Supplementary Material, Independent Investment Company Directors:
Statement of Chairman Arthur Levitt
Open Commission Meeting,
October 13, 1999
Good morning. Today the Commission is considering a comprehensive set of proposals to safeguard and enhance the ability of mutual fund independent directors to execute their most important role: the protection of fund investors. William O. Douglas called corporate directors the "custodians of the interests" of shareholders. Fund directors are no less important. They serve as an investor's front-line defense against conflicts of interest and other potential abuses.
Earlier this year, the Commission hosted a Roundtable on the role of independent fund directors, with broad participation from directors, investor advocates, investment advisers, academics, corporate governance experts, and experienced legal counsel. A consensus emerged from the Roundtable that we needed to take steps to support independent directors in fulfilling their responsibility as guardians of investors' interests.
Not long after the Roundtable, an advisory group of industry experts formed by the Investment Company Institute prepared a set of "best practices" for funds and their boards to consider. These recommendations echo many of the issues discussed at the Roundtable and should help to promote the independence and effectiveness of fund directors. I applaud this effort, and I urge all funds to consider the ICI's recommendations.
One of the ICI's recommended best practices was that "new fund directors receive appropriate orientation and that all fund directors stay abreast of industry and regulatory developments." Consistent with this theme, former Commission Chairman David Ruder has formed the Mutual Fund Directors Education Council, a group made up of fund directors and other experts. The mission of the Council is to promote the development of educational programs for fund directors. Commissioner Johnson will offer the Council his insight and support as an advisory member. I would like to offer my personal thanks to Professor Ruder for this timely initiative, as well as his tireless commitment to other efforts that serve the interests of investors.
Of course, no amount of regulation can ensure director independence and effectiveness. True independence turns on the character and integrity of the individual director. To be effective, an independent director must be willing – and must be equipped – to ask the tough questions and make the tough calls. The proposals before us today are designed to ensure that independent directors have the tools to do so by transforming the best of this year's ideas and recommendations into a reality. The key points of the proposals include:
- Independent directors must comprise a majority – or perhaps even a super-majority – of a fund's board;
- Second, new independent directors must be nominated by the incumbent independent directors, rather than by the fund's management or affiliates;
- Third, any legal counsel for independent directors must be independent legal counsel, meaning counsel that does not also represent fund management or close affiliates;
- Finally, changes to the Commission's disclosure requirements would improve the information available to investors about the independence of their directors.
The proposal also includes the staff's views on other significant issues related to independent directors. In particular, it clarifies the Commission's role in disputes – including litigation – between a fund's independent directors and its management.
I thank the staff for their hard work in generating a set of substantive and meaningful proposals in such short order.
I'll now turn to Paul Roye for further explanation of the proposals before us today.
Continue with the Statement of Paul Roye