February 3, 2000

Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re: Comments on Proposed Rule Regarding Independent Directors of Investment Companies; Release Nos. 33-7754; 34-42007; IC-24082; File No. S7-23-99

Dear Mr. Katz:

As the trustees of the Horace Mann Mutual Funds, we are pleased to have this opportunity to comment on the proposed rules regarding Independent Directors of Investment Companies. We commend the Commission for its efforts towards improving the effectiveness of independent directors, however, we believe there are a couple of aspects where the rules as proposed will have negative effects on shareholders and should be changed prior to adoption.

We serve as the trustees of a relatively small (approximately $1 billion) mutual fund that serves as the underlying investment vehicle for variable insurance products. Because two of our trustees are officers of the Fund, they technically are "interested trustees," although none of the Board members are affiliates of any adviser or subadviser to the Fund and the Fund has no principal underwriter. Based upon the statutory definitions, our board is comprised of two-thirds disinterested board members, with a total board membership of six positions.

We wish to comment specifically on two aspects of the proposed rules:

  • Disclosure of information about fund directors
  • Independent legal counsel

    Disclosure of Information about Fund Directors

    We believe there are many aspects of this portion of the rule proposal that are good, and we generally are in favor of increasing the amount of information provided to shareholders about their board representatives. However, any changes should reasonably balance the benefits to shareholders from receiving such information against the burden to the funds and directors of providing such information. Some of the new proposals would be very burdensome to the funds and their directors, without, we believe, a corresponding benefit to shareholders.

    The proposed rules would require disclosure in the Statement of Additional Information (SAI) and proxy statements of the relationships of and transactions by any director or any immediate family member of a director with (1) any investment adviser, principal underwriter or administrator for the funds, (2) any person directly or indirectly controlling, controlled by or under common control with any such investment adviser, principal underwriter or administrator, or (3) any officer of any such investment adviser, principal underwriter, administrator or controlling or controlled person.

    The term "immediate family member" of a person is defined as the person's spouse, parent, child, sibling, mother- or father-in-law, son- or daughter-in-law, and brother- or sister-in-law (including step and adoptive relationships).

    We believe this requirement is problematic in several respects. First, the definition of "immediate family member" is too broad. Many directors will not have access to all the required information. We are concerned that many persons classified as "immediate family members" may be unwilling to provide the necessary information. We are concerned that if a director is unable to obtain financial information from a particular relative, even if the director has had little or no contact with that individual for a considerable period of time, the director would have no option other than to resign. This could deprive shareholders of a very effective representative and could seriously disrupt the operations of the Board. Even in those circumstances where the information may be obtainable, we believe that many directors will be unwilling to impose on more distant family members to obtain the required information. As a result, many funds may be deprived of the capable services of existing directors. Moreover, many funds likely would experience substantial difficulty in recruiting new qualified directors. This would be particularly true for small funds such as ours where the funds do not pay significant compensation.

    Second, the definition of persons related to the fund is so broad that for many complexes, including ours, the number of entities that would need to be cross checked against could be literally in the hundreds, and could involve many sister companies that are in virtually no way connected with the adviser, other than by common, distant ownership. This further reduces the ability of the directors to go to family members and obtain the necessary information. Moreover, for complexes that have funds with staggered fiscal year ends, the directors would be required to obtain this information at multiple times throughout the year. This would impose a huge burden on both the directors and the funds, with the resulting impact on the ability to attract qualified candidates to board membership. We also believe that having directors spend so much time tracking down this type of information would be a distraction from the important work that should be the focus of the board.

    Generally when the Commission imposes new requirements, it weighs the benefits against the burdens of the proposal. In this case, the burden to directors is very great. Yet in contrast, we see very little benefit to the shareholders, particularly if the requirement significantly reduces the willingness of persons to serve as directors. Therefore, we urge the Commission to eliminate this disclosure requirement.

    The last aspect regarding disclosure about which we would like to comment is the requirement to disclose director share ownership of the funds or complex. We are not opposed to the notion of shareholders being provided this information in general, however, in the context of funds underlying variable insurance products this information may present a misleading impression.

    To the extent directors do not have a beneficial ownership interest in a fund underlying a variable insurance product, it may be based on an assessment of the suitability of an insurance product for their own particular financial circumstances rather than any lack of commitment to, or negative commentary about, the fund. However, if the Commission requires such information, shareholders (in this case contractowners) may infer that the Commission believes there is a problem if there is no share ownership. Therefore, we suggest that if the Commission determines to adopt this provision, an exception be made for funds that are not available for sale to the public.

    Independent Legal Counsel

    We agree with the Commission's premise that independent directors need to have access to qualified, unbiased legal advice in order to effectively exercise their responsibilities. Further, we support the Commission's goal of ensuring that independent directors obtain such advice. However, we disagree with the proposed regulatory approach to reach that goal.

    The selection of counsel, both in terms of the structure of relationships and the firm selected to provide advice, has been an area to which we as trustees, including the independent trustees, have devoted specific attention, and we believe that we have the best knowledge of what is in the best interest of our fund shareholders. Moreover, this is a subject on which we feel well qualified to act. Therefore, we are adverse, as a matter of principle, to a Commission rule that would substitute the Commission's judgment for ours in the matter of selection of our own counsel. We believe that we are fully capable of judging, as we do in all other circumstances, whether we and the fund are receiving good quality service. In addition, we believe that we are better able than a uniform rule to evaluate conflicts of interest. If the Commission believes there is a problem or a potential problem within the industry, we believe it is appropriate for the Commission to raise the sensitivity of independent directors to this issue. However, we have not seen evidence, nor has the Commission demonstrated that there is a problem of sufficient magnitude to justify requiring all funds, even those that are currently effectively operating, to conform their arrangements to a Commission imposed rule.

    Further, we are concerned by the Commission's articulated standard of independence. Although the proposed rule provides some discretion to independent directors to make an exception for remote or minor conflicts of interest, the proposed rule is so vague regarding what is permissible (and the examples in the proposing release are so extreme), it invites litigation on this issue. Particularly given the size of our Fund, and the advantages in such a situation of employing legal counsel that might not otherwise fit the Commission's definition, we believe the actual decision, and the weighing and balancing of factors, should be left to the directors, who are in a better position than the Commission to judge what is in the best interest of the fund and shareholders, given the particular facts and circumstances of the situation.

    We believe that the independent directors are well qualified to assess the potential for conflicts and are able to address the issue through engagement letters or other understandings as suggested in the ICI's Best Practices Report. Moreover, the proposed rule could require boards who believe they are currently well served to terminate long-standing relationships with attorneys who they trust and rely upon and who have a wealth of information about the particular fund.

    We do not believe that legal advice is a commodity. The comfort level of directors in relying on advice from a lawyer is a very personal matter and we feel strongly that we, as the independent directors, should retain the right to hire and fire the lawyers representing us as we deem fit. We, and not the Commission, should have the discretion to make the judgment as to what lawyer can best serve our and the shareholders' needs. At the very least, if the Commission were to persist in its proposal, we believe that it should amend the rule so that it would only apply prospectively and would not have a retroactive impact.

    We urge the Commission to consider these comments and to adopt appropriate amendments to the proposals prior to implementing them.


    A. Thomas Arisman

    /s/A.L. GALLOP
    A.L. Gallop

    Richard A. Holt

    Richard Lang

    Harriet A. Russell

    George J. Zock