SOURCE CAPITAL, INC.
11400 WEST OLYMPIC BOULEVARD × SUITE 1200
March 5, 2004
Mr. Jonathan G. Katz
Re: File No. S7-03-04
Thank you for the opportunity to comment on Investment Company Act Release No. 26323 regarding proposed rules to enhance the independence and effectiveness of fund boards.
Source Capital, Inc. is a $500 million closed-end investment company established in 1968 and listed on the New York Stock Exchange. It relies on certain of the exemption rules discussed in the Release.
Overall we have no strong objection to any of the six proposed changes. However we do have the following suggestions for possible modification as well as responses to your comment request.
A. Board Composition
We do not oppose a change in the current requirement that a majority of the board be independent, but if the requirement were increased, 2/3 seems adequate, which was the number suggested in the ICI's Best Practices study a couple of years ago. This seems appropriate in view of the broad scope of the current and various proposed changes to the definition of interested person. Anomalous results include the designation of fund legal counsel as an interested director even though qualified to serve as independent legal counsel to the disinterested directors. An alternative approach could prescribe a 75% test for directors who are not interested persons of the investment adviser or distributor and a majority or 66 2/3% test for directors who are not interested persons of the investment company. In any event, the requirement should be expressed as a percentage, not a specific limit on disinterested directors because boards differ in size and personality. Because of the efforts needed for boards to search for and screen potential new directors, and to avoid the cost burden of special shareholders' meeting at least for closed-end funds that hold regular annual meetings, we believe the phase-in time should be no less than eighteen months.
B. Independent Chairman of the Board
We are in general agreement with the February 11, 2004 comment letter of the twelve congressmen (Tiberi, et al) to Mr. Donaldson, particularly in view of the proposed supermajority of independent directors requirement.
C. Annual Self-Assessment
If self-assessments are required, documentation of the process should be maintained. All committee chairmen should be independent directors. Audit and nomination (or similar) committees should be required as these areas are the provinces of independent directors. We don't believe specific policies on membership on fund and other corporate boards should be required, but that such matters should be decided on a case-by-case basis. We think that boards should meet at least on a quarterly basis, regardless of the size of the fund.
D. Separate SessionsWe agree with this proposal.
E. Independent Director Staff
We believe that independent directors should be permitted to hire their own staff and experts as needed, but not be required to do so. Independent legal counsel to the disinterested directors should not be required if fund legal counsel is approved by the disinterested directors and meets the independence requirements.
F. Recordkeeping for Approval of Advisory Contracts
We see no reason why funds should not retain copies of written materials that directors consider in approving an advisory contract. The suggested six years retention requirement seems reasonable.
Very truly yours,
/s/ David Rees