A I M Advisors, Inc. 11 Greenway Plaza, Suite 100 Houston, TX 77046-1173 January 28, 2000 VIA E-MAIL (rule-comments@sec.gov) Mr. Jonathan G. Katz Secretary Securities & Exchange Commission 450 5th Street, N.W. Washington, DC 20549-0609 Re: File No. S7-23-99 Dear Mr. Katz: A I M Advisors, Inc. ("AIM") is pleased to have the opportunity to provide comments on the recent rule proposals by the Securities and Exchange Commission ("Commission") regarding the "Role of Independent Directors of Investment Companies." (See endnote 1) AIM endorses the Commission's efforts to support fund governance practices that focus on the best interests of mutual fund shareholders. However, AIM believes some of the recent proposals regarding independent directors should be modified. The modifications we suggest, and the reasons for our suggestions, are set forth below. Comments are set forth under captions representing the applicable sections of the Commission's proposing release no. 33-7754. 1. Section II. A. Independent Directors as a Majority of the Board We support the proposal that a majority of the board members should be independent. Reliance on many exemptive rules is essential for the day-to-day operation of a fund complex as an ongoing business (e.g. the ability to offer multiple classes of shares), and failure to comply even on a temporary basis with conditions necessary for such reliance could have serious consequences for business operations. Therefore, we believe that the majority requirement is more appropriate and practical for a rule-making standard than a two-thirds majority requirement. The proposed new Rule 10 e-1 extending the time for filling vacancies on the board is helpful. In the case of situations where a shareholder vote is required, additional time (e.g. extending the time for compliance to 240 days) would be helpful. In the case of a large complex such as the AIM Funds, a shareholder vote can be a time-consuming and expensive undertaking. We are currently engaged in a vote for many of the funds in the complex. The complex currently consists of 82 portfolios in 16 registrants, comprising approximately $160 billion in assets under management, with approximately 6 million shareholders and many more shareholders who hold street accounts. Since mutual funds generally hold shareholder meetings only when certain events occur, many potential issues relating to changes in investment policy or other matters can accumulate between shareholder meetings. Such changes may involve the filing of registration statements requiring 60 days review with the SEC in addition to the filing of proxy statements. Dealing with all such issues at one time is most cost-effective for the funds and the most efficient use of management company resources. Since a complex-wide shareholder meeting such as the one we are currently conducting may involve substantial costs (our current meeting plans are estimated to cost approximately $14 million), it is important to submit as many items as possible for shareholder votes at the same time. Allowing extra time in proposed Rule 10 e-1 would enable funds to combine issues that accumulate between shareholder meetings with the vote on directors in a way that would be most cost-effective. We believe that a phase-in period of one year from the next fiscal year end of a fund would be an appropriate time frame for compliance with the board composition requirement. 2. Section II. A. 3. Independent Legal Counsel The Commission's proposal on independent counsel, we believe, presents several problems as drafted. We believe that the directors are in the best position to judge the independence of their own counsel. They are experienced in evaluating and dealing with potential conflicts of interest. Directors are experienced and knowledgeable persons who should have an unfettered right to choose their own legal representation. The proposals as drafted could have undesirable effects as legal professionals change their employment situations or clients of law firms may merge or combine with other entities, requiring a board to change counsel as a result of other individuals' employment decisions or business combinations rather than as a result of substantive issues, disrupting client-attorney relationships and disrupting continuity of representation. We believe that the ICI approach in its best practices recommendations, recommending that the board retain qualified legal counsel but leaving to the board the assessment of its own counsel's qualifications, is a better approach. In fact, a "best practices" approach is more consistent with the Commission's own view of the independent directors as experienced business people who are able to make judgments about potential conflicts of interest. Independent board members are fully capable of assessing the level and materiality of business, if any, between affiliates of a mutual fund sponsor and partners of a law firm of which their counsel is a member, and of assessing other conflicts and solutions (such as "Chinese Walls") that could be taken to address such conflicts. 3. Section II. E. Disclosure of Information About Fund Directors With respect to interested directors, we believe that a statement that the director is interested because he is an officer, director or employee of a fund's adviser, distributor or other affiliate, or because he owns securities issued by the advisor, distributor or one of their affiliates, is sufficient. We do not believe that disclosure of any dollar amounts, even in ranges, is necessary or appropriate. Once a director is deemed not to be independent, disclosure of matters relating to his personal financial status is not necessary or relevant. Similarly, disclosure of the aggregate dollar amount of fund equity securities held by a director also appears to us to go too far in disclosing personal financial matters. An indication that a director holds shares in funds in the complex would seem to be sufficient to indicate to shareholders that the director's interests are aligned with their interests to at least some extent. Perhaps in this instance an indication of dollar ranges of a director's fund holdings might be appropriate. We believe that indicating the directors' holdings in the group of funds the director serves, rather than all funds in a complex, would best fulfill the goal of informing shareholders of the extent to which a director's interests are aligned with shareholders' interests. We believe that the proposal regarding disclosure of conflicts of directors' family members also goes too far. Perhaps, requiring such disclosure when a family member is related closely enough to an independent director that their interests would be included in the concept of beneficial ownership by a director would be more appropriate. Inquiry into the personal business affairs of one's adult brothers and sisters, mother- or father-in-law, son- or daughter-in-law, or sister- and brother-in-law, including step and adoptive relationships, should not be necessary for a director to serve on a fund board. It is very likely that many family members would be unwilling to discuss their financial situations in such detail even assuming that family members are on good terms with one another. This requirement could also severely limit the potential pool of "qualified" directors. In general, we believe that a director's interests in personal privacy should be balanced against shareholders' need for information to assess independence. Disclosure that reveals too much about a director's personal financial status is more likely to be of interest to unscrupulous persons than to a shareholder considering whether to invest in a given mutual fund. Even under current disclosure requirements, certain individuals have received correspondence that is threatening and that in some cases could appear to target them as potential victims of theft or worse. 4. Section II. E. F. Board's Role in Fund Governance We believe that disclosure in the Statement of Additional Information ("SAI") of the board's basis for approving the renewal of an existing advisory contract would serve no useful purpose. Such disclosure would essentially duplicate the minutes of the relevant board meeting. Any slight difference in wording between the minutes and the SAI disclosure would likely serve only as fodder for plaintiffs' lawyers. Such disclosure would therefore be likely to be lengthy and to eventually degenerate into boilerplate recitations of legal criteria. 5. Other Issues We hope that the Commission will make it clear that any changes to disclosure resulting from these rules may be made in filings pursuant to Rule 485(b), not requiring 60 days review by the Commission staff. It would be helpful from an administrative viewpoint if recordkeeping requirements applied on a calendar year basis, or the fiscal year of one selected fund in the complex, rather than on the basis of the fiscal year of each fund in a multi-fund complex. We appreciate the opportunity to provide comments on the Commission's proposals. If you have any questions regarding our comments, please feel free to call me at (713) 214-1191. Sincerely, Carol F. Relihan Senior Vice President, Secretary and General Counsel (1) AIM is investment advisor to approximately 120 investment company portfolios as of the date of this letter. The investment companies in the "AIM Family of Funds" consist of equity, fixed income and money market portfolios. As of December 31, 1999, the AIM Family of Funds had a total of approximately $160 billion in assets under management.