Richard G. Cline
March 8, 2004
Jonathan G. Katz, Secretary
Re: Investment Company Governance/SEC File No. S7-03-04
Dear Mr. Katz:
I am Chairman and an independent member of the Boards of Trustees (together, the "Board") of the Northern Institutional Funds and Northern Funds (the "Funds"). I write on behalf of the Board to comment on proposed rule amendments that are intended to enhance the independence of investment company directors and improve their ability to protect registered investment companies and their shareholders.
The Funds have over 53 portfolios with total assets of approximately $48.3 billion. As independent Trustees, we support the initiatives of the Commission to enhance our independence and effectiveness as set forth in the Commission's Release No. IC-26323 (January 15, 2004). For purposes of this letter, however, we have limited our comments to one matter.
The Commission proposes to require that a registered investment company ("fund") relying on any of ten exemptive rules under the Investment Company Act of 1940 (the "1940 Act") have a board of directors whose independent directors constitute at least seventy-five percent of the board. The Commission has requested comment on whether this proposed change should be made and, if so, whether the percentage requirement should be higher or lower. The Commission has also requested comment on the appropriate period of time over which, if the new requirement is adopted, it should be phased in, and whether eighteen months would be sufficient.
Currently, the Funds' Board of Trustees consists of nine persons - six independent Trustees; two non-management Trustees who are not (and have not been) directors, officers or employees of the Funds' investment advisers (or their affiliates) but are "interested Trustees" as defined in Section 2(a)(19) of the 1940 Act for other reasons; and one Trustee who was director, officer and employee of the Funds' investment advisers until his retirement this year.
As previously stated, I am the Chairman of the Funds' Board of Trustees and am an independent Trustee. Additionally, all members of the Audit Committee of the Board and the Board's Committee on Trustees (which considers governance matters) are independent Trustees. The Board of Trustees and these Committees meet regularly in executive session without members of management present. Moreover, the Board of Trustees and these Committees, through their respective chairpersons, provide input on meeting agenda and confer regularly with the Funds' independent auditors and independent legal counsel.
In our circumstances as described above, where the Board Chairman and two-thirds of the Trustees are independent, we believe that the Board of Trustees is an "independent force" (to use the Commission's words) in the Funds' affairs. Moreover, while we are supportive of the position that a super-majority of independent directors can enhance independent director oversight, it is difficult for us to expect that our Board of Trustees will be a more "independent force" if the proposed seventy-five percent requirement is adopted. In this regard, we note that a seventy-five percent requirement could necessitate our recruitment of several new independent Trustees, and that the recruitment of qualified Trustees who clearly satisfy the independence requirements of the 1940 Act can be an involved process with significant financial and non-financial search costs.
For smaller boards like ours, the mathematics of the seventy-five percent rule become very difficult. We believe that our nine-member Board functions very well, in part because its size promotes open communication and the full participation of its members. Yet, assuming that none of our three interested Trustees (two of whom, as noted, are non-management Trustees) leave the Board, our nine-member Board would have to increase to twelve members, which would be an expansion of one-third. We do not believe that such an addition would increase the effectiveness of the Board's independent Trustees or benefit the Funds' shareholders. Furthermore, even if the Board were increased to twelve members, the maintenance of the seventy-five percent ratio would be vulnerable to the resignation or unanticipated loss of just one independent Trustee.
For these reasons, we favor a proposal requiring that independent directors constitute at least two-thirds (rather than seventy-five percent) of a fund board. We believe that a two-thirds requirement, coupled with the Commission's proposed rule that would require a fund to have an independent chairperson, clearly achieves the objective of independent oversight while permitting adequate flexibility for boards to meet the strict independence standards of the 1940 Act.
We also believe that the period over which to phase in any new super-majority rule should not be less than eighteen months from its adoption date. As previously noted, recruiting the necessary number of directors to fulfill the proposed seventy-five percent independence ratio, if adopted, could be a daunting challenge.
In closing and on behalf of the Northern Mutual Funds Board, I wish to thank you for this opportunity to comment.
cc: Other Trustees
The Northern Trust Company
Independent Legal Counsel