Virginia L. Stringer
Chair of the Board of Directors
First American Funds
712 Linwood Avenue
St. Paul, Minnesota 55105
January 12, 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 have been asked by the other disinterested directors of the First American Funds1 to comment briefly upon certain of the proposed rules.2 The directors of the First American Funds have been very supportive of efforts to improve corporate governance to enhance the interests of mutual fund shareholders. Many years before the issuance of the recent ICI Best Practices Report the First American Funds adopted many of such suggested "best practices." 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.
The Funds have a formal policy that all directors are to own shares of the Funds in an amount at least equal to one year's director fees, as we agree that it is important that the interests of directors be aligned with those of Fund shareholders. (Currently directors own Fund shares with a value in excess of $6,000,000.) We also believe that it is important that directors be aware of positions, interests, transactions and relationships which could lead to conflicts of interests, which could cause a putative disinterested director to be considered interested. Therefore, the board has a policy requiring disclosure of such positions, interests, transactions and relationships to other disinterested directors, to enable a collective determination to be made as to whether such relationships would cause a director to be deemed not "independent" or disinterested.
In short, the disinterested directors have not only been very supportive of efforts to improve corporate governance, but have implemented practices and policies well in advance of their recommendation by the ICI or proposal by the SEC. Nonetheless, we feel compelled to criticize three particular rule proposals:
(1) The SEC should not compel the public disclosure of the precise amount of shares held by directors. We agree that the interests of directors and fund shareholders should be aligned, and that directors should own a material amount of shares in the fund complex. As noted above, the Funds currently have a policy requiring directors to own Fund shares in an amount at least equal to one year's director fees. We feel it is appropriate to disclose this policy to the public, and that each director owns at least $50,000 of Fund shares pursuant to this policy. We believe however, that disclosures beyond this are unwarranted intrusions on the privacy of directors and their families. Directors may have significant portions of their net worth invested in Fund shares, and the precise extent of such Fund holdings is not information fund shareholders need to know. Instead, it should be sufficient to disclose that each director owns at least $50,000 worth of Fund shares to demonstrate that the interests of directors and Fund shareholders are aligned.
The adoption of the SEC's 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. Thus, the adoption of this proposed rule is clearly counterproductive.
(2) The SEC should not compel the public disclosure of transactions and relationships where there is no "special treatment."In the proposed rules there is a requirement that various positions, interests, transactions and relationships of fund directors be disclosed. We agree it is critically important that disinterested directors in fact be independent and able to act in the best interests of fund shareholders. The disinterested directors of the Funds have a practice of annually reviewing this issue, and coming to a collective judgment as to whether the "independence" or "disinterestedness" of a director may be called into question. We strongly believe that the public disclosure of all of such positions, interests, transactions and relationships is unnecessary and inappropriate. The First American Funds are advised by U.S. Bank, one of the largest banks in the upper Midwest. Not surprisingly, individual Fund directors over the years have had and still have relationships with U.S. Bank and its affiliates. As long as directors are not receiving any special treatment, we do not feel that such situation calls into question a director's independence, and disclosure of such matters is unnecessary and inappropriate.
The unstated implication of the proposed rule is that business relationships between independent directors and the Bank and its affiliates are somehow suspect. In fact, provided that no special treatment is obtained, it is very useful for independent directors to be aware of thequality of services provided by U.S. Bank and its affiliates in such areas as private investment management, trust and custody services, and so forth. Directors should not be discouraged from entering into such transactions on the same basis as the public.
The proposal to impose reporting requirements on directors' "immediate families" whether or not they share the same household is unnecessary and impractical. 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 of the Funds to ascertain whether or not such persons have loans or other relationships with U.S. Bank? Would a "reasonable" in-law, sibling or adult child disclose such information to a Fund director, 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 the SEC 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, we believe that the adoption of the proposed rules will be counterproductive. The adoption will cause highly qualified candidates to decline to serve as fund directors, if they would be required to publicly disclose highly personal information about themselves and their families even where no special treatment has been granted. In fact, because of privacy concerns the board could lose the services of several current disinterested directors.
Instead of adopting the rule as proposed, if the SEC does anything, it should simply require that the disinterested directors receive information from other disinterested directors on positions, interests, transactions and relationships, and come to a collective determination as to whether such persons can continue to act as an independent, disinterested directors. If not, the board would be forced to compel the termination of such positions, interests, transactions and relationships, and/or have such director(s) recharacterized as interested and perhaps removed entirely from the board.
(3) The SEC should not establish requirements limiting the ability of disinterested directors to select counsel of their own choosing.
The legal profession is highly regulated, and attorneys must conform with applicable state codes of legal ethics. There is absolutely no need for the SEC to override state codes of ethics, and disqualify an attorney from a matter even though such attorney has provided full disclosure and received informed client consent. The SEC's attempt to regulate the attorney-client relationship in this context is unwarranted, unprecedented, and would set a dangerous precedent in an area better left to state regulation and the informed decisions of directors. This proposal raises important issues regarding federal versus state regulation and more appropriately should be decided by Congress rather than an administrative agency.
Thank you very much for your consideration of the viewpoints of the disinterested directors.
Very truly yours,
Virginia L. Stringer
Board of Directors of the First American Funds
1 First American Funds include 38 open-end funds 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.