Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: File Nos. S7-23-99;
Role of Independent Directors of Investment Companies
Dear Mr. Katz:
We have been asked by our clients, the independent trustees and directors of two of the board groupings of the OppenheimerFunds, as well as those of OCC Cash Reserves, Inc. and OCC Accumulation Trust, to provide the following comments on the Commissions proposals1 to amend certain exemptive rules to enhance the framework for the independence of fund directors. Our clients (the "Independent Trustees") support efforts to assure directorial independence, but also believe that their own internal structure has long been designed to establish and preserve independence from management, as contemplated by existing law and regulation. They also believe that the previous Commission approach to dealing with conflicts of interest, i.e., requiring approval by a majority of the disinterested directors, not just a board majority, has worked well over time, and has not led to abuses.
The Independent Trustees support the proposal to require a fund to have at least a majority of independent directors. Given the fact that their funds have been governed so as to take advantage of the safe harbor of Section 15(f) of the Investment Company Act of 1940 (the "Act"), they have long maintained a supermajority position and believe that a clear majority provides an additional level of control over the level established by Section 15(c). Nevertheless, they have also seen that a high level of independence may be found in trustees who have had, but no longer have, affiliations with the advisor or its affiliates or other service providers. Combining a rigorous definition of independence with a substantial supermajority requirement may tend to exclude from board membership directors familiar with the funds but no longer economically tied to their adviser. The Independent Trustees, therefore, recommend that the Commission adopt rules requiring that there be at least a majority of independent directors. However, if a fund's organizational documents require a supermajority for a particular proposal, such as a fund reorganization, then the rules should require a sufficient proportion of independent directors to approve such a proposal. This requirement would help ensure that the advisor's board representative could not block a proposal supported by the independent board members.
The Independent Trustees have concerns with certain of the Commission's disclosure proposals. The Fund Governance Release states,2 that the Commission's disclosure proposals are intended to accomplish four purposes: First, the proposals would require mutual funds to:
Currently, Item 13 of a fund's Statement of Additional Information requires disclosure of key information regarding the fund's directors. Fund shareholders are advised on the back page of the prospectus that additional information about the fund is available in the SAI. Therefore, all investors and all other interested persons have publicly available all information about directors deemed by the Commission relevant to disclose, and this information is updated annually. If the Commission believes that investors are not directed to this information with sufficient precision, the Commission should require on the back page of each prospectus a statement that, "the SAI includes additional information about the fund, including information about the fund's investment adviser, its officers and its directors."
The Independent Trustees question the proposals to add disclosure requirements about themselves in other disclosure documents. First, they agree with the sense of the Commission that its well-crafted initiative to simplify prospectuses should not be jeopardized. Less than two years ago the Commission had appropriately reached the conclusion not to require additional information concerning directors in the prospectus 3.
The Independent Trustees do not believe that further disclosure should be required in annual reports. They do not comprehend why more information should be required about them than is required of directors of other public companies in their annual reports. All corporatedirectors are charged with a fiduciary responsibility to protect the interests of the company they serve, but the Commission has not yet suggested that other public companies provide in annual reports the full panoply of information about directors disclosed in all their other reporting documents. The purpose of the annual report is to provide an update of the company's performance based on its financial information and management's analysis of that performance.4 Extensive information about the directors would distract from the main purpose of the report and detract from the SEC's rational integrated disclosure system.
The Independent Trustees suggest that if additional disclosures seem warranted, despite the absence of cited abuses, the best strategy would be to require the information in the SAI. If shareholders do not request this information to any greater extent than currently, it is hard to argue that it is crucially important to them. Efforts should be made to encourage shareholders to seek all the information made available to them in the SAI rather than to force feed them particular disclosures.
Of course, the Independent Trustees concur that all information should be provided in a proxy statement for the election of directors, because shareholders casting their votes for directors should have immediately available to them in one place all public disclosures that might impact their decision.
The Fund Governance Release states,5 as its second rationale, that its proposals would require mutual funds to: ...
The Independent Trustees believe that the limited value to shareholders of the information concerning their ownership of fund shares needs to be balanced against their legitimate privacy needs. Fund directors do not, nor should they, necessarily have the same economic circumstances. A small dollar investment for one director may be more significant than a larger amount for another. Shareholders would have no way of knowing the financial requirements upon particular independent directors that might impact their ability to invest. Shareholders should not be induced by incomplete information, or misleading press coverage, to assume that the amount of a director's equity investment in a complex adequately measures his level of care and attention. Would one choose a legal advocate on the basis of how much she invested in her client, or a teacher on how much he contributed to his school's capital campaign? Would one argue that the absence of such an investment or contribution indicates that the lawyer's interestsare not be sufficiently aligned with her client's or the teacher's with his students'? To ask the question seems to answer it.
If, despite the limitations on any disclosure, the Commission feels that disclosure should be required, it should be limited to the statement that a director's equity investments in the complex exceed $5,000, $10,000 or $25,000, or are less than $5,000. Any further detail would only lead to invidious comparisons among directors based on incomplete information.
The Fund Governance Release states,6 as its third rationale, that its proposals would require mutual funds to: ...
The Independent Trustees we represent have very serious reservations about the practicality of obtaining, and the philosophical basis for seeking, the information proposed to assist shareholders to assess potential conflicts.
First, as to the practical difficulties, the Commission itself recognized with respect to persons under common control with the adviser, that "the burden on mutual funds of expanding disclosure ... may outweigh the value of the information to investors."7 This burden is even more imposing when it involves asking directors to solicit detailed information from relations facilely referred to as "immediate family members." The possibility that some directors may be personally close with their in-laws does not contradict the fact that others may not be in communication with estranged siblings or bitter ex-spouses and their children. New disclosure rules should not create the risk of liability on funds or directors for not obtaining detailed financial information they do not personally possess. Directors should not have to determine at the risk of liability whether a transaction was "material." Nor should directors have to prove, against a contrary presumption, that they did not know or should not have known particular information.
Second, the relevance to shareholders of the information requested is doubtful and the interpretation impossible. For example, suppose a director's sister had a good year selling insurance for an insurance agency tangentially affiliated with a fund administrator or adviser. How can a shareholder assess whether the compensation received by the sister was deserved or undeserved, whether the sister's title reflects that she is at a meaningful level in the organization or a lower position, or whether she received her position after the director took office or well before the insurance division was acquired in a recently-completed transaction? The limited picture created by revealing discrete facts about a broad circle of family members is less aportrait than a Rorschach test; it measures the shareholder's cynicism more than the director's independence.
The Independent Trustees believe that if any "potential conflict of interest" disclosure is required at all, it should be a statement from the adviser, and only the adviser, that "neither it nor affiliates of it at its direction have offered business opportunities to the independent directors or persons known to be immediate family members or entities known to be controlled by any of such persons," or, if such opportunities were provided, what they were. Any such disclosure should be general, and should be limited to family members sharing the same household. If a broader definition of "immediate family member" is retained, then, to protect the legitimate privacy concerns of the family member involved, the amounts involved should not be computed.
As a legal matter, the Commission should make absolutely clear that the statutory qualification for a director not to be "interested" is and should remain as set forth in Section 2(a)(19) of the Act, and that no "potential conflicts of interest" should result in any liability to the director except as contemplated by Section 36(a) of the Act. The Independent Trustees strongly believe that the funds and directors should be held innocent of liability from any incompleteness in disclosure, even if knowing on the part of the adviser; therefore, they urge that the Commission merely deem certain information worthy of being obtained and preserved in the funds' records but not subject to registration statement disclosure and consequent liability.
The Fund Governance Release states,8 as a fourth rationale, that its proposals would require mutual funds to: ...
To accomplish this purpose, the release would require that a fund's SAI "[D]iscuss in reasonable detail the material factors and the conclusions with respect thereto that formed the basis for the board of directors [sic] approving the existing advisory contract."9
In the course of their annual review the Independent Trustees retain outside consultants to provide voluminous written analysis of numerous factors particularly related to fund performance and expenses, and obtain other information from the adviser and from us as their counsel. They review this material and focus especially on changes from previous reports to them, as well as other data they deem desirable. Many of the board's considerations are based on prior knowledge and may be unstated in informal discussion. As with any group process, there may be differences in interpretation that may have no impact on the outcome.
The Independent Trustees do not believe that shareholders will benefit from having the interplay of board communication at each annual renewal transcribed into legal disclosure from a collection of remarks and inherent understandings. The Independent Trustees agree that it is important for shareholders who are voting to approve an advisory contract to know and understand the reasons that the board recommends approval (if it does), and to have those reasons explained fully in a proxy statement.
The Independent Trustees do support additional disclosure concerning the function and operation of board committees. To the extent that effort is expended by board members at committee meetings, in order to achieve better fund governance, shareholders should be apprised and the directors' efforts recognized.
The Independent Trustees appreciate the efforts of the Commission to support investment company directors as shareholder advocates and the opportunity to provide comments on the rule proposals. Please call Ronald M. Feiman at 212-506-2673 or David M. Butowsky at 212-506-2580 should you require additional information or assistance.
Very truly yours,
Ronald M. Feiman
cc: Chairman Arthur Levitt
Commissioner Norman S. Johnson
Commissioner Isaac C. Hunt, Jr.
Commissioner Paul R. Carey
Commissioner Laura S. Unger
1 Role of Independent Directors of Investment Companies, Investment Company Act Release No. 24082 (Oct. 14, 1999) ("Fund Governance Release").
2 Id., at 54
3 See Registration Form Used by Open-End Management Investment Companies, Investment Company Act Release No. 23064 (Mar. 13, 1998) (adopting amendments to Form N-1A).
4 See Disclosure of Mutual Fund Performance and Portfolio Managers, Investment Company Act Release No. 19382 (Apr. 6, 1993) (adopting form amendments).
5 Fund Governance Release., at 54
6 Id., at 54
7 Id., at 70
8 Id., at 54
9 Id., at 105