UBS Global Asset Management (US) Inc.

February 5, 2004


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

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

Dear Mr. Katz:

UBS Global Asset Management (US) Inc. ("UBS Global AM")1 hereby offers comments on new rule 38a-1 (the "Rule"), adopted under the Investment Company Act of 1940 (the "Act") in SEC Release IA-2204; IC-26299 (the "Adopting Release"), concerning compliance programs of investment companies and investment advisers. In the Adopting Release, the Commission requested comment on certain provisions of the Rule that had not been included in the original Rule proposal.

UBS Global AM believes that effective internal controls and compliance programs for investment companies and investment advisers are essential to protecting investors and for bolstering investor confidence in the investment management industry. We also believe that mutual fund boards of directors need to have direct access to compliance officers and are entitled to be apprised of any concerns compliance officers may have regarding adherence to legal and regulatory requirements by the fund and its service providers. Accordingly, we generally support the goals of the Rule. We are concerned, however, that the Commission's proposal undermines the appropriate role of the board, which is to perform an oversight function as opposed to day-to-day management of fund operations.

Mutual fund boards should not be required to approve chief compliance officer compensation and termination

The Rule requires each fund's board to designate a chief compliance officer ("CCO") and approve the CCO's compensation. The Rule also provides that the CCO may be removed only by action of the board. Finally, the Rule requires the CCO to provide periodic reports to the board, and to meet periodically with the board separately from management. The Adopting Release requested comment on these provisions.

We agree that a fund's board should designate a CCO for the fund and believe that the board should be able to rely heavily upon this person to be the "eyes and ears" of the board with respect to compliance issues affecting the operations and management of the fund. To that end, we strongly support the requirements of the Rule requiring the CCO to provide reports to, and to regularly meet with, the board. We also believe that the board should seek information about the reporting structure surrounding the compliance function to ensure adequate independence from senior management. Finally, in order for the board to have confidence in the CCO, the board must receive information about the CCO's background and qualifications. If the board were not satisfied with the CCO's background or qualifications, the board could refuse to appoint the CCO, and direct the adviser to find a more suitable candidate for the position.

However, we believe that the requirements that the board approve the CCO's compensation and have sole responsibility for terminating the CCO are not necessary to ensure a constructive, informative relationship between a CCO and a board, and indeed place the board undesirably in a role that is more appropriately described as day-to-day management. While UBS Global AM fully supports the notion that fund boards should be actively involved in the oversight of their funds, placing these new requirements upon a board in effect changes fund directors from overseers and "watchdogs," to managers. Typically, directors of public companies rely upon senior management to hire and fire employees, and directors oversee the overall direction and results of the company, without engaging in day-to-day management duties. Moreover, it is entirely unprecedented for a board to have responsibility for the compensation and hiring decisions of a service provider for the entity subject to its governance. Requiring boards to engage in functions traditionally reserved for management alters the traditional role of directors significantly.

UBS Global AM strongly believes that management functions should remain in the hands of management, and that the Rule would extend a board's reach farther than is necessary to accomplish the purposes of the Rule. This is particularly true where the CCO is employed by a service provider to the fund, as opposed to the fund itself. The CCO of the fund's adviser is likely also to serve as the CCO with respect to all other aspects of the adviser's business, including separate fund complexes with different boards, and the adviser's institutional and separately managed account asset management business. To comply with its obligations under the Rule (i.e., to evaluate the appropriateness of the CCO's compensation or to determine whether it is appropriate to terminate the CCO), the board would thus likely need to delve into areas over which it does not even have oversight responsibility.

Moreover, we believe that, in order to meet their obligations under the Rule and to perform these obligations using their reasonable business judgment, most boards are likely to look to hire employees or consultants to assist them in evaluating the compensation of the CCO (relative to their peers in the industry), and potentially advising them on labor law implications of terminating or not terminating a particular CCO. These increased costs will be passed on to fund shareholders. UBS Global AM questions whether the typical shareholder would be willing to pay for consultants to assist a director in determining whether an adviser is adequately compensating its employees. We believe that a board can ensure that the compliance function is sufficiently robust by reviewing the CCO's background and qualifications, reviewing the adequacy of compliance staffing, understanding the compliance reporting structure, receiving regular compliance reports, and meeting periodically with or without other members of the adviser's senior management.2

The term "coercion" in subparagraph (c) of the Rule should be deleted or modified

UBS Global AM supports the notion that there should be no undue influence by employees of the fund, adviser or principal underwriter over the fund's CCO. However, we believe the inclusion of the word "coerce" in subparagraph (c) of the Rule is inappropriate, as coercion does not always imply inappropriate conduct, as do the words "manipulate," "mislead" or "fraudulently influence" (all used in the same subparagraph). The CCO will have a supervisor - whether it is the fund's Chief Legal Officer, the adviser's Chief Executive Officer, or some other member of senior management of the fund or the adviser. As part of their duties, supervisors instruct those who they supervise to act appropriately. In certain cases, the fund's chief legal officer, for example, may be insisting that the fund's CCO enforce a particular interpretation of law. This act should not be seen as undue "coercion." Thus, we propose that the word "coerce" be deleted from subparagraph (c) , as the remaining words cover the notion intended by this subparagraph. In the alternative, the term "coerce" should be clarified to except the appropriate exercise of supervision.

If you have any questions concerning these comments or would like additional information, please contact Amy Doberman, General Counsel, at 212-882 5570 or Brian Storms, Chief Executive Officer, at 212-882 5049.

Sincerely yours,

Brian M. Storms
President and CEO -
UBS Global Asset Management - Americas
  Amy R. Doberman
Managing Director and
General Counsel

1 UBS Global Asset Management (US) Inc. is an indirect, wholly owned subsidiary of UBS AG and a member of the UBS Global Asset Management division, which had approximately $434 million in assets under management worldwide. UBS Global AM and its affiliate UBS Global Asset Management (Americas) Inc. are adviser and/or distributor for over 68 registered mutual funds, with more than $58 billion in assets. (As of December 31, 2003)
2 We note that the requirement that funds appoint a CCO is similar to the Commission's rules with respect to attorneys who represent issuers before the Commission. (See Implementation of Standards of Professional Conduct for Attorneys, SEC Release No. 33-8185.) These rules establish escalation procedures to ensure appropriate independence of attorneys representing the funds. We are not aware of any suggestion that the independence of a fund's chief legal officer is tied to his or her compensation being approved by the fund's board or to the board's exclusive authority to terminate the CLO.