March 17, 2004

Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549-0609

Re: File No. S7-03-04

Dear Mr. Katz:

The Council of Institutional Investors, an association of more than 140 corporate, public and union pension funds responsible for more than $3 trillion in pension assets, appreciates the opportunity to comment on the SEC's proposal to enhance the corporate governance standards for mutual funds.

The proposed standards are in some cases tougher than those endorsed by the Council for publicly traded companies and those required by the stock exchanges. While the proposed changes are a step in the right direction, the Council believes the following changes would further strengthen the proposed reforms:

  • A stricter definition of "independence" should be applied to directors serving on mutual fund boards. Council members have long held that a narrowly drawn definition of an independent director is in the corporation's and all shareholders' ongoing financial interest because:
    • independence is critical to a properly functioning board,
    • certain clearly definable relationships pose a threat to a director's unqualified independence in a sufficient number of cases that they warrant advance identification,
    • the effect of a conflict of interest on an individual director is likely to be almost impossible to detect, either by shareholders or other board members, and,
    • while no definition is perfect, the risk of inappropriately categorizing a few directors is sufficiently small that it is far outweighed by the significant benefits.

    The Council asks the Commission to require mutual funds to apply a definition similar to the Council's definition, which is available on the Council's website at At a minimum, mutual funds should be required to use the independence standards in place at the New York Stock Exchange or the Nasdaq stock market.

  • The Council believes that the all mutual fund directors should stand for annual election by mutual fund investors. Annual meetings are the most direct way to enhance mutual fund director accountability to mutual fund holders. The Council believes that the value of enhanced accountability more than outweighs the very modest costs of the annual meetings.
  • Such a reform would make clear that fund directors have a duty to act in the best interests of fund investors-not an obligation to please fund managers, who are usually responsible for their appointment to the board.

    The Council fears that the other changes proposed by the SEC will be rendered meaningless until mutual funds are required to hold annual meetings and fund investors are able to elect and remove directors.

  • Mutual funds should be held to the same disclosure standards as listed companies. Proxy statements should include information about directors, meeting attendance, director compensation and manager compensation. We agree that additional disclosures, including about fund expenses, brokers' compensation, soft dollars, are warranted.

Please contact me with any questions.


/s/ Sarah A.B. Teslik
Executive Director