From: Camelia Kuhnen []
Sent: Wednesday, June 02, 2004 2:18 PM
Subject: Proposed rule S7-08-04 - supporting evidence

Dear Mr. Katz,

I am a researcher at Stanford University Graduate School of Business interested in studying the mutual fund industry. I have attached here a pdf version of a working paper that I belive has results relevant for the discussion of Proposed Rule "Disclosure Regarding Approval of Investment Advisory Contracts by Directors of Investment Companies" (File No. S7-08-04, Release Nos. 33-8364, 34-49219, IC-26350).

In the paper I construct a comprehensive data set that tracks advisory contracts between 1993-2002 for U.S. mutual funds. The main finding of the paper is that there are inefficiencies in the way advisory contracts are renegotiated: very few mutual funds actually renegotiate these contracts or switch investment advisory firms. The few funds that do undergo such changes actually benefit in terms of future performance and net inflows. The stickiness of advisory contracts combined with the benefits that follow contract renegotiation indicate that there are frictions and conflicts of interest in the mutual fund industry which cause the existence of these contractual inefficiencies. I believe that making the advisory selection process more transparent by having fund directors disclose the exact reasons why they contracted with a certain advisory firm can only help fund investors and reduce the inefficiencies in this industry.

I hope you will find the attached paper useful in the discussion of the proposed rule. Please contact me by email at or by phone at 650-724-4842 if you have any questions.

Thank you.


Camelia M. Kuhnen