Ruth Block
David H. Dievler
John H. Dobkin
William H. Foulk, Jr.
Dr. James M. Hester
Clifford L. Michel
Donald J. Robinson
Robert C. White
January 27, 2000
Mr. Johnathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: Proposals Regarding the Role of Disinterested Directors of Investment Companies (File No. S7-23-99)
Ladies and Gentlemen:
We are the eight disinterested persons who, together with the President of Alliance Capital Management L.P. ("Alliance"), constitute the nine members of the board of directors that supervises more than two-thirds of the operating portfolios of the complex of investment companies managed by Alliance (the "Alliance Funds" or the "Funds"). The total assets of the Funds and portfolios subject to our supervision exceed $50 billion. We are pleased to have this opportunity to comment on the Commission's proposals regarding the role of disinterested directors of investment companies.
All of us have several, and most of us have more than ten, years' experience as Directors of the Alliance Funds. In our supervision of this large and rapidly growing complex, we have sought to place our greatest emphasis on those matters most critical to the success of our shareholders' investments in the Alliance Funds: the Funds' investment performance, the consistency of each Fund's investment style and practices, the breadth and depth of Alliance's investment management and research organization, Alliance's risk measurement and management systems, the quality of Alliance's shareholders servicing operations, the Funds' fees and expenses, and the appropriateness of the Funds' promotional themes. Assisted by highly experienced independent counsel, and benefiting from a cooperative relationship with a senior management team which evidently realizes that our effectiveness is in the best interests of all concerned, we believe it is a matter of ample record that we have contributed significantly to the ability of shareholders to invest suitably and successfully in the Alliance Funds.
In all this we are, of course, hardly unusual. As the Commission itself has noted, there is a broad consensus that the unique governance system established by the Investment Company Act of 1940 (the "Act") has well served investment companies and their shareholders. Of course, this governance mechanism, like any other, must evolve to ensure its continuing effectiveness. Now more than ever, the dramatic growth of the investment company industry, entailing new types of funds offered in new distribution channels to new strata of the investing public, requires investment company boards to review and adjust their practices and procedures to remain effective in discharging their fiduciary and statutory obligations.
From this perspective, we welcomed Chairman Levitt's placing investment company governance at the fore of the Commission's priorities. The Chairman's initiative precipitated the Report of the [Investment Company Institute ("ICI")] Advisory Group on Best Practices for Fund Directors, which we believe will succeed in its mission of enhancing the independence and effectiveness of investment company directors. In several respects, the Commission's subsequent proposals also appropriately seek to universalize what have been among the best governance practices of the industry's most substantial complexes, including the Alliance Funds.
There is, of course, a great difference between the best practices recommendations of an industry advisory body and the Commission's regulatory fiat. We are therefore particularly concerned about two more innovative aspects of the Commission's proposals: first, the Commission's proposal with respect to the independence of counsel to disinterested directors (the "Independent Counsel Proposal"); and second, the Commission's proposals regarding disclosure of the financial holdings and interests of directors and their extended families (the "Disclosure Proposals"). Far from serving the Commission's objective of enhancing the ability of investment company directors to serve their shareholders, adoption of these proposals would make it more difficult for us and other investment company directors to do our jobs, and would therefore be counterproductive of the Commission's objectives.
We shall deal first with the Independent Counsel Proposal. The Commission has not cited, and we are not aware, of any significant problems that have arisen as the result of current industry practice with respect to the retention of counsel to disinterested Directors. There is nothing to suggest that the legal profession's existing rules of professional conduct have proven inadequate. These rules have a long and effective history, and already require prompt disclosure to investment company boards of any relationships that might affect counsel's independence. More fundamentally, by disqualifying outright certain experienced legal counsel, the proposal seems to be at odds with a fundamental precept of mutual fund governance--that disinterested directors should be relied upon to make informed, reasoned and sound business judgments regarding the best interests of the funds they supervise. Within the borders established by the legal profession's ethical constraints, the suitability of counsel is peculiarly a question of business judgment.
We well understand the important role we play in overseeing the relationships between the Funds on the one hand, and Alliance and its affiliates on the other hand, and the key role that counsel may play in assisting us in this role. We believe that we possess in ample measure the experience and sound business judgment to select, evaluate and retain our own counsel without regulatory constraint. In this regard, the Independent Counsel Proposal's de minimis exception is inadequate to enable boards such as ours to continue to obtain the advice of the most able counsel i.e., counsel with both substantial 1940 Act and broader financial services expertise. Rather, under the Commission's proposal as currently formulated and explained, a sizable proportion of the industry's most significant and effective boards, including our own, would be obliged to disrupt long-standing independent counsel relationships that have most certainly benefited shareholders.1
We are thus at a loss to understand why the Commission proposes to intrude in an area where there has been no suggestion of abuse and that is regulated under well-tried professional ethical standards. We believe that the Independent Counsel Proposal will inevitably and significantly impair the quality of representation of independent directors.
In our view, the Disclosure Proposals entail similarly substantial counterproductive potential. We believe that the extent of directors' ownership of shares of the funds under their supervision is probative of the alignment of directors' and shareholders' interests and, in the aggregate, should be disclosed. But beyond this, much of the information proposed to be publicly disclosed is of a character that many directors will be unwilling to provide and, indeed, more than a few will be unable to obtain. We expect that many siblings and other relatives will not respond favorably, if at all, to financial inquiries of such a personal and private nature.
We believe it is likely that these considerations, together with the associated potential liability concerns, will discourage many individuals of substance, ability and experience from serving, or continuing to serve, as independent directors of investment companies. In our experience, very few such individuals are unwilling to provide extensive information about their backgrounds and professional and financial relationships to their current or prospective fellow directors, who are well able to evaluate such information from the standpoints of alignment with shareholder interests and potential conflicts of interest. This is an important aspect of the ongoing process of peer review within a board. However, public disclosure of information of this nature is unduly intrusive into the private and personal financial affairs of such individuals and their families, to an extent clearly disproportionate to any evident public benefit.
* * *
We appreciate this opportunity to convey our views to the Commission. Please do not hesitate to contact us if we can be of any further assistance to the Commission or its staff with regard to these important matters. For this purpose, you may contact the Secretary of the Alliance Funds, Edmund P. Bergan, Jr., Esq. at (212) 969-2108.
Very truly yours,
Ruth Block |
Dr. James M. Hester |
|
David H. Dievler |
Clifford L. Michel |
|
John H. Dobkin |
Donald J. Robinson |
|
William H. Foulk, Jr. |
Robert C. White |
cc: Edmund P. Bergan, Jr.
Sullivan & Cromwell
1 . In our own case, for instance, we would be obliged to give up Sullivan & Cromwell as our independent counsel because of some underwriting, mergers and acquisitions work performed for a publicly owned sister company of Alliance. We would thus lose the benefit not only of that firm's many years' experience with the Funds and Alliance, but also its unique insight gained through the extensive involvement of two Sullivan & Cromwell partners, Alfred Jaretzki, Jr. and Stephen K. West, in the creation and evolution of the 1940 Act.