January 24, 2000
Jonathan G. Katz
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549-0609
Investment Company Governance Release: File No. S7-23-99
Dear Mr. Katz:
We are responding to the Securities and Exchange Commissionís ("SEC") request for commentary on proposed new rules relating to investment company governance (the "proposal"). As the independent trustees for Allmerica Investment Trust and Allmerica Securities Trust (the "Trusts"), we want to express our views on the proposal in advance of the SECís finalizing any new rules.
We would like to commend the SEC for undertaking a positive process to raise issues concerning investment company governance. Overall, the ideas embedded in the proposal are thought provoking and generally very constructive. Through this response we would like to add what we believe is a constructive perspective on certain aspects of the proposal, including related implementation considerations.
In advance of our specific commentary, it is important that you have some perspective on the Allmerica fund management organization and the structure of our board of trustees. The signatories of this letter are the independent trustees of the Trusts, each of which is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940 (the "Act") as an open-end company. The Trusts provide a broad range of investment options through fourteen separate investment portfolios (the "Funds"). Shares of the Funds are sold exclusively to variable annuity and variable life insurance separate accounts and to qualified pension and retirement plans. As of December 31, 1999, there were over $6 billion of assets in the Funds. The investment manager for the Funds is Allmerica Financial Investment Management Services, Inc. ("Allmerica"). The Funds are run as a "manager of managers" complex in which Allmerica, subject to board approval, selects subadvisers that manage the investment portfolios. At present, an affiliate of Allmerica is the subadviser for four funds and the rest are subadvised by ten unaffiliated subadvisers. There currently are nine trustees of Allmerica Investment Trust, five of whom are not "interested persons" within the meaning of the Act; and ten trustees of Allmerica Securities Trust, six of whom are not interested persons.
Selection and Nomination of Independent Directors
The Allmerica boards currently follow the practice of having the independent directors nominate new independent directors. We understand that the purpose of the proposed changes is to prevent fund management from unduly influencing the selection/election process. However, our experience is that management has been very helpful in the nomination process by bringing forward individuals with exemplary credentials. We would support an approach that requires substantial independent director participation in the nominating process -- including the establishment of general criterea for board service and the conduct of due diligence of potential director candidates. However, we do not believe it is necessary to require that the responsibility to nominate and elect be solely that of the independent directors. At a minimum, the final rule should clarify that it is appropriate for management to be actively involved in the nomination process, that directors should seek management input if they desire and that there are not punitive consequences to the use of this input.
Independent Legal Counsel
It is our opinion that the SECís approach to the use and qualifications of legal counsel misses the mark. We interpret the proposal to require that independent directors either must operate without the benefit of legal counsel, in a highly regulated and increasingly complex environment, or attempt to employ counsel that meets difficult and contorted standards of independence. We recognize that the proposal permits a board to make exceptions to this narrowly defined independence standard but we question whether this provides adequate flexibility. For the same reason, we wonder whether it would be prudent for a board ever to rely on this exception in any but the most glaringly obvious cases.
In our view, the proposed narrow definition of independence related to separate legal counsel acts as a disservice to the independent directors in two ways: (1) by limiting the choice of firms and/or individuals who may serve and (2) possibly foreclosing the most effective representation taking account of legal expertise and board dynamics.
The proposed approach is especially problematic for a manager of-managers structure such as the Allmerica Funds. During our process of hiring separate Trustee counsel, we found that significant conflicts with Allmerica and/or certain of our sub-advisers limited our number of choices. Ultimately after a rigorous search process, we retained counsel that we believe represents us very effectively. However, we believe that under the proposed definition of independence that we would not have been able to continue to retain this firm due to minor conflicts with a number of the sub-advisers and a remote Allmerica affiliate. This serves as an example of how implementation of the proposed definition represents an impediment to the identification, selection and retention of competent counsel.
It would be a disservice to us and other boards if we were required to seek new counsel in order to meet the proposed definition. In light of our experience, we likely would have great difficulty identifying another suitable candidate firm or individual that does not have disqualifying conflicts.
If independent counsel is to be required, we think a better approach would be to provide a list of appropriate factors to guide a board in making an informed determination in light of all relevant facts and circumstances.
Disclosure of Additional Director Information
The proposal contemplates disclosure of a range of information not currently required but that might be of interest to some small subset of shareholders. However, the specifics of the suggested disclosure are too expansive to be efficient to implement and administer or, frankly, to serve the purpose of providing useful, clearly understandable information to the vast majority of shareholders. As proposed, the disclosure requirements will make it virtually impossible to obtain complete, timely data much less to effectively monitor all of the required information. Even assuming that the information could be readily obtained, in our view, much of it would be more confusing than informative to all but a small number of shareholders.
Our biggest concern is that the failure to disclose the required information (even unwittingly as easily could happen) potentially could trigger an SEC enforcement action and/or shareholder litigation. For example, it is conceivable that disclosure of "conflicts" information could encourage inappropriate and even frivolous challenges to director independence. Additionally, it is plausible that due to the more expansive disclosure obligations that some individuals will not be able or willing to comply satisfactorily therefore discouraging qualified candidates from board service. We do not believe any of this is intended by the proposal.
We could support the proposed expanded disclosure of potential conflicts information if it is limited by the following:
In addition, we believe that any new disclosure requirements must take account of the special circumstances of funds, such as the Allmerica Funds, underlying variable annuity and variable insurance products. As an example, it would not be appropriate to require such funds to disclose director share ownership since directors cannot directly own such funds. The absence of fund ownership, in this example, easily could be misinterpreted as a lack of commitment to the funds by board members.
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We hope that these comments and viewpoints are constructive and helpful in your deliberations regarding the proposal.
|/s/ P. Kevin Condrone
P. Kevin Condrone
| /s/Attiat Ott
|/s/Cynthia A. Hargadon |
Cynthia A. Hargadon
| /s/Paul D. Paganucci
Paul D. Paganucci
(Trustee Allmerica Securities Trust only)
/s/Cynthia A. Hargadon
|/s/Paul D. Paganucci
Paul D. Paganucci
(Trustee Allmerica Securities Trust only)
|/s/ Gordon Holmes
|/s/Ranee P. Warner
Ranee P. Warner
|/s/ Bruce C. Langton
Bruce C. Langton