Andrew M. Hunter III
5100 IDS Center
80 South 8th Street
Minneapolis, MN 55402
January 18, 2000
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549-0609
Re: Proposed SEC rules regarding independent directors - File No. S7-23-99
Dear Mr. Katz:
I am a "disinterested" director of the First American Funds1and the Chair of the Nominating Committee of the First American Funds board. I would like to briefly comment upon the SEC's proposed new rules.2 Several of the proposed rules are excellent, and in fact have been followed by the First American Funds board for many years. For example, 75% of its directors are "disinterested," the board chair since 1993 has been "disinterested" and the selection and nomination of disinterested directors is entrusted to the disinterested directors.
While some of the proposals make sense, two particular rule proposals should not be adopted.
First, the SEC should not compel the public disclosure of the exact amount of shares held by each director. Directors should hold a material amount of shares in the fund complex, so that the interests of directors and fund shareholders are aligned. The First American Funds have a policy which requires that directors own Fund shares in an amount at least equal to one year's director fees. It should be sufficient that this policy be disclosed to the public, along with the fact that each director owns at least $50,000 of Fund shares pursuant to this policy. Further disclosures would be unwarranted intrusions on the privacy of directors and their families.
Directors of the First American Funds hold shares with a value in excess of $6,000,000. Director investments in the Funds may represent a significant portion of such director's net worth. Directors should not be compelled to disclose the exact amount of such holdings, as such disclosure is not necessary to show that their interests are aligned with those of other Fund shareholders.
If the rule is adopted as proposed, directors may be compelled to liquidate a substantial amount of Fund holdings to avoid public disclosure of their value. Such divestiture is not in the best interests of the Funds and the rest of their shareholders. If action is taken on a proposed rule regarding disclosure of Fund ownership, the SEC should allow directors to disclose compliance with a policy requiring the ownership of a particular minimum amount of Fund shares (say $50,000), rather than requiring the disclosure of the exact amount of share ownership.
Second, the SEC should not require public disclosure of transactions and relationships where there is no "special treatment." Directors of funds advised by a bank in particular may have retirement plan assets invested in mutual funds or separate accounts which are managed by the bank, trust, custody, lending and other relationships, all of which are entered into on an "arm's length" basis. The public disclosure of such relationships is unnecessary and inappropriate. As long as directors are not receiving any special treatment, such situation does not call into question a director's independence, and disclosure of such matters is unnecessary and inappropriate. The implication of the proposed rule is that business relationships between the independent directors and the bank/adviser are inappropriate. In reality, if no special treatment is provided, it is useful from a due diligence standpoint for independent directors to have first hand knowledge of the quality of services provided by the bank and its affiliates.
The First American Funds have a policy under which all of the independent directors review this issue, and come to a collective judgment as to whether the independence or "disinterestedness" of a director may be called into question because of positions, interests, transactions and relationships. As long as this policy exists there is no need for public disclosures of such transactions and relationships.
The list of persons covered by the proposed disclosure requirements, i.e., "immediate family members," is ridiculously broad. As proposed, "immediate family member" means siblings, adult children, mothers- and fathers-in-law, sons- and daughters-in-law, and brothers- and sisters-in-law. How is a director to determine whether or not such persons have loans or other relationships with the bank which manages the First American Funds? Would a "reasonable" mother-in-law disclose such information to a son-in-law, particularly where it will be published in a proxy statement? If a director is unable to obtain such information, will he/she (or the fund) be subject to SEC sanctions?
From my perspective as Chair of the Funds' Nominating Committee, I am acutely aware of the need to maintain and expand the pool of highly competent persons who are willing to serve as fund directors. I am very concerned that the adoption of the two proposals discussed above will shrink the candidate pool, and have other negative consequences.
The adoption of the rule proposal requiring precise disclosure of Fund shares owned will: (a) discourage substantial investments in fund shares by directors; (b) encourage fund directors to liquidate fund shares prior to the adoption of new rules mandating disclosure; (c) discourage substantial fund shareholders from serving on fund boards; and (d) discourage fund boards from adding individuals of modest circumstances as directors, for fear that such individuals cannot buy an "impressive" number of fund shares.
The adoption of the proposed rule requiring disclosure of transactions and relationships about themselves and their families where there is no special treatment will cause highly qualified candidates to decline to serve as fund directors. In fact, because of privacy concerns the First American Funds board could lose the services of several current disinterested directors if this proposal were adopted.
Thank you for your consideration.
Andrew M. Hunter III
Director, First American Funds
Chair, Nominating Committee
1 First American Funds include 38 open-end funds with assets of approximately $32 billion included as part of three corporations, First American Funds, Inc., First American Investment Funds, Inc., and First American Strategy Funds, Inc.
2 See Release Nos. 33-7754; 34-42007; IC-24082.