From: Geoffrey F. Foisie []
Sent: December 22, 2003
Subject: File No. S7-19-03

First I would like to thank the Commission for providing me this opportunity to comment, on behalf of myself and my clients, on its proposed rulemaking, File No. S7-19-03. Shawbrook is an investment advisor that places client money primarily in mutual funds. For that reason my comments are in response solely to the provisions of the proposed rulemaking that apply to the election of directors of investment companies.

The Commission, in its proposed rulemaking says that, with regard to investment companies, "the proposed rules are intended to improve the ability of fund security holders to participate meaningfully in the nomination and election of directors."

Many, and perhaps most, fund shareholders cannot "improve" their ability to nominate and elect fund directors since they never receive the chance to vote on directors in the first place. I believe the following accurately describes the situation today:

"In practice, because most funds do not have annual shareholder meetings and fund boards are extremely static, the public shareholders rarely elect directors." 1

Is the Commission really concerned about the ability of mutual fund shareholders to elect their directors? No where, as far as I can discern, is there any reference in the proposed rulemaking to the lack of universal shareholder voting or any indication that this absence is something the Commission has any intention of addressing in the future.

Unfortunately it seems as if investment companies have been included in this rulemaking as an afterthought:

The only mention of "investment companies" or "mutual funds" in the July 15, 2003, staff report is a footnote observing that the staff did not focus on them in preparing the report.2

It should thus come as no surprise that the "summary of comments" issued pursuant to the staff report contain no discussion regarding election of investment company directors.

The August 14, 2003, proposed rulemaking which preceded this proposed rulemaking had no investigation, discussion or analysis of investment companies. Instead investment companies appear only in time for the rulemaking to note the rules developed for operating companies will also apply to investment companies.

The following statement from the proposed rulemaking is another indication of a half-hearted interest in investment companies and the inability of shareholders to elect fund directors: "We do not know the precise number of states that prohibit security holders from nominating a candidate or candidates for election as director or the number of companies that are permitted to and do/or (would) include a prohibition against nominating a candidate or candidates in their articles of incorporation or bylaws."

Certainly the Commission must know that it does not need to survey every state to understand why many mutual fund shareholders are disenfranchised. A majority, and perhaps an overwhelming majority, of funds and/or fund assets are domiciled in only a handful of states, such as Delaware, Maryland, Massachusetts and New York.3

A modest inquiry into the statutory and case law concerning the election of mutual fund directors in those few states would indicate whether the proposed changes would result in fund shareholders being able to, in the Commission's own words, "participate meaningfully in the nomination and election of directors." I believe the Commission would find that at least some of the above mentioned states have intentionally crafted laws that effectively preclude many fund shareholders from voting for their directors.4

A recent newsworthy example might be the Heartland Municipal Bond funds that were domiciled in Maryland. I am not certain but I believe the Commission would find that Maryland statutes enabled Heartland to avoid ever scheduling an election of directors open to those unfortunate public shareholders.

The fact that the Commission in this rulemaking has avoided this central flaw of mutual fund ownership is not just a minor policy oversight. The inability of many mutual fund shareholders to select their directors strikes at the very heart of the mutual fund regulatory scheme where the primary responsibility for monitoring mutual funds legally falls on their shareholder/owners. Hopefully the Commission will not perpetuate a regulatory scheme which puts the legal onus on all, and not just some, fund shareholders while denying some of those same shareholders the means to carry out their legal obligation.5

I would hope the Commission recognizes that the proposed rulemaking is inadequate for addressing this flaw and suggest that the Commission commence a review of the law, rules and regulations, both federal and state, that inhibit many mutual fund shareholders from ever electing directors.

Whether or not investment companies are included in the instant proposed rulemaking is secondary. The Commission could always later on apply the nominating procedures it developed for operating companies after it had first analyzed the unique voting problems affecting mutual fund shareholders.

Again, I thank the Commission for this opportunity to comment.

Geoffrey F. Foisie