F. PIERCE LINAWEAVER, Ph.D.
COMMITTEE OF INDEPENDENT DIRECTORS
T. ROWE PRICE MUTUAL FUNDS
100 EAST PRATT
BALTIMORE, MD 21202
February 25, 2004
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Re: Comments on Proposed Rule: Investment Company Governance Release No. IC-26323; File No. S7-03-04
Dear Mr. Katz,
This letter is submitted on behalf of the directors of the T. Rowe Price Mutual Funds who are not "interested persons" as defined in the Investment Company Act of 1940 (the "1940 Act"), hereinafter referred to as "independent directors." We are pleased to submit this letter to the Securities and Exchange Commission in response to the Commission's request, contained in Release No. IC-26323, for comments on the Commission's proposed rules on Investment Company Governance.
The T. Rowe Price Mutual Funds consists of more than 100 mutual funds of all types, with over $120 billion worth of assets under management.
We applaud the Commission's interest in promoting good corporate governance of mutual funds. We note that with respect to a number of the items in the proposing release, the T. Rowe Price Mutual Funds meet the standards enunciated in the Commission's proposed rules, such as having a supermajority of independent directors on fund boards. We also have independent counsel, separate outside auditors from the investment advisor, and a lead independent director who chairs the Committee of Independent Directors. Our fund boards audit committee and other committees are made up totally of independent directors. Our Independent Directors Committee regularly meets with no representative of the investment adviser present.
We are concerned, however, with the Commission's proposal to require that the chair of a fund board be an independent director. We have a majority now and could elect an independent director chair of a fund board, if in our judgment it made sense to do so. In our experience, independent directors on a fund's board are most effective when they are able to obtain the maximum amount of information that management can reasonably supply about its business, and in light of that information to exercise oversight and skeptical objectivity in their evaluation of management's performance, policies and procedures as well as various proposals that might be presented. The proposed rule to require the chair be an independent director is not necessary and could interfere with the proper balance between the role of fund management and the role of independent directors. This is because it would impose a functional organization on the boards of all mutual funds that does not (and obviously cannot) take into account the unique dynamics of each board, instead of allowing each board to determine how best it can implement the proper balance between management discretion and independent director oversight.
We express no specific comment on the other proposed rules in the proposing release, except insofar as they may be implicated in our analysis of the proposed requirement for an independent chair of the board.
Requiring An Independent Chair Is Unnecessary For Proper Corporate Governance
A proper balance between management and independent directors should not impose on the independent directors duties that they believe would be better performed by an official of the investment advisor. We believe that a culture of proper corporate governance for mutual funds exists at its best when independent directors can sit in judgment, objectively and fairly performing their fiduciary and ethical duties as directors, without having to function as a part of the management. We believe that a mutual fund should be free to find this proper balance on its own, and that boards should be free to elect as chair the director that they believe can most effectively serve the interest of the fund in that position, whether that director is interested or independent.
In the proposing release, the Commission suggests that it is concerned about the type of boardroom culture that may be fostered by the presence of an interested person acting as chair. In particular, it appears that the Commission is concerned that, with an interested chair, the boardroom culture may favor the interests of the investment adviser over that of fund shareholders. For example, the release suggests that a fund board may be more effective in negotiating an advisory fee if the chair is not an interested director. These concerns, while important, overstate the role of the chair of the board in setting the culture of the boardroom, given the fact that virtually all fund boards are currently majority independent, and under the Commission's proposed rules would be at least 75% independent.
We believe that the Commission has underestimated the importance of one of the primary functions of the chair: that is, the chair's administrative role as an organizer and presenter of information about the operations and practices of the company that manages the mutual fund. Based on our experience as independent directors of the T. Rowe Price Mutual Funds, we believe that a senior executive of the adviser, serving as board chair, is most effective at organizing highly complex and technical information to present to the rest of the board. Our lead independent director sets the agenda for fund board meetings mutually with our board chair. An executive of the adviser is necessarily more familiar than an independent director with the daily implementation of the mutual fund's strategies and goals, and any problems (whether chronic or unforeseen) that might hinder the successful performance of the adviser in meeting its obligations to the investment company. More than simply presiding over a meeting, the interested chair can provide, either personally or by choosing other appropriate personnel of the investment adviser, the detailed presentations necessary for a board to govern the investment company effectively. Complementary to the administrative role of the chair is the evaluative and oversight role of the independent directors, who impartially judge the information presented to them as well as any additional information that they might decide to request from the adviser or outside sources, and as a group decide what action will be in the best interest of the fund. Independent directors perform this role by critically analyzing the information presented to them by the adviser, by meeting separately, and by voting separately as independent directors on specific matters of corporate governance, in accordance with current rules governing mutual funds.
We respectfully caution the Commission not to place independent directors inadvertently in the position of performing complex administrative tasks for the board that could be better left to interested directors. The Commission also proposes a new rule requiring that funds explicitly authorize independent directors to hire employees and others to help them fulfill their fiduciary duties, and requests comment on whether independent directors should be required to hire their own staff. We would view a rule requiring an independent chairman, when coupled with a rule explicitly allowing or, even more, requiring independent directors to have their own employees, as a dramatic shift in the balance between the role of management and that of independent directors. Independent directors already have the ability to hire their own staff, if they believe it necessary, given that mutual fund boards have a majority of independent directors. Instead of allowing fund boards to determine the proper balance, the proposed rules would blur the line between the functions of independent directors and that of management, in the apparent hope that management's expertise will be replicated by employees of the independent directors, and that independent directors will be able to lead the administrative tasks of the board. This substitution of roles would duplicate many costs that fund managers bear in the normal course of operations that are a part of information collection and presentation to boards. In addition, it would likely make that process less efficient and effective. It could also significantly impair the independent director acting as chair from being able to sit in judgment on the performance of the adviser and other matters because of concern with proper presentation of correct information instead of being focused on skeptically judging a presentation by management.
It is true that in some circumstances a chair, in the course of presiding over the agenda of board meetings and the information presented, might be able to exercise an unwholesome influence over the deliberations of the board. In the case of a registered investment company, however, that possibility is minimized by the requirements of the 1940 Act and Commission rules thereunder. For example, a majority of independent directors must approve transactions and contracts and review practices involving potential conflicts of interest that are otherwise prohibited by the 1940 Act. Independent directors must evaluate and approve the advisory contract, the principal underwriting contract, and any Rule 12b-1 plan, and must select the fund's independent accountant and value certain securities of the fund. Furthermore, independent directors already control virtually all mutual funds because their boards must have a majority of independent directors, independent directors select and nominate independent directors, and when independent directors hire counsel such counsel cannot have substantial ties to the fund's management.
We can understand that the Commission is concerned that notwithstanding the legal and practical safeguards described above, there is a risk that a fund adviser, through an executive officer who is also chair of the fund board, may attempt to exercise an undue influence over independent directors by monopolizing information about the fund and providing an editorial slant to that information. We respectfully submit, however, that each fund board is in the best position to judge for itself whether, because of that danger or for any other reason, it should elect an independent chair. In our case, our judgment that the T. Rowe Price Funds are best served by having a senior executive of the Funds' investment adviser serve as chair is made in the context of a number of relevant circumstances: we have a lead independent director, our board has a supermajority of independent directors, we have independent counsel, and we regularly meet without anyone from management (including the chair) present.
Also, we believe that the newly adopted rule requiring appointment of a chief compliance officer further reduces the risk of a fund advisor exercising improper influence over the independent directors. With a chief compliance officer reporting to the board on the implementation of compliance policies and procedures of the fund and its service providers, any potential remaining monopoly of information is broken.
In sum, it is our position that each mutual fund board of directors should continue to be permitted to weigh for itself the relative advantages and disadvantages of having an independent director serve as chair of the board.
The Commission has set forth in the proposing release possible alternatives to a requirement to make the chair of the board an independent director. These alternatives include requiring independent directors to hold separate meetings and appoint a lead director to chair such meetings, requiring the chairs of all or certain board committees to be independent directors, or requiring the chair of the board be elected annually by both a majority of the board as a whole and by a majority of independent directors. Without necessarily endorsing the adoption of rules implementing these suggestions, we find them highly preferable to the rule mandating an independent chair that the Commission currently proposes. That is because they interfere less with a board's ability to determine for itself the proper balance between management and the independent directors, and because many funds (including our own) have already adopted all or many of these proposals.
* * *
We appreciate this opportunity to comment on the Commission's proposing release, and would be pleased to discuss any questions the Commission or its Staff may have with respect to this letter. Any such questions may be directed to the undersigned through our independent counsel, Joel H. Goldberg, Esquire of Shearman & Sterling LLP, at 212-848-4886.
Very truly yours,
F. Pierce Linaweaver, Ph.D.
Chairman of the Committee of Independent Directors,
T. Rowe Price Mutual Funds
cc: Hon. William H. Donaldson, Chairman.
Hon. Paul S. Atkins, Commissioner
Hon. Roel C. Campos, Commissioner
Hon. Cynthia A. Glassman, Commissioner
Hon. Harvey J. Goldschmid, Commissioner
Paul F. Roye, Director, Division of Investment Management
Giovanni P. Prezioso, General Counsel