From: kevin_p_laughlin@vanguard.com Sent: Friday, May 21, 2004 5:21 PM To: rule-comments@sec.gov Subject: File No. S7-12-04 Mr. Jonathan G. Katz Secretary Securities and Exchange Commission 450 Fifth Street, NW Washington, DC 20549-0609 Re: File No. S7-12-04 Dear Sir: I am writing to comment on the Commission's proposed rule on "Disclosure Regarding Portfolio Managers of Registered Management Companies." I have been involved with the mutual fund industry ever since I began to write my senior thesis at Princeton University in 1949. In 1951, I went to work for industry pioneer Wellington Management Company, heading the company from 1965 to 1974. In 1974, I founded a new mutual fund organization, which I named The Vanguard Group of Investment Companies, and served as its chairman and chief executive through early 1996, and for the next two years as senior chairman. Since the start of 1999, I have served as President of Vanguard's Bogle Financial Markets Research Center. I no longer serve either as an officer or director of Vanguard, and I do not presume to speak for the firm. Rather, my comments on the proposed rule reflect the principles and values that I did my best to manifest in the creation of Vanguard, then as now the only mutual fund group which is truly "mutual." Since its inception, our management company, The Vanguard Group, Inc., has been 100% owned by the mutual fund members of the Vanguard Group and provides them with administrative, investment management, and distribution services on an "at-cost" basis. This unique shareholder-owner structure, the low costs it engenders, and our focus on funds designed to track or generally reflect indexes of the bond and stock markets have together largely accounted for the firm's substantial and steady growth over the years. Since Vanguard's inception on September 24, 1974, our fund assets have grown from $1.4 billion to $720 billion currently. During the span of my 50-plus year career, the mutual fund industry has undergone a fundamental change: An industry that was once focused on stewardship has become increasingly?if not entirely?focused on salesmanship. This industry, sadly, is now miles away from the principles articulated so clearly in the Investment Company Act of 1940?namely, that mutual funds must be "organized, operated, and managed" in the interest of shareowners, rather than the interest of managers and distributors. The recent mutual fund scandals are only the most visible manifestation of this transformation. As disgusting as the scandals are, they offer us a wonderful opportunity to finally address the conflicts of interest that plague our industry, and an opportunity to plainly reestablish that the interest of mutual fund shareholders are paramount, just as the 1940 Act makes clear. Given those goals, I feel strongly that the Commission's proposed rule on the disclosure of portfolio manager compensation is far too limited. Disclosing only the structure of portfolio manager compensation, without disclosing the dollar amount of compensation earned, is only a small step from no disclosure at all. I submit that the Commission should require disclosure of the dollar amount of each manager's compensation (including his or her share of the profits of the management company itself). Further, it is a mistake to exclude mutual fund executives from such disclosure, and thus comparable disclosure should also be required for the five highest-paid executives of the management company. Full disclosure of the compensation of fund managers and executives not only affords investors information on which they can make a more intelligent examination of corporate and fund performance, it also allows them to make better investment decisions. Even more important, however, is the fact that disclosure modifies conduct. The knowledge that an action will be disclosed will clearly make a party think twice before doing something questionable. In light of the ethical failures on the part of so many mutual fund executives, it must be obvious that ours is an industry that is in dire need of the benefits of heightened disclosure. There is no rational reason for exempting the single enclave of corporate America that represents the mutual fund industry from the compensation disclosure that is required of all of their counterparts in other publicly held companies. Such an exemption ill-serves mutual fund shareholders. Further, I would suggest that the Commission should also reexamine its rules on disclosure of mutual fund officers' and directors' holdings of fund shares. The extent to which fund directors, executives, and portfolio managers "eat their own cooking" by investing in the shares of the funds they manage or oversee is a vital issue, with little solid information available. Management company officials and portfolio managers are not currently required to disclose either their holdings of fund shares or their fund share transactions. Fund directors are required to provide some disclosure of their mutual fund ownership, but they are exempt from disclosure of the precise number of shares they own. Rather, fund directors need now only disclose the range of their holdings: none; $10,000 or less; $10,000 to $50,000; $50,000 to $100,000; over $100,000, both for the fund and for all funds in the group. What earthly good does it do when an investor learns only that a given director has spread a modest $100,000 (or more?) among 100 or more funds in the group? If such information is better than no disclosure at all, it is only barely so. Here, too, it's time to end the present exemptions of fund officers and directors from the disclosure of holdings that apply to their counterparts in all other publicly held corporations. In light of this industry's failure to measure up to the standards so plainly set forth in the 1940 Act, it is high time that we again embrace "service to shareholders first" as our industry's defining objective. The current environment lends itself to making the long-overdue effort to move in this direction. Revising the Commission's current and proposed regulations to provide full and accurate disclosure of portfolio manager compensation, senior management compensation, and ownership of fund shares is an essential first step towards this worthy goal. Sincerely, John C. Bogle