November 18, 1999
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
Re: File No. S7-23-99
Ladies and Gentlemen:
We are the Board members of The Infinity Mutual Funds, Inc. (the "Fund"), which currently consists of 23 portfolios with aggregate assets exceeding $4.5 billion as of November 1, 1999. Two of our portfolios are advised by Mitchell Hutchins Asset Management and 21 are advised by First American National Bank of Nashville, Tennessee.1 The Fund has been in existence for almost 10 years and, in the past, previously existing portfolios have been advised by The Bank of New York and BEA Associates.
Our Board is comprised of four independent directors, one is the former Chief Economist of Riggs National Bank, another is the former Chief Financial Officer of American Standard and of Pan American Airways, another is the former Chief Financial Officer of Hospital Corporation of America, and, another, with considerable mutual fund director experience, is President Emeritus and former President of The Church Pension Group NYC and a former senior bank officer. In short, we believe we have considerable public company, as well as mutual fund, Board experience.
We read with interest the ICI's Report of the Advisory Group on Best Practices for Fund Directors and also the Commission's proposals designed to enhance the independence and effectiveness of fund directors. While we expect others to comment in detail about the proposals, we wanted to comment specifically about the independent counsel proposal and hope our views are taken to heart.
We believe the Commission's proposal will limit unnecessarily our ability to apply our business judgment appropriately in selecting our counsel, a position we believe has been critical to our ability to function effectively.
Rather than provide a long argument, we would assert simply that, in the absence of a direct conflict -- such as when counsel seeks to represent both the Fund's Board and its adviser or other service provider in the matter at hand -- the Board should be permitted to evaluate the nature of counsel's dual relationship to determine whether the relationship impairs its ability to function effectively. Obviously, we would expect counsel would make a full presentation, respond to questions and be forthcoming to requests for additional information. We also would expect that our conclusions and the basis for them would be memorialized in the Fund's minutes.
We believe it is surprising for Congress and the Commission to have invested in fund boards the enormous responsibility of overseeing investment companies -- relying heavily on the Board members' business judgment -- and at the same time not trust them to exercise that same judgment to choose counsel wisely.
What particularly troubles us is the proposal seems to ignore market reality. Most experienced fund counsel (and since a number of us have other mutual fund board experience, we have been represented by a number of firms) practice out of larger, full service firms which typically have great strengths in the financial services sector. As financial services firms become more diversified, a trend that will be accelerated by the repeal of Glass-Steagall, it will become even more likely that a large law firm will be performing some services for some branch of many financial conglomerates. The proposal would preclude such a firm from serving as counsel to the independent board members of mutual funds managed by some other arm of the conglomerate. We see no reason why our choice of counsel should be per se proscribed.
We also note that under the Commission's proposal, potentially disabling conflicts could arise as previously independent financial services businesses combine if Board counsel were providing services to the acquired entity. Similarly, a disabling conflict could arise as a result of services performed for the adviser or a subsidiary or affiliate, unrelated to work for the fund. We can conceive of many other examples where the result, effectively, would be to deprive us of counsel of choice. Furthermore, the proposal is retroactive because representations within the last two fiscal years could be disabling even if they are to be discontinued for the future.
The proposal appears to suggest that if the per se proposal is adopted, Boards will simply find new counsel. This makes the assumption, which we believe is totally unwarranted, that the population of potential counsel to independent board members is fungible. It is not. Counsel is most effective when a long-term relationship has been established. Independent Board members should not be placed in the position where they must choose a counsel who is not the counsel they prefer. As is pointed out in the release accompanying the proposed rule changes, the Investment Company Act invests the independent Board members with a great deal of responsibility and authority. We believe that level of responsibility requires that we have the authority to select counsel of our choice without the obstruction of mechanical standards.
Undoubtedly the proposal with respect to independent counsel is well intended, but we believe it derives from some people's views of perception and ignores materially the importance and the substance of the relationship between independent Board members and their counsel. Certainly a business relationship that counsel may have with the manager or its affiliates is an important consideration in determining whether that counsel should become or remain counsel to the independent Board members. Consequently, we favor any provision that would strengthen disclosure and reporting requirements. Ultimately, however, we think shareholder interests would be best served by permitting us to make the determination as to counsel and hope the Commission would concur.
Very truly yours,
Norma A. Coldwell
Richard H. Francis
William W. McInnes
Robert A. Robinson
1 Our funds currently are subject to proposals to combine with other funds.