Leonard W. Kedrowski
16 Dellwood Avenue
Dellwood, MN 55110
January 10, 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:
As a director of the First American Funds1 I would like to briefly comment upon certain of the SEC's proposed new rules.2 Some of the proposed rules are excellent. For example, I believe that independent directors should constitute a super-majority of the fund's board, and independent directors should select and nominate other independent directors.
However, I strongly oppose the adoption of two particular rule proposals.
First, the SEC should not compel the public disclosure of the exact amount of shares held by each director. I believe that 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. This policy should be disclosed to the public, along with the fact that each director owns at least $50,000 of Fund shares under 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. I hold a substantial amount of my retirement plan assets in the Funds. I should not be compelledto disclose the exact amount of such holdings, as such disclosure is not necessary to show that my interests are aligned with those of other Fund shareholders.
If the rule is adopted as proposed, I may have to consider liquidating a substantial amount of my Fund holdings to avoid public disclosure. Such divestiture is not in the best interests of the Fund and the rest of the 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.
I also oppose the proposal that there be 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, and trust, custody 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 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 absurdly 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 am I to ascertain 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? If you were to adopt the proposed rule requiring the public disclosure of highly personal information about directors and their "immediate families" as defined above, would the pool of competent people willing to become directors of investment companies become larger or smaller?
Again, many of the proposed rules are positive and from my perspective, welcome, and their adoption would be in the best interests of Fund shareholders.
Thank you very much for your consideration.
Very truly yours,
Leonard W. Kedrowski
First American Funds
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.