GE Asset Management
777 Long Ridge Road
Building B, 3rd Floor
Stamford, Connecticut 06927


January 28, 2000

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Mr. Jonathan G. Katz

RE: Role of Independent Directors of Investment Companies
File No. S7-23-99

Ladies and Gentlemen:

We appreciate this opportunity to comment on proposals to enhance the independence and effectiveness of investment company directors (the "Proposals").1 We are writing to you on behalf of two advisory affiliates of General Electric Company ("GE"), GE Asset Management Incorporated ("GEAM") and General Electric Investment Corporation ("GEIC"), and the trustees/directors of the Funds they manage. As discussed in more detail below, we want to point out several aspects of the Proposals that would be unduly burdensome on our funds, their independent trustees/directors and our advisory affiliates in light of GE's expansive and complex corporate structure.

We note that employees of our companies have been involved in the drafting of the comment letter being submitted contemporaneously to the Commission by the Investment Company Institute (the "ICI"). We agree with the ICI's comments and strongly support their recommendations, but we are concerned that in certain instances such recommendations do not fully recognize the far-reaching effect that the Proposals would have on funds advised by affiliates of global, multi-faceted organizations, such as GE.

In particular, this letter addresses the following Proposals:

I. Selection of Independent Counsel. If the Proposal regarding the qualifications of legal counsel to the non-interested directors is adopted, it will be extremely difficult and time-consuming for those directors of funds advised by GEAM or GEIC to select experienced, independent counsel with diversified expertise to represent them, given the vastness of the GE organization and its numerous and rapidly growing list of affiliates. We suggest that this Proposal is unnecessary to ensure that non-interested directors are represented by independent legal counsel and that, if adopted, it might have the opposite effect of discouraging such representation. Alternatively, we recommend that the term "control persons" be limited to controlling and controlled companies of the fund's adviser, distributor and administrator in order not to limit unnecessarily the pool of qualified counsel that would be "independent" of fund management.

II. Disclosure Requirements for Fund Directors. In the first instance, we believe that this additional disclosure is unnecessary; information regarding potential conflicts of interest will have been evaluated by the appropriate parties in connection with the nomination and election of fund directors. If these Proposals are adopted, however, we recommend that the proposed disclosure concerning potential conflicts of interests between the directors and the funds be modified as follows:

  • The requirements should apply only to a fund's non-interested directors and immediate family members living in the same household as the director. Since the purpose of the disclosure is to allow the Commission and prospective shareholders to evaluate the "true independence" of a particular director, this information is irrelevant with respect to a director that the fund already views as "interested" for purposes of Section 2(a)(19) under the Investment Company Act of 1940, as amended (the "1940 Act").

  • The definition of "control person" should be limited to a fund's adviser, principal underwriter and their respective controlling and controlled companies. Extending these proposed reporting requirements to a company's thousands of possible affiliates that are sister companies would severely disadvantage funds advised by these entities or similar large organizations with advisory affiliates.

  • The definition of "administrator" should be narrowed to exclude fund service providers that furnish transfer agency, custody and fund accounting services under circumstances where they are not sponsors or promoters of the fund or are not represented on the fund's board.

  • The scope of the proposed disclosure regarding cross-directorships should be limited to fund directors and their immediate family members (as defined by the ICI) and officers of the fund's adviser.

    III. Paperwork Burden. We believe that Section IV (Paperwork Reduction Act) grossly underestimates the increased paperwork burden imposed by the Proposals regarding additional disclosure about fund directors, at least with respect to funds managed by advisory affiliates of large corporations like GE. Given the broad scope of the proposed definitions of both "immediate family members" and "control persons", we believe that these Proposals, if adopted, will create an expensive, time-consuming burden on the part of fund directors that serve fund complexes affiliated with large corporations, which will (a) distract fund directors from the duties they have been appointed to perform, (b) discourage service to funds by qualified non-interested director-candidates, and (c) not be outweighed by any benefit this information may provide to the Commission or fund shareholders.


    GE is a public company that has over 3,800 affiliates2 worldwide. Each of GEAM and GEIC is a wholly-owned subsidiary of General Electric Company. GEAM serves as the investment adviser and administrator of (a) seventeen (17) portfolios of GE Funds3, multi-class funds that are offered to retail and institutional investors, (b) six (6) portfolios of GE LifeStyle Funds4, which are asset allocation funds offered primarily to employee benefit plans, (c) thirteen (13) portfolios of GE Institutional Funds5, which are offered to institutional investors, and (d) ten (10) portfolios of GE Investments Funds, Inc.6, which are offered to separate accounts of insurance companies and certain employee benefit plans. (GEAM also serves as a adviser or sub-adviser to seven (7) other funds or portfolios that are managed by other companies.) GEIC serves as the investment adviser and administrator of eight (8) investment companies, which are employees' securities companies under Section 2(a)(13) of the 1940 Act and are available only to GE employees, their immediate family members and others enumerated in orders issued by the Commission.7 Because of the unique issues facing these employees' securities companies under the Proposals, a separate letter commenting on the Proposals has been submitted on their behalf. As of December 31, 1999, GE investment advisory firms oversaw $115.8 billion and managed individual and institutional assets of $91.7 billion, of which more than $18.2 billion was invested in mutual funds.


    I. Selection of Independent Counsel.

    Our Funds, their advisers and the non-interested trustees are perfectly satisfied with the two law firms that currently serve as counsel to GE and its family of funds. (One law firm represents primarily GE Funds, GE LifeStyle Funds and the employees' securities companies, and another law firm represents primarily GE Institutional Funds and GE Investments Funds.) Nonetheless, we recognize that there always could be a benefit to additional bright, experienced lawyers rendering services and that shareholder confidence could be enhanced by the retention of special counsel responsible only for advising the non-interested trustees. Unfortunately, the Proposal is contradictory in that it is designed to enhance the functioning of independent directors and then severely limits their discretion on a matter that the directors are in the best position to decide. We believe that the non-interested directors and prospective legal counsel are well suited to evaluate whether a particular law firm has any conflict of interest with respect to its representation.

    The ICI points out that the result of the Proposal would be that the universe of counsel that may be available to non-interested directors could be severely diminished. We thought the Commission could benefit from a specific example. Given the broad definition of "control person,"8 the Proposal as adopted would prohibit any law firm from serving as legal counsel to the Funds' non-interested trustees if the firm performed legal services for GEAM, GEIC, their parent, General Electric Company, and any of GE's more than 3,800 affiliates in the last two years.9 There are over 700 laws firms in GE's data base that have been approved for retention concerning a variety of legal matters. GE's annual legal fee reports indicate that more than 400 law firms were paid legal fees relating to GE entities that amounted to more than $25,000 annually. If adopted, the Proposal would impose a tremendous burden on GE and the Fund boards, particularly the non-interested trustees, who would have to spend numerous hours conducting a search because many reputable firms would be disqualified under the proposed rules. Alternatively, given the fact that GE's corporate structure is dynamic and that acquisitions are frequently occurring, a law firm identified as independent could quickly become disqualified. The unfortunate result of the Proposal may be that exasperated fund boards dispense with the effort to find separate counsel.

    We have found that, under the Proposal, most law firms with experience in the investment management area would be disqualified from representing our independent trustees because some of their partners or associates have performed legal services for some GE affiliate in the last two years. We believe it would be extremely difficult for non-interested trustees of funds advised by affiliates of large corporations with complex and diverse organizational structures to find counsel that is both independent under the Proposal and experienced in the mutual fund industry and related subjects. We note that the exception provided in the Proposal for remote or minor conflicts, e.g., minor real estate transactions, is so narrow that it deprives this exception of any real usefulness or applicability. The pool of law firms which have investment management experience is comprised for the most part of firms that have many diverse practice areas. In light of the recent consolidations in the legal industry, several law firms that were identified as experienced counsel and were being considered for retention have advised the Funds' non-interested trustees that they may no longer qualify as independent counsel under the current Proposal.

    In the first instance, we propose that the Proposal regarding the qualifications of independent counsel be dropped. Legal counsel -- subject to professional and ethical constraints -- is best equipped to handle the burden of this determination. Independent directors have confidence in counsel's ability to recognize and disclose any potential conflict of interest. The ICI has recommended that the independent directors, in the exercise of their business judgment, be required to make an annual finding that their counsel is independent, and such finding would be based upon counsel's annual representation that it continued to be independent from the fund's adviser and its other service providers. However, even this approach could be problematic under the vast GE corporate structure if the analysis included every "control person" of GEAM or GEIC. Counsel may not be able to assure the trustees that it is aware of every GE affiliate. For example, counsel may have been retained by an entity in which GE has a 25% ownership interest, but which does not bear the GE name, and certainly does not have any connection to GE's investment advisory business.

    Alternatively, we suggest that the definition of "control person" be narrowed to include only controlling and controlled affiliates of the fund's adviser, distributor or administrator. Law firms that provide services to sister companies of GEAM and GEIC that are in no way connected to the financial services arm of GE should not be disqualified. Otherwise, in the case of complex corporate structures like GE, the Proposal would render it unnecessarily difficult for independent directors to avail themselves of suitable legal representation. The result would be that such boards would be precluded from retaining independent counsel, possibly after spending countless hours in the search process. Consequently, given the benefits the Commission attributes to the retention of "independent" counsel, the Funds and their shareholders would be affected detrimentally.

    II. Disclosure Requirements for Fund Directors.

    Limit "Reporting" Persons. The Commission proposes to require SAI disclosure concerning potential conflicts of interest of fund directors (both non-interested and interested), including shares owned by directors and their immediate family members in the fund's adviser, principal underwriter and administrator, and their respective control persons. As noted above, the definition of "control persons" would include numerous GE entities. We understand that the purposes of this Proposal are two-fold -- to enable the Commission to ensure that fund directors are "independent" from the fund's adviser, distributor and administrator and to permit shareholders to assess for themselves directors' allegiances. These purposes should be satisfied by providing ownership information related to the fund and certain service providers with respect to the directors themselves and immediate family members living in the same household as the director. Whether a director's brother-in-law owns shares of a GE-controlled entity should not be material to the Commission or a fund shareholder because this remote relationship is unlikely to influence a directors' ability to act in the best interests of fund shareholders.

    An exception to this general assumption might arise if the brother-in-law or other remote relative acquired the shares at the behest and for the benefit of the fund director. This effort to use another person to do indirectly what the independent director could not do directly could be dealt with specifically in the rules without expanding the scope of "reporting" persons as dramatically as proposed. Furthermore, the Proposal should only require this disclosure with respect to non-interested directors, since there are no independence issues with respect to interested directors. As argued in the ICI's letter, the reason why a director is an interested person is irrelevant. Moreover, why is the public -- including fund shareholders -- entitled to assess the stock ownership of a fund's manager by the manager's officers and employees who serve as directors of the fund? Did these individuals abandon all rights to privacy when they agreed to serve on the board of a registered investment company?

    Limit Definition of "Control Person". In order to simplify compliance by directors of funds managed by advisory affiliates of global, multi-faceted organizations such as GE, we propose limiting the definition of "control person" to a fund's adviser, principal underwriter and their respective controlling and controlled companies. As noted above, GE's reporting systems do not currently maintain lists of affiliates based upon 25% ownership, since such a list would not be relevant for any other reporting purposes. Without such a list, an independent director might not even be aware that his ownership interest (not to mention an interest held by family members) in a particular company was reportable, since many GE affiliates do not bear the GE name. If a non-interested director of a Fund is not aware of an ownership interest in a GE-affiliated company, then one may assume that the ownership interest engenders no real conflict of interest. Nonetheless, the disclosure obligation in the Proposals would still be applicable. It is obvious that this Proposal is not well-designed to accomplish its purpose. We suggest that particular conflicts of interest could be disclosed to and evaluated by the board on a case-by-case basis and, if necessary, the affected director could recuse himself or herself from any relevant board considerations and votes.

    Narrow Definition of "Administrator". In order to enable compliance by directors of fund's with multiple entities acting as service providers, we propose clarifying the definition of administrator.10 The Commission is proposing to amend Rule 0-1 under the 1940 Act to define an administrator as "any person who provides significant administrative or business affairs management services to a fund."11 Directors already have an obligation to disclose any interest they may have in a matter before the board, such as approval of a transfer agency or accounting services contract. We believe that the purpose of the Proposal is served by disclosing any potential conflicts of interest that may arise between a non-interested director and the fund's service provider that furnishes purely fund administration services. Accordingly, we recommend that the definition of "administrator" be narrowed to exclude fund service providers providing transfer agency, custody and fund accounting services under circumstances where they are not sponsors or promoters of the fund and are not represented by an employee or nominee on the fund's board.

    Restrict Disclosure of Cross-Directorships. The Proposals would require disclosure of situations where an officer of an investment adviser, principal underwriter or administrator of a fund, or an officer of a person directly or indirectly controlling, controlled by, or under common control with an investment adviser, principal underwriter, or administrator of the fund serves, or has served since the beginning of the last two completed fiscal years of the fund, as a director of a company of which a fund director or his immediate family member is, or was, an officer.12 We submit that this disclosure requirement is overly-broad and therefore unnecessary because of the unlikelihood that potential conflicts of interests would arise with respect to these remote relationships. Not every possibility of conflict needs regulation and public disclosure with no regard for cost or time; only potentially significant conflicts or circumstances where the Commission has observed repeated abuses warrant the draconian solutions proposed by the Commission.

    We agree with the ICI's recommendation that, given the purpose of the Proposal, cross-directorship information should only be required with respect to independent directors and limited to immediate family members that reside in the same household with the independent director. However, given the size of the GE organization and the existence of similarly situated large corporations with advisory affiliates, we would go further to suggest that the disclosure requirement be limited to situations where only an officer of the fund's adviser serves as a director of a company of which an independent fund director or his or her immediate family member (as defined by the ICI) is, or was, an officer. The purpose of the disclosure is to attempt to uncover any allegiances that a director might have to fund management that would impinge on his or her ability to act in the best interests of a fund and its shareholders. Therefore, we believe this purpose is sufficiently served by limiting the requirement to officers of the fund's adviser, without causing any undue burden on the part of the independent directors and their family members to research needless information that would not be of importance to shareholders.

    As of December 31, 1999, GE had approximately 163,000 employees in the United States, and approximately 130,000 employees outside the United States. Under the theory of "six degrees of separation," isn't it likely that some non-interested fund directors will have business or charitable interests in common with one or more of these people without any thought of a common GE relationship? Isn't this a trap for the person who does not interrogate each person he or she meets? Does the Commission really believe that membership on a fund board should require the director to demand a questionnaire be completed by each person with whom he or she has contact? Does the record of abuse really warrant this intrusion into normal relationships?

    III. Disclosure Information About Fund Directors - Paperwork Burden.

    With respect to directors who serve on fund boards where the assets are managed by advisory affiliates of large complex organizations such as GE, we believe that the Commission has grossly underestimated the number of additional hours that would be incurred in gathering the proposed additional disclosure regarding fund directors.13 The Proposals would require, among other things, (a) share ownership of funds within the fund complex owned by directors, (b) shares owned by directors and their immediate family members in the fund's adviser, principal underwriter and administrator, and their respective control persons; and (c) other information about directors' potential conflicts of interest.14 The disclosure would be required in each fund's statement of additional information, in proxy statements relating to the election of directors, and, in some cases, in each fund's annual report.

    With respect to N-1A amendments alone, the Proposing Release estimates that the hour burden per portfolio per filing would increase merely by 24 hours for each initial registration statement and by only 4 hours for each post-effective amendment, and the total hour burden would increase by 1,049,720 hours.15 Given the number of funds in any large fund complex, the number of "control persons" related to any global, multi-faceted organization such as GE, and the broad definition of "immediate family", we believe it would take many more hours for a fund company to figure out what information is required (e.g., to compile a list of GE 25%-owned affiliates and analyze the relevant affiliations) and extract that information for each director.

    As mentioned above, there are over 3,800 entities in which GE has an ownership interest of 10% or more. GE does not keep records that distinguish affiliated companies on the basis of 25% ownership, since this information is not relevant to any other area of the law. It would take a tremendous amount of time and effort for our personnel to compile such a list, which would be used solely for purposes of complying with the Proposals. In addition to compiling such a list, the subsequent analysis, which would have to be performed on a periodic basis with respect to individual officers and their affiliations and the interaction between those relationships and the fund directors' affiliations is incomprehensible. There are currently fifty-four (54) investment company portfolios managed by GEAM or GEIC (not including the seven (7) portfolios advised or sub-advised by GEAM, but managed by other companies) and eight (8) trustees that serve on the various boards. Consider, for example, that each trustee is married, has one surviving parent, two children, one of whom is married, one minor grandchild and one sibling who is married (a relatively small family). The definition of "immediate family" and "control person" would require researching any affiliations with respect to seventy-two (72) persons and the numerous GE affiliates. These complexities are magnified by the fact that GEAM has retained sub-advisers for several Funds, which will necessitate an analysis and review of ownership interests for all of these individuals with respect to those sub-advisers and their respective control persons.

    In addition, it is not clear whether the Commission's estimates included the number of hours that the directors themselves would spend tracking down this information. Directors from large families may spend hours if not days trying to get information from their family members that have any ownership interest in GE's "control" affiliates. The burden on independent directors would be particularly substantial, especially where the compensation paid to the trustee is not significant and the trustee does not serve on multiple fund boards. We propose that the director's time could be better spent serving the interests of fund shareholders. We believe that this administrative burden is not outweighed by the marginal usefulness that this information might provide to investors.

    The mutual fund industry has maintained a favorable image and has been relatively free from controversy without the extraordinary standards that the Commission is now proposing. Frequently, the Commission adopts rules based on its experience approving exemptions, issuing orders or no-action letters. Occasionally, rules are drafted to deal with enforcement matters. We are not aware that the expanded scope of inquiry into in-law security holdings, for example, is based on any empirical evidence of need and should not be imposed on the industry and the independent directors in the absence of a clear need and benefit.

    We appreciate the Commission's consideration of our comments as they relate to GE, its advisory affiliates and the non-interested trustees/directors of GE-affiliated funds. If you have any questions or need additional information, please contact Matthew J. Simpson, Esq. at 203-961-2109.

    Very truly yours,

    /s/ Michael J. Cosgrove            
    Michael J. Cosgrove
    Chairman of Board of each of the Funds and
    a Trustee of each of the employees' securities companies,
    on behalf of the Trustees/Directors of the Funds

    /s/ John R. Costantino             
    John R. Costantino
    Non-Interested Trustee of the Funds,
    on behalf of the Non-Interested Trustees of the Funds

    /s/ Matthew J. Simpson             
    Matthew J. Simpson
    Vice President and General Counsel,
    GE Asset Management Services,
    on behalf of GEAM and GEIC

    cc: Non-Interested Trustees of GE-advised mutual funds


    1 SEC Release No. IC-24082 (Oct. 14, 1999) ("Proposing Release").

    2 An "affiliate" for this purpose is deemed to be any entity in which General Electric Company owns 10% or more of the outstanding equity interests.

    3 Investment Company Act file number: 811-7142.

    4 Investment Company Act file number: 811-07701.

    5 Investment Company Act file number: 811-08257.

    6 Investment Company Act file number: 811-04041.

    7 Investment Company Act file numbers: Elfun Trusts: 811-00483; Elfun International Equity Fund (formerly Elfun Global Fund): 811-05216; Elfun Income Fund: 811-03866; Elfun Tax-Exempt Income Fund: 811-02735; Elfun Diversified Fund: 811-05324; Elfun Money Market Fund: 811-05904; General Electric S&S Program Mutual Fund: 811-01494; and General Electric S&S Long Term Interest Fund: 813-00048.

    8 The Commission proposes amending rule 0-1 to define "control person" as any person (other than a registered investment company) directly or indirectly controlling, controlled by, or under common control with a fund's investment adviser, principal underwriter, or administrator. See the Proposing Release at n.251.

    9 As noted above, this information relates to all GE affiliates. Therefore, some of these affiliates may be less than 25%-owned by a GE entity. GE's internal records do not currently produce a report of law firm usage relating only to affiliates that are "controlled" within the meaning of the 1940 Act. The presumption of control at 25% ownership is not a universal concept and, as a result, GE does not currently maintain records distinguishing companies that are 25% or more owned by GE from other companies in which GE has a 10% or greater interest.

    10 We agree with the ICI's recommendation that the conflicts of interest disclosure and reporting requirements should not apply to fund administrators, but if that recommendation is not accepted by the Commission, we propose narrowing the definition of "administrator".

    11 See the Proposing Release at n.250.

    12 See the Proposing Release at pp. 80-81.

    13 See the Proposing Release at pp. 111-18.

    14 See the Proposing Release at pp. 58-72.

    15 See the Proposing Release at pp. 112-13.