CHARLES C. REILLY
9 Hampton Harbor Road
Hampton Bays, New York
January 28, 2000
U.S. Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
PAttention: Jonathan G. Katz, Secretary
Role of Independent Directors of
Investment Companies (File No. S7-23-99);
Investment Company Release No. 24082
Ladies and Gentlemen:
I am writing on behalf of the independent directors of the Merrill Lynch Global Cluster of Funds (the "Funds") concerning the above-referenced proposed rulemaking under the Investment Company Act of 1940 (the "1940 Act"). The Funds are eighteen open-end funds and one closed-end fund with combined net assets of approximately $20 billion. The Funds are managed by Merrill Lynch Asset Management Group and its affiliates. We are writing to express our views with respect to three aspects of the proposed rule amendments that are of particular concern to us: (1) the proposed requirements concerning board composition; (2) the proposal to expand disclosure concerning independent directors; and (3) the proposed definition of independent counsel.
We support the Commission"s proposed requirement that Fund boards include a majority of independent directors. We also agree with the recommendation of the Investment Company Institute"s "best practices" report that a super-majority of independent directors is preferable to a simple majority. However, requiring a super-majority by rule is likely to create practical difficulties for many funds. In particular, the death or unexpected resignation of one or more directors could force the board to select new directors too hastily.
We appreciate the need to disclose meaningful information about the independent directors to prospective investors and current shareholders. We question, however, the need for the proposed amendments to expand the disclosure of information about independent directors. We strongly believe that relatively few investors consider information about a fund"s directors in deciding whether to invest in a fund. Accordingly, privacy concerns and the burden of obtaining and disclosing the proposed information outweigh any benefit to investors. At the same time, we do not object to access by the Commission to relevant information in order to assist it in ensuring compliance with board governance requirements. To the extent the Commission believes such information would be helpful, we suggest that the Commission require funds to maintain records containing such information.
We question the need for any requirement that directors disclose their respective ownership of shares of the fund complex. While the Commission"s desire to create an identification between directors and shareholders is commendable, federal and state law already impose fiduciary duties on all fund directors to shareholders. We believe a better practice would be that suggested in the Investment Company Institute"s "best practices" report -- each fund should disclose its policy regarding directors" ownership of shares of funds within the fund complex. In this manner, solidarity with shareholders can be demonstrated without compromising the directors" privacy. If the Commission does decide to require disclosure of fund holdings, we believe that disclosure should be done on a complex-wide basis, not fund by fund, because a director"s choice of funds should reflect his or her specific investment objectives. In addition, we believe that using ranges of holdings with an upper cap on disclosure (e.g., over $250,000) is desirable.
We oppose the Commission"s proposal to require, beyond already applicable requirements, disclosure of potential conflicts of interest of the independent directors. Under the 1940 Act, a fund director either is an "interested person" or not an "interested person." Disclosure of which directors are interested already is required. The proposed amendments would suggest that certain independent directors may not be totally independent, thereby confusing their status. In addition, the proposed disclosure would greatly expand a fund"s disclosure documents because putting a particular disclosure in context may require extensive discussion of how the transaction or relationship being disclosed relates to a director"s overall financial or professional situation.
It appears that the Commission"s interest in this information may be more closely related to compliance with regulatory requirements than to information shareholders or potential investors would consider to be material. Such information could be used by the Commission to determine whether a director is interested due to a material business or professional relationship. Here again, the Commission could achieve its objectives by requiring the information to be retained by funds.
The proposed amendments requiring disclosure with respect to positions, interests, transactions and relationships of directors and their family members are extremely burdensome. In our view, this requirement would impose a due diligence obligation beyond a director"s ability to fulfill. The proposal also assumes a family dynamic that likely does not apply to many families. Consequently, a director may be obligated to disclose information about a sibling or in-law that he or she simply is unable to obtain. Incomplete disclosure would expose the director to potential liability, even in situations in which the director could not have known the information.
Furthermore, as with the issues above, we do not believe that investors would rely on information about a director"s relatives in making an investment decision about a fund. If the Commission nevertheless decides that disclosure of relationships resulting from transactions or positions of family members should be required, we believe that the Commission should limit disclosure to dependent members of the director"s household, because in such instances the director would be better able to obtain the information requested. Also, because the time limit for a material business or professional relationship in the 1940 Act is for a two-year period, we suggest that this would be a more appropriate period rather than the proposed five-year period.
Independent CounselWe are served by qualified legal counsel who is separate and independent from fund counsel or counsel for management. The Investment Company Institute"s "best practices" report has identified the representation of the independent directors by their own counsel as a recommended practice of board governance, and we agree. We strongly object, however, to the Commission"s approach of imposing regulatory requirements on our legal counsel. While we benefit from the advice and advocacy of our counsel, we believe that (1) selection of counsel involves many personal considerations that we, not the Commission, should consider; (2) the Commission"s regulatory proposal poses specific practical impediments to selection and retention of qualified independent counsel; (3) the legal profession already imposes ethical requirements barring legal representation where unresolved conflicts of interest exist; and (4) we are in the best position to evaluate the qualifications and independence of counsel, much as we evaluate other potential conflicts involving the Funds.
The Commission should not ignore the personal nature of the relationship between the independent directors and the individual acting as counsel. As independent directors, we are faced with significant responsibilities in our oversight of the Funds, and often feel the need to consult with counsel we know and trust. At these times, it is of little importance to us as to the business affairs of our counsel"s other partners, provided we are informed of any perceived or real conflict. We hire an individual lawyer, not an entire firm, to provide us with the advice we need. As directors, we would feel particularly deprived of our ability to rely on an individual lawyer with whom we have developed a strong relationship should the Commission"s rules deem him or her as unqualified due to his or her firm"s other activities.
We thank you for giving us the opportunity to share our views with the Commission.
Very truly yours,
Charles C. Reilly
Chairman of the
Merrill Lynch Global Cluster of Funds
The Honorable Arthur Levitt
The Honorable Norman S. Johnson
The Honorable Isaac C. Hunt, Jr.
The Honorable Paul R. Carey
The Honorable Laura S. Unger
The Honorable Paul Roye