Faegre & Benson llp
2200 Norwest Center, 90 South Seventh Street
Minneapolis, Minnesota 55402-3901
January 26, 2000
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549-0609
Re: Proposed SEC rules regarding independent directors - File No. S7-23-99
Dear Mr. Katz:
We are writing to express our concern about aspects of the proposed SEC rules that would establish requirements limiting the ability of disinterested directors to select counsel of their own choosing.
Although we share your conviction that counsel to independent mutual fund directors should have all the attributes necessary to zealously and independently represent such directors, we believe that ethical rules already governing attorney-client relationships effectively and admirably address this concern. More importantly, however, as discussed more fully below, we believe that the proposed SEC rules could have the unintended and unfortunate consequence of limiting the independent directors' access to the best available legal counsel. We strongly believe that this would constitute a grossly unfair (and, in the circumstances, wholly unnecessary) intrusion into the discretion that independent directors currently have, and will continue to need with ever increasing importance, on their engagement of legal counsel they believe can best serve their (and the fund shareholders') interests.
State Conflict of Interest Rules
The legal profession is highly regulated and attorneys must conform with applicable state codes of legal ethics. These require legal counsel to disclose any conflicts of interest to clients and prospective clients in advance of any representation and to obtain the consent of all parties to the representation. Moreover, an attorney may not represent a client in any matter - even with the client's consent - unless the attorney is satisfied that he or she can independently and zealously represent the client. In our experience, law firms are conservative in applying conflict of interest rules and have the necessary experience and judgment to determine when they can appropriately undertake a matter. Similarly, independent directors of mutual funds are typically highly sophisticated, experienced persons who are quite capable of determining for themselves whether any actual or perceived conflict of interest should preclude counsel from representing them. The independent directors are typically drawn from the business community - often including persons from the legal and accounting professions - and are skilled at evaluating and addressing conflict of interest concerns. Moreover, the potential liability of the independent directors to the fund and its shareholders if they fail to discharge their fiduciary duties is an additional incentive to the independent directors to ensure that they obtain competent and independent legal advice.
The Importance of Local Counsel
In a number of business and legal communities with a substantial presence of sophisticated and highly-developed investment management and other financial services companies, such as Minneapolis-St. Paul, there may only be a limited number of law firms with sufficient experience and expertise in investment management law to provide competent legal advice to independent directors of mutual funds. These same law firms will typically also provide investment banking, banking and other counsel to these financial services companies. However, the persons at the financial services companies responsible for the selection of counsel will seldom, if ever, be the same persons charged with identifying candidates for counsel to the independent directors of mutual fund affiliates.
An undesirable - and presumably unintended - result of the imposition of unnecessarily rigid conflict of interest requirements would be to compel independent directors to engage out-of-town counsel. However, many obligations of the independent directors are a function of state law, on which out-of-town counsel will often be unable to advise. Moreover, the advantages to the independent directors of immediately accessible, local counsel are self-evident. The exception for "minor or remote" conflicts of the type cited in the proposing release would in our opinion do little to alleviate the broad sweep of the proposed disqualification provisions.
In sum, we believe that the broad reach of the SEC's proposed rules are both unnecessary and potentially counterproductive.
Thank you very much for your consideration.
Very truly yours,
FAEGRE & BENSON LLP
By: /s/ Matthew L. Thompson
By: /s/ P. Graham van der Leeuw