DLA has approximately 200 registered representatives approximately 45,000 active accounts and approximately $3.2 billion in assets under management.
It strikes me that numerous investors in these two Funds would be aghast that the SEC is seeking, without those investors input or voice, to reconfigure the Funds management team-- including an interested chairman-- which has successfully managed the Funds to date. This disenfranchisement is particularly troubling since it runs directly counter to what are apparently several of the SECs most compelling goals: fairness and responsiveness to shareholders and fostering the opportunity for shareholders to make their voices heard. Indeed, comments from several individual investors zero in on this point and express indignation that their time spent researching and analyzing mutual fund companies in the selection process and their satisfaction with their ultimate choices (including those management teams with interested chairmen) are being totally disregarded by the proposed requirement mandating an independent chairman. It is as if the SEC believes that it is in a better position than the shareholders-- whose financial interests are directly at stake-- to evaluate the advantages/disadvantages of an independent chairman versus an interested chairman.
I also must agree with the sentiments expressed in some of the other comments which point out the disincentive to owners and risk takers of mandating an independent chairman. I believe that my sense of ownership allows me to best promote interest in the Funds performance, as well as promoting and implementing an environment of corporate compliance in an effort to foster and protect the Funds reputation. Without that sense of ownership, my belief is that all that the Funds strive for is compromised. Why, one might ask, would anyone have the incentive to start a mutual fund absent this sense of ownership? As a consequence, on an even broader level, this disincentive to owners ultimately poses a risk to capital formation and competition in the capital markets.
I should also point out that I do not believe there is any credible evidence that funds chaired by independent chairmen perform any better than those chaired by interested chairmen, and there is no evidence that funds chaired by independent chairman have experienced any better compliance records. Market forces are also ignored in this current exercise of the SECs rulemaking. Clearly, fund investors unhappy with performance, fees and/or fund governance and compliance can sell their mutual fund
shares at any time. This action provides the most powerful incentive to fund managers, board members and chairmen alike.
Given the circumstances described above, it should be obvious that my personal and professional reputation in the eyes of the Funds shareholders in connection with both the SOA Real Estate and Value Funds is on the line everyday. My own money is committed to these Funds and, as such, my financial interests are closely aligned with those of the shareholders
In addition, given the relatively small, combined size and relatively recent launch of the two Funds, the economic and practical reality is that an independent chairman could not possibly be expected to devote the time and attention to overseeing the Funds as I routinely devote. Given my personal experience, expertise, enthusiasm and commitment to these Funds, it is inconceivable to me that any regulatory agency believes that the shareholders would be better served by replacing me with an independent chairman who has relatively little at stake and who will likely devote only a fraction of his/her time to managing, promoting, and overseeing the Funds and seeking to protect the shareholders interests.
In sum, the Funds present and future, I believe, are predicated on my commitment to the performance and the promotion of these Funds. In addition, given the Funds history and my constant monitoring of all aspects of the Funds operations, it is unlikely that an independent chair could perform this role as capably as I can. Each and every day, I have no choice but to do everything within my ability to ensure the Funds success. I share this same goal with the Funds shareholders and fear that by mandating my replacement, the SEC may potentially be placing the thousands of investors who have put their money and their trust in these Funds at a disadvantage. Finally, the mutual fund shareholders, who the SEC seeks to protect, should not be deprived of their right to choose a management team which includes an interested chairman.
For all of the reasons stated above, I urge the SEC not to adopt the independent chairman requirement.
Spirit of America Investment Fund, Inc.