(212) 506-2538

January 21, 2000

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:

On behalf of our clients, the independent directors of the Morgan Stanley Dean Witter family of funds, we are pleased to comment on the proposed rule amendments concerning independent fund directors.1

We agree with the Commission that fund directors, especially independent directors, play a critical role in the financial lives of millions of Americans. We also share your commitment to enhancing director independence and effectiveness. As part of this commitment, two of the Morgan Stanley Dean Witter fund directors were participants in the SEC's recent directors roundtable.

We are focusing our comments on two aspects of the SEC's proposals: (1) the proposed board composition requirements and (2) the disclosure proposals.

Board Composition Requirements

We support the proposal to require a fund to have at least a majority of independent directors in order to rely on the specified exemptive rules. This requirement would help ensure a board had an appropriate level of independence when addressing conflict of interest situations. While the ICI Advisory Group and others persons have recommended a higher ratio of independent directors, we do not believe their recommendations should be a matter of government mandate. Small fund groups, especially, may not have the resources to support a higher requirement. In addition, we see no inconsistency in the SEC setting a sound "baseline" and the Advisory Group expressing its views on "best practices."

Basic Information About Directors

Required Information

Currently, a fund's board of directors is required briefly to describe, in the SAI, its responsibilities with respect to the fund's management.2 In addition, each director is required to disclose the following information:

1. Name,
2. Address,
3. Age,
4. Position(s) with the fund,
5. Principal occupation(s) during the past 5 years, including any positions held with affiliated persons or principal underwriters of the fund,
6. Any family relationship between other fund directors or officers,
7. Whether the director is an "interested person" of the fund, and
8. Compensation, including accrued retirement benefits, received from the fund as well as the fund complex.

All fund shareholders are instructed on the back page of the prospectus that additional information about the fund is available in the SAI, which may be obtained, without charge, by calling a toll-free telephone number. Many fund groups also inform shareholders that the SAI may be obtained from a financial intermediary, such as a broker-dealer, or by e-mail request.

With directors disclosing the noted information in every fund SAI and with all investors - including the media - being provided this document upon request, there is no reasonable basis for the Commission to be "concerned that mutual fund investors do not in all cases have access to significant information about fund directors when they need it."3 Along these same lines, the disclosure proposals state, "Critics have charged that shareholders do not know the very people who are entrusted with safeguarding their interests."4 Assuming there is merit to this claim, the Commission should - as a fine-tuning measure - require on the back page of each prospectus disclosure that, "the SAI includes information about the fund's officers and directors, as well as additional information about the fund."

With respect to basic information about fund directors, the proposals would require a description of the relationship, events or transactions that result in a director being an "interested person." Why a person is interested is not necessary or useful information for investors. There is no evidence to suggest investors are asking "how interested" are a fund's interested directors. Furthermore, in most cases, this information is readily apparent because directors are required to disclose their recent professional positions.

The Commission, however, could improve the SAI by requiring a general, plain English definition of an interested person along with denoting the interested directors. For example, "the term `interested person' generally means any person who has a professional or business relationship with the fund, its investment adviser or principal underwriter that legally excludes that person from being considered an independent director."

The proposals also would require disclosure of the total number of portfolios, rather than investment companies, that a director oversees. We support this proposal and agree that it would provide a more accurate picture of a director's responsibilities.

Location of Information

The Commission is proposing to include "basic information" about directors in a fund's proxy statements for the election of directors, annual reports and SAI. This information should be provided in a proxy statement for the election of directors in order for shareholders to cast their ballot in an informed manner.

Information about fund directors, however, should not be required in annual reports.5 Annual reports are generally intended to provide a recent snapshot of important financial information and management's analysis of a fund's past investment performance.6 The background of individual directors is not sufficiently related to an adviser's discussion of investment performance, a line graph or a list of portfolio securities. Furthermore, if this type of information is available to all investors upon request, there is no need "to ensure that shareholders will receive it regularly."7 An annual report and SAI requiring the same information is the first step in dismantling the rational integrated disclosure system the SEC adopted several decades ago.

In addition, while basic information about directors is appropriate in the SAI, no information about fund directors should be included in the prospectus. The Commission should not "reconsider" its position in this regard. We understand the seemingly logical argument that, because this information is important, it should be in the primary disclosure document. While the argument has some academic appeal, it runs completely counter to the intended purpose of a fund prospectus. A prospectus is intended to communicate "essential information" about a fund that is of "fundamental importance to most investors."8 Basic information about fund directors is important -- but not to most investors when weighed against a fund's investment objective, investment strategies and risks, fees and expenses, shareholder services, and tax consequences. The SEC deserves a great deal of credit for the disclosure initiatives it put in place only a short year ago.9 We should continue our journey forward.10

Ownership of Equity Securities in Fund Complex

We support the concept of directors disclosing the dollar amount of securities they own in their fund complex. We also agree that disclosure on a "fund complex," and not an individual fund, basis is appropriate for the reasons the Commission articulated.

The disclosure, however, should state investments in dollar ranges in order to balance a director's right to a reasonable level of financial privacy. For example, a director could disclose investments in a fund complex of:

Less than $5,000
Between $5,000 and $25,000
Between $25,001 and $50,000
Between $50,001 and $100,000
More than $100,000

Conflicts of Interests

General Approach

The proposals also would enhance the disclosure required in proxy statements and SAI because of "situations that could involve conflicts of interest."11 This aspect of the proposals, in particular, is extremely problematic and should not be adopted.

As an initial matter, the conflict of interest proposals offer little support for a substantial expansion of the interests, transactions and relationships that would be subject to the disclosure. The proposals cite no study that suggests the need for revised disclosure, nor do they cite any specific abuses. The proposals also do not address the practical difficulties in attempting to obtain the requisite information, particularly in circumstances involving more remote familyrelationships and/or a fund with a sub-adviser or third party administrator serving many other clients.

The conflict of interest proposals rest on three proffered rationales. First, "shareholders may decide for themselves whether an independent director has any potential conflicts of interest that could affect the director's ability to protect the interest of shareholders."12 Second, the "resulting public dissemination may discourage the selection of independent directors who have relationships or engage in activities that raise questions about their independence."13 These two rationales together with requesting information that goes beyond the scope of Section 2(a)(19) virtually would guarantee that investment advisers and directors will continue to suffer Strougo type litigation.14 The proffered rationale is tantamount to the Strougo phase "calls into question" a director's independence. The industry fear generated by the Strougo cases went far beyond whether a demand was required in a derivative lawsuit; there is deep concern that the courts could incorporate a Strougo holding into the Investment Company Act -- calling into question, among other things, advisory agreements and 12b-1 plans.

A quick review of how the Strougo cases -- and their progeny -- began, demonstrates with mathematical certainty that the conflict of interest proposals, if adopted, will lead to merit-less lawsuits. In 1993, the Commission proposed to expand the disclosure requirements for directors and nominees in the area of director compensation.15 The Commission reasoned that, "[t]he aggregate benefit package that a director receives as a result of his or her relationship to a fund complex could be material to a shareholder's assessment of the director's independence."16 Several commentators argued that the inference of lacking independence was unwarranted because the fund, not the adviser, pays the compensation of independent directors. Mindful of this concern, the Commission nevertheless stated, in the adopting release, that the amount of compensation "could be one factor to be considered in evaluating the independence of a fund director."17 Less than 18 months after the Commission issued the adopting release, Robert Strougo filed his initial action against Scudder, Stevens & Clark.18 In denyingdefendants' motion to dismiss, the court held, based on Strougo's urging, that the directors' "substantial compensation" from serving on multiple Scudder fund boards "call into question" the directors' independence.19 With this decision, the Strougo legacy was born.20

The Strougo legacy stands for the proposition that factors outside those Congress specified in Section 2(a)(19) may call into question any decision statutorily independent directors make. The current proposals, if adopted, in effect would throw gasoline on the fire. The Commission would be blessing dozens of positions, interests, transactions and relationships not specified in Section 2(a)(19) as appropriate as complaint material. Even in the case of merit-less lawsuits, the burden of far-reaching, pre-trial discovery would drive the most pious fund groups to the settlement table.

Because of these concerns, we believe any conflict of interest analysis, at a minimum, should stay within the parameters of Section 2(a)(19). However, even with respect to Section 2(a)(19), the SAI and proxy statements are not the appropriate forum to disclose this information. The third rationale proffered for the conflict of interest disclosure is that "the information would assist the Commission in evaluating whether it should exercise its authority to determine that a director is `interested' under Section 2(a)(19)(A)(vi) and (B)(vi)."21 The SEC, of course, has a legitimate interest in this information. However, the Commission is proposing to amend the record keeping rules to require funds to preserve any documentation used to determine that a director qualifies as an independent director.22 In most cases, this would require fund groups to maintain their director questionnaires. We support this proposal. With the record keeping requirement in place, it is unnecessary to expand the disclosure in the SAI or proxy statements for the SEC to have access to the information.

Specific Disclosure Proposals

Positions. Comment was requested on the proposed disclosure of director positions. Some of these positions are within the scope of Section 2(a)(19), such as an officer of the adviser, and others are not, such as an employee of an administrator. Moreover, the disclosure proposals would reach back 5 years rather than the statutory 2 years for certain positions. For the reasons stated above, none of these proposals should be adopted, especially those positions and time periods not set forth in Section 2(a)(19).

Interests. Comment was requested on the proposed disclosure of director interests. For the reasons stated above, none of these proposals should be adopted, especially those pertaining to interests and time periods not set forth in Section 2(a)(19).23

Transactions and Relationships. Comment was requested on the proposed disclosure of director transactions and relationships. As with the other proposals, some of the transactions and relationships are within the boundaries of Section 2(a)(19) and others are not. None of the proposals should be adopted for the reasons stated above.

Board's Role in Fund Governance

The disclosure proposals would modify the information in proxy statements and the SAI relating to the board's role in governing a fund. The SAI and proxy statements would require certain additional information about board committees. We support this proposal because it would provide greater insight to a fund's basic governance structure.

The proposals would also require the SAI to include the board's reasoning for renewing an advisory agreement. The Commission believes that this disclosure "will help investors understand and evaluate the board's basis for that action."24 The genesis of the proposal is the discussion required in proxy statements when shareholders are asked to approve an advisory agreement.

We do not support disclosure in the SAI concerning the reasons for renewing an advisory agreement. It is an illogical leap to base the SAI proposal, even in part, on the proxy requirements. The predicate to the proxy requirement is that shareholders are being asked to take action on the contract.25 By contrast the SAI is intended to ensure that non-essential investment-related information is available to those persons interested in reviewing it.26 With respect to governance matters in particular, the SAI should communicate general information about the persons who govern the fund and the fund's governing structure. Specific factors a board considers in approving an agreement do not fall within this rubric. If the Commission decides to change the purpose of the SAI, it is only a matter of time before proposals appear to disclose the board's deliberations on the numerous other agreements it considers. With the ever present goal of prospectus simplification, this would be a giant step in the wrong direction.

Cost-Benefit Analysis

Lastly, we feel compelled to comment on the disclosure section of the Commission's cost-benefit analysis.27 The estimated cost of compliance is grossly understated. The analysis estimates that the additional hourly burden for preparing an initial registration statement would be 10 hours. The hourly burden for the subsequent post-effective amendments is estimated to be 1/6 of the hours for the initial registration statement. Thus, according to the Commission's analysis, the additional hourly burden for a PEA is 1.66 hours.

In view of the complexity and scope of the proposals, compliance would be burdensome if not impossible. Certainly, at a minimum, director questionnaires would have to be expanded significantly and directors likely would require assistance in responding to them. In addition, questionnaires would likely have to be circulated to a director's "immediate" family members. Given the scope of transactions, relationships and interests that would be subject to disclosure, it may be difficult for a fund to obtain the requisite information on a timely basis.28 Moreover, difficult judgment calls have to be made respecting when a particular interest, transaction or relationship must be disclosed. This would create an exceptionally higher hourly burden than the Commission currently estimates.

Also, at least 250 hours would be spent converting the disclosure rules into "plain English" director questionnaires in order to reduce the burden on the directors who would provide the requisite information. By way of illustration, imagine a director questionnaire that tracks the language of proposed Item 13(a)(7)(iv) of Form N-1A. Consider the following (SEC defined terms and Instructions are footnoted):

* * *

To fund directors:

"Describe briefly any material interest,29 direct or indirect,30 of any director or immediate family member31 of a director in any material transaction, or material series of similar transactions, since the beginning of the last two completed fiscal years of the Fund,32 or in any currently proposed material transaction, or material series of similar transactions, to which any of the following persons was or is to be a party. . . .33

. . . An officer34 of an investment company, or a person35 that would be an investment company but for the exclusions provided by sections 3(c)(1)36 and 3(c)(7),37having the same investment adviser, principal underwriter, or administrator as the Fund or having an investment adviser, principal underwriter, or administrator that directly or indirectly controls,38 is controlled by, or is under common control with an investment adviser, principal underwriter, or administrator of the Fund."

* * *

We appreciate the opportunity to provide comments on the rule proposals. Please call David M. Butowsky at 506-2580, Stuart A. Strauss at 506-2695, or Robert A. Robertson at 506-2538, should you have any questions or need additional information.

Very truly yours,

Robert A. Robertson

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) ("Proposing Release").

2 SAI, Item 13.

3 Proposing Release at Section II.E. (emphasis added).

4 Proposing Release at Section II.E.

5 Some fund groups list the names of their directors (and the positions they hold) in annual reports. This is an optional business decision on management's part, and it usually takes ½ page. This permissible business practice should not serve as the basis for mandating several pages of needless disclosure.

6 See Disclosure of Mutual Fund Performance and Portfolio Managers, Investment Company Act Release No. 19382 (Apr. 6, 1993) (adopting form amendments).

7 Proposing Release at Section II.E.1.a.

8 Registration Form Used by Open-End Management Investment Companies, Investment Company Act Release No. 22528 (Feb. 29, 1997) (proposing amendments to Form N-1A).

9 "[T]he SEC during the last couple of years, under the leadership of Chairman Arthur Levitt, has engaged in a campaign to make disclosure documents, including fund prospectuses, more user-friendly and written in `plain English.'" Robert A. Robertson, In Search of the Perfect Mutual Fund Prospectus, The Business Lawyer 489 (Feb. 1999).

10 In proposing the previous round of amendments to "streamline" Form N-1A, the Commission requested comment on whether information about a fund's directors is essential information that should be required to be disclosed in the prospectus. Id. Commentators, at the time, rightfully maintained that the information is not essential to a typical investor and would only serve to lengthen the prospectus. 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). Nothing has changed in the intervening two years.

11 Proposing Release, Section E.3.b.

12 Id.

13 Id.

14 The Strougo cases include:

C Strougo v. Scudder, Stevens & Clark, 964 F. Supp. 783 (S.D.N.Y. May 6, 1997) ("Strougo I");
C Strougo v. Bassini, 1 F. Supp. 2d 268 (S.D.N.Y. Apr. 6, 1998);
C Strougo v. BEA Associates, 98 Civ. 3725, 1999,

15 Amendments to Proxy Rules for Registered Investment Companies, Investment Company Act Release No. 19957 (Dec. 16, 1993) (proposing amendments).

16 Id. (emphasis added).

17 Amendments to Proxy Rules for Registered Investment Companies, Investment Company Act Release No. 20614 (Oct. 13, 1994) (adopting amendments) (emphasis added).

18 Strougo I was filed on March 22, 1996. See Strougo I, 964 F. Supp. at 788, supra.

19 Strougo v. Scudder, Stevens & Clark, 964 F. Supp. 783, 795 (S.D.N.Y. May 6, 1997).

20 After several years of litigation, Chairman Levitt publicly stated his views on the subject in March 1999. He acknowledged that there have been "questions raised in the press and in the courts about whether simply serving on multiple boards or portfolios compromises a director's independence. Recent court decisions say it doesn't." He was "inclined to agree." Arthur Levitt, SEC Chairman, "Keeping Faith with the Shareholder Interest: Strengthening the Role of Independent Directors of Mutual Funds," Remarks at Mutual Funds Conference, Palm Springs, CA (Mar. 22, 1999). The Chairman's comments were welcome.
We should not go through this drill again.

21 Proposing Release, Section E.3.b.

22 Proposed Rule 31a-2(a)(4).

23 As previously discussed, we do, however, support directors disclosing fund shares they own in their fund complex.

24 Proposing Release at II.E.4.

25 Item 22(c) of 14A (emphasis added) ("If action is to be taken with respect to an investment advisory contract, include [the specified] information in the proxy statement."); see Tannenbaum v. Zeller, 552 F.2d 402, 429-30 (2d Cir. 1977) (emphasis added) ("The management of an investment company [is obligated under the proxy rules] to furnish its shareholders with all information necessary to enable them to make an informed judgment on questions concerning investment contracts presented to them . . . .").

26 Registration Form Used by Open-End Management Investment Companies, Investment Company Act Release No. 22528 (Feb. 29, 1997) (proposing amendments to Form N-1A).

27 Proposing Release at III.

28 Particular difficulties would be presented for a fund which had a third party administrator and/or multiple advisers or sub/advisers. Each of these entities may provide services for many other registered investment companies and/or non-U.S. or private investment companies. Each one of these other investment companies, as well as their officers, would constitute "Related Parties" of the fund, as defined in the proposed rules.

29 "State the nature of the interest, the approximate dollar amount involved in the transaction, and, where practicable, the approximate dollar amount of the interest.

In computing the amount involved in the transaction or series of similar transactions, include all periodic payments in the case of any lease or other agreement providing for periodic payments.

Compute the amount of interest of any director or immediate family member of the director without regard to the amount of profit or loss involved in the transaction(s)."

30 "Disclose indirect, as well as direct, material interests in transactions. A person who has a position or relationship with, or interest in, a company that engages in a transaction with one of the persons listed . . . may have an indirect interest in the transaction by reason of the position, relationship, or interest. The interest in the transaction, however, will not be deemed "material" . . . where the interest (including a limited partnership interest, but excluding a general partnership interest) or a creditor interest in a company that is a party to the transaction with one of the persons specified . . . , and the transaction is not material to the company."

31 The term "immediate family member" means "a person's spouse, parent, child, sibling, mother- or father-in-law, son- or daughter-in-law, or brother- or sister-in-law, and includes step and adoptive relationships."

32 "If the Registrant is a Series company whose Series have different fiscal years, then, in determining the date that is the beginning of the last two completed fiscal years of the Registrant, use the earliest date of any Series."

33 "As to any transaction involving the purchase or sale of assets, state the cost of the assets to the purchaser and, if acquired by the seller within two years prior to the transaction, the cost to the seller. Describe the method used in determining the purchase or sale price and the name of the person making the determination.

No information need be given as to any transaction where the interest of the director or immediate family member arises solely from the ownership of securities of a person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13 and the director or immediate family member receives no extra or specialbenefit not shared on a pro rata basis by all holders of the class of securities.

Transactions include loans, lines of credit, and other indebtedness. For indebtedness, indicate the largest aggregate amount of indebtedness outstanding at any time during the period, the nature of the indebtedness and the transaction in which it was incurred, the amount outstanding as of the latest practicable date, and the rate of interest paid or charged.

No information need to be given as to any routine, retail transaction. For example, the Fund need not disclose that a director holds a credit card or bank or brokerage account with a person specified . . . unless the director is accorded special treatment."

34 The term "officer" means "the president, vice-president, secretary, treasurer, controller, or any other officer who performs policy-making functions."

35 The term "person" means "a natural person or a company." The term "company" means "a corporation, a partnership, an association, a joint-stock company, a trust, a fund, or any organized group of persons whether incorporated or not; or any receiver, trustee in a case under Title 11 of the United States Code or similar official or any liquidating agent for any of the foregoing, in his capacity as such."

36 Section 3(c)(1) excepts from the definition of investment company "any issuer whose outstanding securities (other than short-term paper) are beneficially owned by not more than one hundred persons and which is not making and does not presently propose to make a public offering of its securities. Such issuer shall be deemed to be an investment company for purposes of the limitations set forth in sub-paragraphs (A)(i) and (B)(i) of section 12(d)(1) governing the purchase or other acquisition by such issuer of any security issued by any registered investment company and the sale of any security issued by any registered open-end investment company to any such issuer. For purposes of this paragraph:

(A) Beneficial ownership by a company shall be deemed to be beneficial ownership by one person, except that, if the company owns 10 per centum or more of the outstanding voting securities of the issuer, and is, but for the exception provided for in this paragraph or paragraph (7), would be an investment company the beneficial ownership shall be deemed to be that of the holders of such company's outstanding securities (other than short-term paper).

(B) Beneficial ownership by any person who acquires securities or interests in securities of an issuer described in the first sentence of this paragraph shall be deemed to be beneficial ownership by the person from whom such transfer was made, pursuant to such rulesand regulations as the Commission shall prescribe as necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of this title, where the transfer was caused by legal separation, divorce, death, or other involuntary event."

37 Section 3(c)(7) excepts from the definition of investment company "any issuer, the outstanding securities of which are owned exclusively by persons who, at the time of acquisition of such securities, are qualified purchasers, and which is not making and does not at that time propose to make a public offering of such securities. Securities that are owned by persons who received the securities from a qualified purchaser as a gift or bequest, or in a case in which the transfer was caused be legal separation, divorce, death, or other involuntary event, shall be deemed to be owned by a qualified purchaser, subject to such rules, regulations, and orders as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. . . ."

38 The term "control" means "the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with such company.

Any person who owns beneficially, either directly or through one or more controlled companies, more than 25 per centum of the voting securities of a company shall be presumed to control such company. Any person who does not so own more than 25 per centum of the voting securities of any company shall be presumed not to control such company. A natural person shall be presumed not to be a controlled person within the meaning to this title. Any such presumption may be rebutted by evidence, but except as hereinafter provided, shall continue until a determination to the contrary made by the Commission by order either on its own motion or on application by an interested person. If an application filed hereunder is not granted or denied by the Commission within sixty days after filing thereof, the determination sought by the application shall be deemed to have been temporarily granted pending final determination of the Commission thereon. The Commission, upon its own motion or upon application, may by order revoke or modify any order issued under this paragraph whenever it shall find that the determination embraced in such original order is no longer consistent with the facts."