March 12, 2004

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

Re: File No. S7-03-04
Investment Company Governance

Dear Mr. Katz:

Improving fund governance is essential to the type of mutual fund reform that we believe is needed to better protect and benefit shareholder interests. The proposed rule to the Investment Company Act clearly identifies important changes needed to accomplish these goals, within the limits of existing Commission authority.

The proposed rule recognizes and respects the distinct roles played by the fund managers in conducting daily operations, and those of fund directors in overseeing those operations and policing conflicts of interest. By requiring that three-quarters of board members -- including the chairman -- be independent, the proposed rule helps to ensure that this oversight function will be controlled by individuals whose sole obligation is to ensure that shareholders' interests are protected.

In addition to enhancing the general independence of the board, the proposed rule gives independent directors key tools they need to more effectively meet their obligations and responsibilities. Permitting independent directors to hire a limited number of staff on a consulting basis should help ensure that they have access to necessary expertise. And requiring boards to conduct annual self-assessments should provide a useful mechanism for evaluating their effectiveness in fulfilling general responsibilities as well as specific functions.

We also strongly support the requirement that boards maintain records of their deliberations in evaluating and approving the advisory contract. This may be the single most important function entrusted to the board, and it is an area where evidence suggests many boards have been less diligent than they ought to be. By making boards more accountable, and by making their deliberations more transparent to both shareholders and regulators, this provision will, we believe, encourage directors to better fulfill this central board responsibility.

However, it is our view that the mutual fund market is not as cost-competitive as it should be. A major and growing portion of mutual fund transactions are conducted through employer-sponsored retirement plans, where employees generally have very limited ability to shop around for low-cost funds. One way fund companies compete for this business is by shifting administrative costs onto employees in the form of higher 12b-1 (research) fees. Thus, competition in this market often occurs in ways that drive costs up, not down.

There is also evidence of reverse competition in the broker sold market, where funds compete to be sold, not bought. In this instance, funds compete to be sold by offering generous financial incentives to the fund salespeople. This practice also drives up costs to investors.

We believe that the Commission has offered several effective proposals for improving mutual fund sales practices. But absent regulatory intervention and meaningful, industry-wide cost competition, shareholders will have to rely almost exclusively on fund boards to discipline costs.

Our conclusion is that if this proposed rule is adopted without weakening amendments, it will embolden fund boards to act as strong negotiators in setting fund costs. And if this rule is supplemented by legislation to codify these requirements, strengthen the definition of independent director, and expand and clarify directors' fiduciary duty, shareholders can have increased confidence that their fund boards will fulfill their statutory obligations.

Sincerely yours,

David Certner
Federal Affairs