FOR IMMEDIATE RELEASE 99-31 SEC Chairman Arthur Levitt Proposes Significant Reforms to Mutual Fund Governance Structure Palm Desert, CA, March 22, 1999 -- Securities and Exchange Commission Chairman Arthur Levitt today proposed a series of significant reforms to the mutual fund governance structure that will enable independent fund directors to better protect and serve fund shareholders. Chairman Levitt announced the measures, which derive from the independent fund directors roundtable hosted by the Commission in February, at the annual Investment Company Institute's Mutual Funds and Investment Management Conference. Summary of the four proposals: 1. Require fund boards to have a majority of independent directors; 2. Require independent directors to nominate any new independent directors; 3. Require that outside counsel for directors be independent from management to ensure that directors get objective and accurate information; and 4. Require that fund shareholders have more specific information on which to judge the independence of their fund directors. Chairman Levitt said, "These four straightforward proposals form the cornerstone of a major Commission effort to improve mutual fund governance. While these initial measures would be the most significant changes in a generation, this is just the beginning. The Commission will act on these measures immediately and will continue to mine the wealth of suggestions from the roundtable for additional reforms to pursue." Chairman Levitt added, "Whether shareholders realize it or not, how directors fulfill their responsibilities directly affects them every day. From negotiating and overseeing fund fees, to monitoring performance, to policing potential conflicts of interest, fund directors should be on the front lines in defense of the shareholder interest. They need to have the tools, the access and the power to faithfully fulfill their legal duty and moral mandate as the shareholder's representative." I. Fund Boards Should Have a Majority of Independent Directors Chairman Levitt said, "All fund boards should have a majority of independent directors, rather than just 40 percent as the law currently requires. Most large fund families already have a majority of independent directors on their boards. And many funds whose sponsors have undergone reorganizations in recent years have boards that are at least 75 percent independent directors." --more-- Fund Director News Release March 22, 1999 Page 2 II. Independent Directors Should Nominate Any New Independent Directors Chairman Levitt said, "Independent directors should nominate any new independent directors. Many boards already meet that standard. Funds that pay for their own distribution expenses under Rule 12b-1 are required to have self-nominating independent directors. If the primary role of independent directors is to protect the shareholder interest and act as a check on management, wouldn't self-nominating independent directors be more effective -- not just in distribution issues -- but in any conflict of interest with management?" III. Outside Counsel for Directors Should be Independent From Management to Help Ensure That Directors Are Getting Objective and Accurate Information Chairman Levitt said, "We need to make sure that the information that independent directors receive is accurate, objective, and tells the whole story. Even the most independent and assertive directors can't do their jobs effectively if they aren't getting the right information at the right time from the right people. Fund directors should have access to independent counsel and auditors. Those upon whom fund directors rely for guidance need to be truly independent of fund management in fact and in appearance. For instance, should directors be concerned when the auditor for the fund is also the auditor for the investment advisor - especially when the auditor performs extensive consulting services for the advisor?" He added, "The Commission can assist independent directors by helping them obtain the information they need. I will ask the Commission's Office of Compliance Inspections and Examinations to pay special attention to materials such as advisory contracts and distribution plan renewals during their examinations. We need to know whether directors are getting enough information to carry out their fiduciary responsibilities to the shareholders in these and other areas." IV. Fund Shareholders Should Have More Specific Information on Which to Judge the Independence of Their Funds' Directors Chairman Levitt said, "I'd also like to see shareholders get more information about directors. I know that there are directors who may technically be considered to be independent, but who have had business or other relationships with management. Shareholders should know that. Shareholders should also know whether the directors' interests are in line with their own interests. They should know whether and how much the directors have invested in the funds they oversee." --more-- Fund Director News Release March 22, 1999 Page 3 Chairman Levitt also noted that while recent court decisions have indicated that service on multiple boards or portfolios does not compromise a director's independence, he believes that that information, including remuneration, should be disclosed to shareholders. Implementation Chairman Levitt, "As the first part of our initiative to improve fund governance, I've outlined four proposals for reform that we will address through our own rulemaking and disclosure process. There is no question in my mind they are the right things to do for the mutual fund industry and for shareholders. Consequently, I've asked the Division of Investment Management to turn these proposals into concrete reforms as soon as possible." Action the Industry Should Take Chairman Levitt also encouraged the mutual fund industry to employ various reforms, including: --Industry should develop measures to enhance the role of independent directors; --Fund directors and investment advisors should consider being covered by separate insurance policies, which will protect independent directors if they are sued by the investment advisor; --Fund directors should more closely scrutinize fund brokerage as it relates to soft dollars and best execution; and --Working with the Commission, fund directors should explore ways to improve disclosure to shareholders, such as the effects of taxes on their investments. Longer Term Issues Chairman Levitt noted several other issues raised at the roundtable that require more careful study and thoughtful discussion by the Commission and the industry, including: independent directors' roles in connection with funds' distribution arrangements, advisory contracts, and valuation procedures. In closing, Chairman Levitt said, "You can count on the Commission to do its part. But, it would be unfortunate if those were the only footsteps of action that mutual fund investors hear. Effective and accountable fund governance reduces the opportunity for people to say that the industry is incapable of looking after the interests of its investors. I believe all of us recognize a central truth: enhancing independent director effectiveness is good for investors. And what's good for investors is good for business." [THE FULL TEXT OF THE SPEECH IS AVAILABLE BY CALLING (202) 942- 0020] # # #