Ashok N. Bakhru
March 9, 2004
Jonathan G. Katz, Secretary
Re: Investment Company Governance; SEC File No. S7-03-04
Dear Mr. Katz:
This letter is submitted in response to a request for comment by the Securities and Exchange Commission ("you") on proposed regulatory changes. These changes are intended to enhance the independence and effectiveness of investment company directors and to improve their ability to protect the interests of the registered investment companies ("funds") and fund shareholders they serve. The proposed changes are published in Release No. IC-26323 (Jan. 15, 2004). This letter is submitted on behalf of the undersigned and the other independent Trustees of Goldman Sachs Trust and Goldman Sachs Variable Insurance Trust, two open-end management investment companies consisting of 64 separate portfolios with assets of approximately $100 billion (the "Funds"). (See SEC Registration Nos. 811-5349 and 811-08361.)
You have proposed five principal regulatory changes to strengthen the independence of fund directors (as well as a sixth change relating to the retention of certain records). Our comments on the proposed regulatory changes are as follows.
Board Composition. We support the proposal to require that independent directors constitute a supermajority of a fund board which, in our view, could be either two-thirds or seventy-five percent of the board. We also believe, if you adopt a supermajority requirement, that funds should be allowed at least eighteen months to comply with the requirement.
Independent Chairman of the Board. We support the proposal to require that the chairman of a fund board be an independent director. We have had an independent chairman of the board for more than ten years. It has been our experience that the chairman can provide an important and meaningful role in the preparation of board agenda and in fostering the dialogue between fund management and the independent directors on fund-related matters. With regards to your specific question whether an independent director is able to lead effectively the board through a discussion of a detailed and complex agenda, our response is "yes." Independent directors are fully capable in this regard. Moreover, if a particular independent director/chairman is unable to lead board discussions effectively, it is likely that other independent directors will be able to serve capably as the chairman. These views are also equally shared by management of our Funds.
On the other hand, with regards to your specific question whether the chairman of all board committees should also be required to be an independent director, our response is "no." We believe that there are certain committees, such as dividend committees and valuation committees, where it is unnecessary to require that the chairman be independent.
Annual Self-Assessment. We support the proposal to require fund directors to perform an evaluation, at least annually, of the effectiveness of the board and its committees. We have been performing annual self-assessments for five years, and have found that the self-assessments have both strengthened our fund governance and have facilitated the dialogue among independent Board members, non-independent Board members and Fund management. We believe, however, that all self-assessments must be held in strictest confidence to promote full and frank responses. We are, therefore, uncertain whether we agree completely with your stated expectation that the minutes of the board of directors should reflect the substance of the matters discussed during the board's self-assessment, and we hope you will consider this point further.
With regards to your question whether you should restrict the number of fund boards on which a director serves, our response is "no." We believe that the appropriate number of fund boards on which a director serves should be considered in a board's self-assessment, based on relevant circumstances and facts, and should not be determined by a Commission rule. Moreover, we strongly support the practice of using pooled board structures as it leads to efficiencies in addressing issues common across a fund complex; our experience has borne this out.
Separate Sessions. We support the proposal that independent directors be required to meet at least quarterly in a separate session at which no interested persons of the fund are present (except fund counsel). The independent members of the Funds' Board of Trustees, and certain Board committees (such as the Audit Committee), meet regularly in executive session without management or the interested Trustees present. We believe these sessions have helped strengthen collaboration and teamwork among the non-interested Trustees and our ability to consider the matters presented to the Board and the Committees for review or action. We also believe, however, that it is unnecessary to require by regulation that separate sessions be held more frequently than quarterly, so long as the independent Trustees have the discretion to do so.
Independent Director Staff. We support the proposal that funds explicitly authorize the independent directors to hire employees and to retain advisers and experts necessary to carry out their duties. The Funds' Board of Trustees and certain committees (such as the Audit Committee and the Governance and Nominating Committee) already have this authority. In addition, the Board of Trustees utilizes the services of the Funds' independent auditors and independent legal counsel and, in accordance with Rule 38a-1 under the 1940 Act, has selected a chief compliance officer for the Funds. In these circumstances we do not believe that you should require independent directors to hire their own staff.
Other Matters. In addition to our comments on your specific proposals, we note that in your release publishing these proposals you recognize that funds meet the investment needs and fulfill the expectations of their shareholders because of the efforts and skill of their investment advisers, and that investors do not generally invest in a fund because of the skill or reputation of its board of directors. You also observed, however, that oversight by a fund's board of directors is critical because of the unique set of conflicts the investment adviser has with a fund. As you proceed with the proposals discussed in this letter, as well as your other regulatory initiatives, we ask that you continue to recognize that your rules need to strike the proper balance between the responsibilities of management and the oversight responsibilities of fund directors.
Thank you for this opportunity to comment on your proposals. We hope our thoughts are constructive.