JANUS FUND INDEPENDENT TRUSTEES
January 28, 2000
Securities and Exchange Commission
450 Fifth Street, N.W., Stop 6-9
Washington, D.C. 20549-0609
Attention: Mr. Jonathan G. Katz, Secretary
Re: File No. S7-23-99 - Proposed Rule Regarding Role of Independent Directors of Investment Companies
Dear Mr. Katz:
We are writing this letter as the independent trustees of the Janus Funds. The Janus Funds are comprised of 34 mutual funds with total assets of approximately $214 billion and approximately four million shareholders. This letter is submitted in response to the request for comments in Release No. IC-24082 (the "Proposing Release"), in which the Commission proposed certain rule amendments concerning investment company directors.
We generally applaud efforts to assure the independence and effectiveness of investment company directors and to enhance the ability of investors to assess the independence of directors. In that spirit, we support much of what the Commission has proposed in the Proposing Release; however, we have concerns about three proposals in the Proposing Release, as follows:
(1) Independent Legal Counsel
We believe that it is not appropriate for the Commission to regulate which counsel independent directors select to advise them on legal matters. We recognize that the proposed rules do not require investment company directors to have independent counsel. However, as acknowledged in the Proposing Release, tying use of the identified Exemptive Rules to the use of "independent" legal counsel will effectively require any legal counsel for the directors of investment companies of any size -- including the Janus Funds -- to meet the proposed independence standards.
We believe that we, and other independent directors, are quite capable, without intervention of the Commission, of selecting our own counsel, evaluating counsel's independence and obtaining from counsel appropriate assurances that any circumstances that might impair counsel's independence will be brought to our attention. We are acutely aware of the importance that we receive advice independent of the adviser, which explains why the Janus independent trustees have engaged separate counsel for approximately 25 years. We consider the extent of counsel's independence -- in addition to other factors such as counsel's experience -- as paramount when selecting counsel and when determining whether to continue an existing relationship with our counsel.
We also understand that the lawyers' rules of professional responsibility protect independent directors from their counsel undertaking representations that present conflicts of interest. However, the legal profession's ethical rules often permit conflicts to be resolved by disclosure and client consent, and are often handled by lawyers on conflicting matters being "walled off" from one another. This is a practical solution which recognizes that today, lawyers may be in the same law firm, but may not practice together or share client information; indeed, they may not be in the same office or even know one another and thus not present the risks that the conflicts rules were intended to address. This solution also respects the client's wishes and preserves the client's ability to work with the counsel of their choice.
Thus, we believe our own efforts and interests, coupled with the lawyers' ethical rules, provide reasonable assurance that the independent counsel we select will provide advice that is independent of the interests of the Funds' adviser. The Commission's proposal appears to add nothing of substance to this process, but threatens to add unwarranted time, delay, cost and burden to the selection and retention of counsel for all funds whose independent directors elect to use separate counsel.
As acknowledged in the Proposing Release, the proposed definition of independent counsel would likely require some independent directors to replace their current counsel. While this would be particularly costly to small funds, balancing potential benefits against potential harms appears not to warrant any fund having to bear that cost. We doubt that instances of independent directors not being well advised because their counsel lacks sufficient independence are so pervasive as to justify regulating the selection of counsel by all independent directors as proposed, with the attendant costs and disruption of relationships.
We recognize that a "de minimis" exception is proposed to be built into Rule 0-1 which would allow the independent directors to retain counsel who might otherwise be disqualified if counsel's disqualifying representation was "so limited that it would not adversely affect the counsel's ability to provide impartial, objective, and unbiased legal counsel to the [independent] directors." However, the example given in the Proposing Release of what might be considered de minimis -- a law firm partner who represented an affiliate of the fund's adviser in a minor real estate transaction -- is so narrow that directors are given little comfort that the exception could effectively be used in real-world circumstances that present more difficult issues.
Over time, many relationships between independent directors and their counsel are likely to be disrupted if the Commission's proposal is adopted, given today's increasingly complex world of multinational and multi-office law firms, law firm mergers and lawyers who often change firms during the course of their careers. Couple that with the increasing consolidation of companies in the financial services industry and an even greater number of counsel relationships are at risk, even if appropriate disclosures are made and consents obtained, and even if conflicting interests are appropriately "walled off" within a firm. We submit that this disruption is unwarranted and unnecessary and that adequate mechanisms are already in place to protect independent directors and their funds from insufficiently independent counsel.
We are advised that it is not clear under the proposed rules what would happen if a fund relying on the Exemptive Rules later discovered that counsel to the independent directors did not meet the Commission's definition of independence during some period. Is the fund deemed to have been out of compliance during that period subject to SEC enforcement action or shareholder suit? Are all transactions and actions taken in reliance on the Exemptive Rules during that period deemed invalid, void or voidable? Given the complexities described in the immediately preceding paragraph, one could envision that these questions will be faced by some fund groups in the near future. We believe that funds should not be asked to face such difficult questions in the absence of clear benefits to be gained by regulation over the current industry practice.
For all these reasons, we believe the Commission should not extend its regulatory reach to the selection of independent counsel. If, however, the Commission does decide to adopt rules regarding counsel, we offer the following suggestions:
(i) Do not require that information about counsel to the independent directors or the selection of counsel be included in the fund's disclosure documents, since we believe it is unlikely that investors will look for, be interested in or appreciate information about the independence of counsel selected by the independent directors of their fund.
(ii) Establish a "transition period" of two years for coming into compliance with the new rule to permit independent directors to retain their current counsel even if that counsel had disqualifying representations during the two years before the rules come into effect.
(iii) Add a provision suspending the "independent legal counsel" requirement for a period - perhaps 90 days - in the event that currently "independent" counsel becomes disqualified and needs to be replaced as a result of some future event (such as a law firm merger or new partner joining the firm) to provide time for the independent directors to identify, interview and select new counsel.
(2) Director Relationship Disclosures
Although we support disclosure of relevant information for investors to assess their fund and its directors, the broad net cast by the proposed rules would require inclusion of private information about directors' family members that is likely to be irrelevant to an investor's assessment of the fund and its directors.
Specifically, the Commission's proposed disclosures focus on positions, interests and transactions/relationships of a director and the director's "immediate family members." While the positions and transactions/relationships of truly close family members may be known to a director without inquiry, a director may not - indeed, most likely will not - know the securities holdings of family members in a fund's adviser and related persons, at least not where the adviser or its related persons are publicly traded companies, and particularly where the list of "immediate family members" includes relatively remote relationships such as "in-laws".
We are informed that the proposed "immediate family member" definition is similar to definitions used in other SEC rules. However, such a broad definition of "immediate family" will include people who do not share the same household with the director, or even have routine contact with the director, and it is doubtful that information about securities holdings of such persons would be noteworthy to investors if disclosed to them.
We submit that the proposed expansion of information related to directors' family members, their activities and their investments is intrusive to private interests of other persons, likely to be offensive to many relatives of directors, particularly those more remote and, most importantly, of doubtful relevance or importance to the investment decisions of investors in mutual funds.
We suggest that, in making an investment decision, an investor would normally view the positions, interests and transactions/relationships of any particular director in context, recognizing that the director was only one of a number of independent directors on the board. At most, positions, interests, transactions and relationships of remote family members might be considered pertinent to a shareholder voting on whether a particular individual should be elected or re-elected to serve as a fund's independent director. Disclosure should therefore be limited to proxy statements for meetings at which directors are elected, and not required in annual reports or SAIs.
(3) Director Stock Ownership Disclosure
The SEC has also proposed that information be provided in the SAI and the proxy statement concerning the ownership by directors of shares in the mutual funds that they serve. We endorse the proposal to provide information as to whether or not the directors own shares of the funds for which they have governance responsibilities. Where the directors serve as trustees for mutiple funds in a series fund or trust, or for several separate funds within a group, we believe that the information should be provided for the group of funds for which the directors serve, in the aggregate, and not on a fund by fund basis. We submit that the alignment of the interest of the directors and the shareholders is adequately demonstrated by aggregate information.
We also recommend that the information concerning share ownership by the directors not include the value of the directors' investment as suggested in the proposal. Realizing that inclusion of the dollar value of the investment both intrudes on the privacy of the directors and fails to provide any true measure of a director's commitment to the fund relative to the director's total resources. We believe the important fact is that the director has made an investment in common with the shareholders of the funds, and disclosure of this fact is sufficient to satisfy the reasonable interest of an investor/shareholder.
Finally, we agree with the Commission's prior conclusion that information about a fund's directors/trustees -- including information of the type covered in the Proposing Release -- should not appear in the prospectus, because it is not normally considered so important to an investor's decision-making process as to warrant placement there.
Pursuant to the instructions in the Proposing Release, this letter is being submitted in triplicate. We are also submitting this letter via e-mail to the SEC's e-mail address at email@example.com.
/s/ Gary O. Loo
Gary O. Loo
/s/ Dennis B. Mullen
Dennis B. Mullen
/s/ James T. Rothe
James T. Rothe
/s/ William D. Stewart
William D. Stewart
/s/ Martin H. Waldinger
Martin H. Waldinger