April 18, 2003

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

Re: Compliance Programs of Investment Companies and Investment Advisers
(File No. S7-03-03)

Dear Mr. Katz:

We are submitting this letter in response to the Securities and Exchange Commission's ("Commission") request for comment on proposed rules under the Investment Company Act of 1940 and the Investment Advisers Act of 1940 that would require mutual funds and registered investment advisers to adopt and implement policies and procedures reasonably designed to prevent violations of the federal securities laws ("Compliance Procedures").1

We serve as counsel to the independent directors of several fund complexes. While our experience with these clients informs our comments, this letter reflects the views of our firm and not of any particular group of independent directors. Our comments focus on proposed Rule 38a-1 under the Investment Company Act.

We believe that proposed Rule 38a-1, while well-meaning, does not appear to be supported by any compelling justification. Our particular concerns relate to the anticipated role of a fund's independent directors in approving the fund's Compliance Procedures.

Rule 38a-1 would require that a fund's board of directors, including a majority of the fund's independent directors, approve detailed Compliance Procedures as well as appointment of the fund's compliance officer. The Release does not explain why such approval should be necessary, except to suggest that it reflects "the important role of fund boards in overseeing fund compliance with the federal securities laws." Neither the Release nor the proposed rule provide any guidance on the findings that a board of directors should make in approving Compliance Procedures. Moreover, in analyzing the costs likely to be imposed by proposed Rule 38a-1, the Commission did not take into account the significant level of board resources that would be required.

We believe that the Commission should be mindful of the recommendations of its Division of Investment Management ("Division"), set forth in its 1992 report on mutual fund regulation:

[W]e believe that independent directors perform best when required to exercise their judgment in conflict of interest situations - for example, when they review advisory contracts under sections 15(c) and 36(b) [under the Investment Company Act] or review the use of affiliated brokers under rule 17e-1 [under the Investment Company Act]. We believe that independent directors are unnecessarily burdened, however, when required to make determinations that call for a high level of involvement in day-to-day activities. Rules that impose specific duties and responsibilities on independent directors should not require them to "micro-manage" operational matters. To the extent possible, operational matters that do not present a conflict between the interests of advisers and the investment companies they advise should be handled primarily or exclusively by the investment adviser. Similarly, information gathering should be left to the adviser, the investment company's auditor, counsel or outside consultants, as appropriate under the circumstances. Finally, in order to allow directors to devote their time and attention to truly important matters, we believe that provisions that require directors to conduct reviews and detailed make [sic] findings that involve more ritual than substance should be eliminated.2

Since 1992, the Commission's rulemaking for mutual funds has often reflected this assessment by the Division. The Commission's evolving views on board approval of operational matters is reflected, for example, in its rulemakings concerning the custody of fund assets. Although the protection of fund assets is a core value of the Investment Company Act, the Commission has concluded that specific board involvement in approving policies and procedures relating to the details of custody arrangements is not always necessary.3

Similarly, we believe that specific board involvement in approving a fund's Compliance Procedures is unnecessary. The Commission proposes that the Compliance Procedures address - and therefore that the independent directors evaluate - at least 14 areas, many of which are highly technical in nature. While we do not dispute the importance of these areas from a compliance and operational perspective, we are skeptical that a fund board, particularly the independent directors, can provide meaningful insight into the types of procedures that would best address, for example, the creation and safekeeping of required records or the processing of fund shares. Consequently, board findings concerning such procedures could involve "more ritual than substance." Moreover, we believe that requiring the board to approve Compliance Procedures of this scope is at odds with the Commission's assertion in the Release that "[t]he rule would thus require board oversight of the fund's compliance program, but would not require directors to become involved in the day-to-day administration of the program."

As part of its traditional oversight role, a fund's board of directors should be actively engaged in significant issues related to the fund's compliance with the federal securities laws. As a further part of this role, the directors should assure that fund service providers have assumed responsibility for establishing compliance procedures and that compliance issues are being addressed in a coordinated fashion. Accordingly, we believe that the appropriate role for the fund board, particularly the independent directors, is not formally to approve the fund's Compliance Procedures but instead to confirm that the fund's investment adviser (or another appropriate service provider) has "taken ownership" of the responsibility for assuring the fund's compliance with the federal securities laws and is devoting sufficient resources to this function. In our experience, boards already play this role.

* * *

We appreciate the opportunity to comment on the Release and would be pleased to answer any questions you might have regarding our comments. Please contact Woodrow W. Campbell, Jr. at (212) 909-6779 or Kenneth J. Berman at (202) 383-8050.

Respectfully submitted,


1 Compliance Programs of Investment Companies and Investment Advisers, Rel. Nos. IC-25925 and IA-2107, File No. S7-03-03 (Feb. 5, 2003) ("Release").
2 Division of Investment Management, SEC, Protecting Investors: A Half Century of Investment Company Regulation, at 266 (May 1992).
3 See Custody of Investment Company Assets with a Securities Depository, Rel. No. IC-25266 (Nov. 15, 2001) (adopting amendments to ICA Rule 17f-4) ("Although directors, in exercising their general responsibility to oversee fund operations, should monitor the fund's dealings with its own custodian, close involvement in approving arrangements with domestic depositories appears unnecessary."); Custody of Investment Company Assets Outside the United States, Rel. No. IC-24424 (April 27, 2000) (adopting ICA Rule 17f-7); Custody of Investment Company Assets Outside the United States, Rel. No. IC-22658 (May 12, 1997) (adopting amendments to ICA Rule 17f-5); Custody of Investment Company Assets with Futures Commission Merchants and Commodity Clearing Organizations, Rel. No. IC-22389 (Dec. 11, 1996) (adopting ICA Rule 17f-6) ("[T] rule's objective standards make specific provisions concerning board oversight unnecessary."); Revision of Certain Annual Review Requirements of Investment Company Boards of Directors, Rel. No. IC-19719 (Sept. 17, 1993) (amendments to ICA rules eliminating certain annual approval requirements).