January 8, 2004

Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549-0609

Submitted electronically:

SUBJECT: File No. S7-03-03
Compliance Programs of Investment Companies

Dear Mr. Katz:

We commend the staff of the Securities and Exchange Commission (Commission) on the extensive effort and thoughtful consideration given to establishing procedures designed to prevent violations of the federal securities laws. We further appreciate the staff's willingness to consider other measures that would enhance the independence and effectiveness of chief compliance officers. It is our view that the release contains much of what is necessary to achieve an effective and efficient oversight of service providers. However, we believe additional tools are required in order for independent directors to receive the information necessary to evaluate whether service providers are conducting their business for the benefit of a fund and its shareholders.

The Commission's release states, "We (the Commission) have observed that compliance failures have occurred when a fund service provider has denied information to the fund's board, or has been less than forthright, because the service provider viewed full disclosure as detrimental to its own interests." We agree this is the problem. We believe four new tools are necessary to fix the problem:

First, service providers must be obligated to provide relevant information in a timely fashion in a format that makes its importance clearly understandable.

Second, the chief compliance officer must have the necessary authority to assure that the information is provided and that effective action is taken to address any shortcomings.

Third, senior management of each service provider must be accountable.

Fourth, persons who provide information about shortcomings must be protected from reprisals.

A number of Congressional proposals seek to fix the problem of service providers denying independent directors relevant information. We believe that many of the areas addressed in House Bill 2420 and in proposed bills before the U.S. Senate are best addressed through the Commission's rule-making process. We believe that Congress should narrow its focus and pass legislation to ensure that relevant information is given to the independent directors.

Congress and the Commission attempted to fix the problem in the 1970 amendment to Section 15(c) of the Investment Company Act. The Commission sought to require the investment adviser to inform independent directors about matters reasonably necessary to evaluate the terms of any contract. Instead, Congress adopted language making it the duty of the board to request that the investment adviser provide information. Only after information has been requested is the investment adviser required to provide it. This language has been used by investment advisers as an excuse for not providing information to the independent directors.

Absent Congressional action to amend Section 15(c), we believe the Commission's rule can be strengthened by requiring the following:

First, each service provider must identify conflicts and other compliance factors creating risk exposure for the firm and its clients. The Commission's release only refers to the investment adviser and not the other service providers.

Second, each service provider must provide a list of these conflicts and other compliance factors to the independent directors with proposed policies and procedures that it determines will minimize the risks they pose.

In addition, we believe the Commission should prepare a list identifying conflicts and other compliance factors for all service providers, similar to the one set out in the release for investment advisers, and periodically update that list as part of a collaborative ongoing education process for the benefit of independent directors and shareholders.

We will and believe independent directors of all other investment company boards will determine whether the policies and procedures proposed by the service providers address the conflicts. We will exercise the standard of care required by the laws of the State under which our respective funds are organized in making that determination. We do not believe that it is necessary to create a federal fiduciary standard for independent directors of investment companies in order to ensure that they do their job.

The Commission's rule seeks to support the independent directors in their effort to ferret out information by creating a position of chief compliance officer. The release states the Commission's view on what qualifications and authority that person should have. The rule, however, does not mandate those qualifications or authority. Further, there is no accountability of senior management of service providers for the information relied on or actions taken by the chief compliance officer.

The current investigations referred to in the release were initiated and have been able to proceed because employees came forward with information. They were unable or unwilling to do so within their own organizations earlier for fear of reprisal. Accordingly, to assure the needed flow of information, employees must be willing to provide relevant information. The whistleblower provisions of the Sarbanes-Oxley Act, Sections 806 and 1107, may not cover employees who provide the type of information that is most relevant to the work of the chief compliance officer and the independent directors. Legislation or rule making must ensure employees are protected.

Finally, the rule seems to increase the likelihood that the fund and its independent directors will be named in legal actions that arise from the misconduct of service providers. This will cause the fund to bear litigation costs. It blurs the responsibility of a service provider for the proper conduct of its business. It also exposes independent directors to substantial personal liability at a time when insurance carriers are significantly narrowing the coverage in directors and officers liability policies.

The reason for the increased exposure of the fund and independent directors to legal actions is the way in which the rule requires the chief compliance officer to report to the independent directors. While the release states that in order to have the necessary authority and access to information the chief compliance officer most likely will be an employee of the investment adviser, the direct confidential reporting and control over her employment would be used to contend that a relationship akin to employment exists. Most contracts with service providers protect the service providers against liability except for willful misfeasance, bad faith, gross negligence or reckless disregard of obligations. Often the contracts require the fund to pay legal expenses. Under current contract terms and the language of the rule it appears that service providers might be protected by the terms of the contracts for the conduct of the chief compliance officer, even where she has been denied information by her fellow employees and officers, while the fund and independent directors will not.

We believe it would be efficient for the Commission by rule to provide the additional tools needed to address the imbalance of power between service providers and independent directors when it comes to monitoring the day-to-day operations of a fund and to place the responsibility on the appropriate persons. This rule needs to:

  • assure the flow of information,

  • assign accountability to senior management of service providers for the adequacy and accuracy of that information,

  • protect funds and their shareholders if a service provider fails to provide relevant information in a timely fashion in an understandable format, and

  • encourage service providers to work collaborative with independent directors to identify conflicts and propose appropriate action to minimize the risks posed by the conflicts.

The rule could require that:

  • An adviser provide to the independent directors information regarding each business practice that may conflict with meeting its obligations of providing services to a fund that are in the best interests of its shareholders and propose such procedures as may reasonably be necessary to protect the best interests of fund shareholders.

  • An adviser annually, or more frequently as requested by the independent directors, certify that the procedures to protect the best interests of fund shareholders that have been proposed by the adviser and approved by independent directors of the fund are in place and that it has an adequate staff administering the provisions in accordance with their terms.

  • An adviser create a compliance committee that includes senior management representatives from each of its areas of business operations that provides services to the fund and designate a spokesperson for the committee to be chief compliance officer.

  • The chief compliance officer have complete management authority to assure total access to persons responsible for the oversight of all operations that relate to the management and safekeeping of the fund's assets, the administration of shareholder accounts, and the distribution of the fund's shares and with all other members of the committee accountable for the full compliance with each of the procedures proposed by the adviser and approved by the independent directors.

  • An adviser compensate the chief compliance officer consistent with compensation paid to others in its organization with like authority and responsibility and not discharge, reassign or transfer or in any way limit the power and authority of a chief compliance officer without first obtaining approval of the independent directors.

  • An ombudsman be appointed in order to keep the names of employees who provide information confidential.

  • An adviser be required to indemnify and hold harmless the fund and its shareholders and independent directors for costs that arise from its:

    • failure to provide independent directors with relevant information in a timely fashion in a format that explains the conflicts of interests and recommends procedures to address the conflicts,

    • failure to implement and properly administer any procedure it has proposed and independent directors have approved, and

    • failure to respond accurately and fully to any request for information from the independent directors.

We appreciate the opportunity to comment on the proposed compliance programs for investment companies.

Warmest regards,


Arne H. Carlson
Independent Chairman of the Board

Independent members of American Express Funds' Board of Directors:

Philip J. Carroll, Jr.
Retired Chairman and CEO, Fluor Corporation
Livio D. DeSimone
Retired Chairman and CEO, 3M
Heinz F. Hutter Retired President and COO, Cargill, Inc.
Anne P. Jones
Former Commissioner, FCC; Former Director, SEC
Stephen R. Lewis, Jr. Retired President, Carleton College
Alan G. Quasha
Founder and President, Quadrant Mgmt, Inc.
Alan K. Simpson
Former United States Senator for Wyoming
Alison Taunton-Rigby
President and CEO, Forester Biotech