KOBRICK INVESTMENT TRUST
101 Federal Street
Boston, MA 02110
January 28, 2000
VIA E-MAIL AND OVERNIGHT MAIL
Jonathan G. Katz
U.S. Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549-0609
Re: File No. S7-23-99
Release Nos. 33-7754; 34-42007; IC-24082
Role of Independent Directors of Investment Companies
Dear Mr. Katz:
On behalf of the trustees of Kobrick Investment Trust (the "Trustees"), I am pleased to comment on the Securities and Exchange Commission's proposals relating to the role of independent directors of investment companies. The comments in Section I address the proposal to extend the disclosure requirements to immediate family members of directors. The comments in Section II address the proposal to require independent directors to retain independent counsel if such directors desire to retain counsel to rely on certain exemptive rules.
Sharing the Commission's view that independent directors of mutual funds play an important role in fund oversight, the Trustees applaud the Commission's initiatives to strengthen the effectiveness and independence of the boards of directors of investment companies. The Trustees are acutely aware of their critical oversight function in mutual fund operations and the protection of shareholder interests. The Trustees agree with Chairman Levitt's opening remarks at the SEC Roundtable on the Role of Independent Directors held in February 1999 that directors be an "independent check" and serve as a force of accountability on behalf of shareholders to maintain the integrity of the fund.
Although supportive of the Commission's efforts on the role of independent directors, the Trustees have concerns about the proposal to require fund directors to disclose information about immediate family members and the proposal relating to legal counsel for the independent directors.
I. Disclosure of Information about a Director's Immediate Family Members
Directors should not be required to disclose information relating to immediate family members.
The Trustees generally support the proposal to disclose additional information about directors in the funds' annual report, statement of additional information and proxy statement. However, they object to that part of the proposal that extends the disclosure requirements to their immediate family members.
Prior to accepting the offer to serve as trustees, the Trustees were fully informed about and educated themselves on the special nature of an investment company and the critical role that trustees of an investment company have. The Trustees were also informed about the heightened focus on potential conflicts of interest and the related disclosure requirements. As such, disclosure of information is routine for them. For instance, each year the Trustees complete detailed trustee questionnaires. However, it is when the reach of their disclosure requirements extends beyond a reasonable limit that the Trustees become concerned. The Trustees feel that the proposal to increase a director's disclosure requirements by including information about their immediate family members crosses the bounds of reasonableness.
There are numerous adverse consequences of adopting the proposed disclosure requirement, including the invasion of a director's and his/her family member's privacy, the difficulty a director will have obtaining the information from a family member and the strained familial relations that may ensue. The Trustees fear that this additional disclosure will be another deterrent to attracting experienced and talented professionals to serve on investment company boards.
Any concerns about the adequacy of disclosure are mitigated by each director's fiduciary obligations to the shareholders of the funds and the common law principles concerning conflicts of interest that have developed over the years. These obligations and principles encourage directors to provide adequate disclosure regarding circumstances that would or could give rise to a conflict of interest. The Trustees believe that the proposed additional disclosure will not produce any greater benefit, but could have unintended adverse consequences.
If the Commission adopts the disclosure requirements concerning immediate family members, the Trustees recommend that the definition of "immediate family members" be narrowed. As proposed, the definition includes family relationships that are too attenuated to provide useful information for shareholders. For example, there is no benefit to disclosing the activities of the Trustees' in-laws, particularly if they are financially independent of the Trustees. If this disclosure proposal is adopted, the Trustees recommend that a director should only be required to disclose information for family members (excluding in-laws) who are financially dependent on the director.
II. Requirement that Counsel be Independent
If legal counsel is sought in connection with relying on the exemptive rules, independent fund directors should not be required to retain legal counsel that is independent.
There are many situations where independent directors of investment companies should retain independent legal counsel to advise them with respect to certain matters. However, there are also many situations where independent counsel is not best suited for the task at hand, often because other counsel, that is not independent, is more capable to handle the matter. The Trustees believe that the objective for independent directors should be to select the most appropriate legal counsel available given all of the facts and circumstances. Accordingly, the independent directors should be able to exercise their business judgment to determine whether or not to retain independent counsel.
The Trustees believe that the Commission has already adequately addressed the concern of independence by requiring a certain percentage of directors of investment companies to be independent and requiring certain board actions to be approved by a majority of these independent directors. They believe that independent directors are generally well-informed and knowledgeable professionals and take their fiduciary responsibilities quite seriously. The selection of counsel is an important decision that should be made by the independent directors in the exercise of their business judgment. The directors should be encouraged to conduct due diligence before retaining counsel and identify any real or potential conflicts of interest. Armed with this information, they can then make an informed decision about the best counsel to handle the matter. It is the opinion of the Trustees that some of the factors directors should consider are as follows:
1. Which counsel has the expertise to best advise the directors about the matter? Often times the matter will involve facts and circumstances specific to the investment company and counsel familiar with these facts and circumstances can address the issue more quickly and efficiently than independent counsel who will first need to get "up to speed" on the matter.
2. What is the cost of retaining counsel? Although independent directors should strive to find the best counsel available, consideration needs to be given to the cost of this representation, particularly for smaller fund complexes, such as the current Kobrick Fund complex. The benefit of having independent counsel as compared with the added costs for such counsel may not always be justified.
3. Will the directors be able to select truly independent counsel in all situations? The Trustees believe that there are only a small number of law firms with the expertise to represent investment companies in complex matters. Given the broad affiliations of many investment firms, many of these experienced law firms could be precluded from representing the independent directors. Other firms may turn down the representation due to lack of availability or lack of interest in taking on a one-time matter. As such, it may be difficult to find qualified independent legal counsel. If the proposal is adopted, the unfortunate result may be that independent directors may be forced to use an inexperienced law firm that would spend an inordinate number of hours learning the regulation of mutual funds and the related issues.
Counsel's advice on the directors' obligations under the exemptive rules generally relates to procedural matters. Accordingly, counsel's role is to provide an objective assessment of the matter and is not likely to be influenced by its representation of other clients. As such, the Trustees do not believe it is necessary in all circumstances that legal counsel be independent to provide objective advice concerning reliance on exemptive rules.
Finally, it should not be overlooked that the legal profession is regulated by its own professional conduct rules at the state level. As noted in the Commission's proposing release, a lawyer may represent clients with conflicting interests after full disclosure and client consent. Under most rules of professional conduct, lawyers may only provide advice to both the mutual funds and fund management if there is a reasonable belief that the representation will not adversely affect the relationship with the either party and each party consents after consultation about the risks and advantages of common representation. If fund management's legal counsel finds that representation of the fund would be materially limited in any way, then they have a duty to decline this dual representation. This provides the Trustees with comfort that even if legal counsel to the independent directors is also legal counsel to fund management, counsel will bring to their attention any material conflicts. At that point, the directors will decide in the exercise of their business judgment whether independent legal counsel is necessary in the best interests of the fund's shareholders.
The Trustees would like to reiterate that, except for the concerns discussed above, they generally welcome the current initiatives by the mutual fund industry and the Commission to enhance the independence and the effectiveness of boards of directors of investment companies. They appreciate the opportunity to comment on these proposals and thank you for your consideration.
/s/ Richard A. Goldman
Richard A. Goldman
Secretary, Kobrick Investment Trust