January 28, 2000
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: File No. S7-23-99; Release No. IC-24082
Dear Mr. Katz:
We are writing in response to the SEC's rule proposals regarding the Role of Independent Directors of Investment Companies.
We are the independent directors of a relatively small mutual fund complex, the EquiTrust Mutual Funds. We oversee three registered investment companies with a total of 13 portfolios and approximately $450 million in assets. As the four independent directors on each board, we represent a majority of the total board of seven members. The independent directors have considerable experience serving as independent directors of the funds, with a majority serving approximately ten years or more.
We applaud the SEC for taking on this important task of considering what changes would be helpful towards enhancing the independence and effectiveness of boards of directors of investment companies, to enable them to better serve the interests of shareholders. Many of the changes are good and should improve the ability of the board to serve shareholders. However, we have significant concerns about a number of the proposed rules.
With regard to the proposal for disclosure of information about fund directors, we believe that the SEC has proposed a rule that is not feasible. Most specifically, we are concerned about the proposed extension of the disclosure requirements to "immediate family members of directors," as defined in the proposal. This definition is incredibly broad and, as a result, imposes a huge burden on directors without a corresponding benefit to shareholders. We believe that most directors will be unwilling and/or unable to secure this type of information from extended family members and, therefore, will be unwilling or unable to serve. Particularly for relatively small complexes that pay little compensation for board service, such an onerous requirement is likely to make it very difficult to attract qualified directors.
Generally when the SEC imposes new requirements it weighs the benefits against the burdens of the proposal. In this case the burden to directors is very great. Yet, in contrast, we see very little benefit to the shareholders. It is difficult to see how, for example, knowledge of shareownerhip by distant relatives of a director will be useful to fund shareholders. Once the relationships have become so attenuated, the usefulness to shareholders of this information does not, we believe, outweigh the detriment to shareholders caused by the increased difficulties funds will face in attracting qualified directors.
The second aspect of the rule proposals, to which we have a strongly negative reaction, is the proposal to require that independent legal counsel meet the SEC's definition of independent.
We find this proposal counter to what the SEC has been trying to accomplish during the past two decades. During that period the SEC has recognized that funds have differing circumstances and has adopted rules that place greater responsibilities on the independent directors and rely on their judgment to make good decisions, recognizing that a single standard will not fit all funds. Yet, in this matter, the SEC's basic premise is that the independent directors cannot exercise reasonable judgment about whether they are receiving good legal advice and that one standard rule fits all situations. Anomalously, this proposal may actually force independent directors to choose to have no counsel (and rely upon counsel to the fund), rather than to introduce new parties and structures. The alternative of simply not having any counsel designated as serving the independent directors as a specific client seems to push directors to a less desirable result.
We believe that we are fully capable of judging, as we do in all other circumstances, whether we and the fund are receiving good quality service. If the SEC believes there is a problem or a potential problem within the industry, we believe it is appropriate for the SEC to raise the sensitivity of independent directors to this issue. However, we have not seen evidence, nor has the SEC demonstrated that there is a problem of sufficient magnitude to justify all funds, even those that are currently effectively operating, to change their arrangements. In the alternative, we believe it would be reasonable for the SEC to adopt rules that require counsel to provide certain information regarding their client relationship with parties affiliated with the funds to assure that independent directors are basing their decisions upon full disclosure. But in all cases, we believe the actual decision, and the weighing and balancing of factors, should be left to the directors, who are in a better position than the SEC to judge what is in the best interest of the fund and shareholders, given the particular facts and circumstances of the situation. For example, particularly given the size and type of some funds, it may actually be advantageous to the shareholders for counsel to the independent directors to perform some work for the adviser, particularly work that provides counsel access to information that is beneficial to the servicing of shareholders needs. In addition to reducing costs to shareholders, it provides counsel greater access to information.
We believe that the independent directors are well qualified to assess the potential for conflicts and are able to address the issue through engagement letters or other understandings as suggested in the ICI's Best Practices Report. Moreover, the proposed rule could require boards who believe they are currently well served to terminate long-standing relationships with attorneys who they trust and rely upon and who have a wealth of information about the particular fund. In our particular situation, if the rule is adopted as proposed, we would not want to be forced to change what we believe is a highly effective arrangement that we have trusted and relied upon for over 20 years, and where our law firm has extensive knowledge about the funds.
We do not believe that legal advice is a commodity. The comfort level of directors in relying on advice from a lawyer is a very personal matter and we feel strongly that we, as the independent directors, should retain the right to hire and fire the lawyers representing us as we deem fit. We, and not the SEC, should have the discretion to make the judgment as to what lawyer can best serve our and the shareholder needs. At the very least, if the SEC were to persist in its proposal, we believe that it should amend the rule so that it would only apply prospectively and would not have a retroactive impact.
With regard to suspension of board composition requirements, we believe that the SEC is appropriately proposing an extension of the time period to fill a vacancy. However, given the time that it may take to identify a recruit a replacement candidate, we believe that the proposed extended periods are still too short. We would suggest 90 days if the Board may fill the position and 180 days if a shareholder vote is required.
We urge the SEC to consider these comments and to adopt appropriate amendments to the proposals prior to implementing them.
Donald G. Bartling
Erwin H. Johnson
Curtis C. Pietz