[Federal Register Volume 64, Number 212 (Wednesday, November 3, 1999)]
[Proposed Rules]
[Pages 59826-59876]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-27442]
[[Page 59825]]
_______________________________________________________________________
Part II
Securities and Exchange Commission
_______________________________________________________________________
17 CFR Parts 239, 240, 270, 271 and 274
Role of Independent Directors of Investment Companies; Proposed Rule
Interpretive Matters Concerning Independent Directors of Investment
Companies; Final Rule
Federal Register / Vol. 64, No. 212 / Wednesday, November 3, 1999 /
Proposed Rules
[[Page 59826]]
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 239, 240, 270 and 274
[Release Nos. 33-7754; 34-42007; IC-24082; File No. S7-23-99]
RIN 3235-AH75
Role of Independent Directors of Investment Companies
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Commission is publishing for comment proposed amendments
to certain exemptive rules under the Investment Company Act of 1940 to
require that, for investment companies that rely on those rules:
independent directors constitute at least a majority of their board of
directors; independent directors select and nominate other independent
directors; and any legal counsel for the independent directors be an
independent legal counsel. We also are proposing amendments to our
rules and forms to improve the disclosure that investment companies
provide about their directors. These proposed amendments are designed
to enhance the independence and effectiveness of boards of directors of
investment companies and to better enable investors to assess the
independence of directors.
DATES: Comments must be received on or before January 28, 2000.
ADDRESSES: Comments should be submitted in triplicate to Jonathan G.
Katz, Secretary, Securities and Exchange Commission, 450 5th Street,
N.W., Washington, D.C. 20549-0609. Comments also may be submitted
electronically at the following E-mail address: rule-comments@sec.gov.
All comment letters should refer to File No. S7-23-99; this file number
should be included on the subject line if E-mail is used. Comment
letters will be available for public inspection and copying in the
Commission's Public Reference Room, 450 5th Street, N.W., Washington,
D.C. 20549. Electronically submitted comment letters also will be
posted on the Commission's Internet web site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: For information regarding the proposed
substantive rule amendments, contact Jennifer B. McHugh, Attorney,
Office of Regulatory Policy, (202) 942-0690, or regarding the
disclosure amendments, contact Annette M. Capretta, Senior Counsel, or
Heather A. Seidel, Senior Counsel, Office of Disclosure Regulation,
(202) 942-0721, at the Division of Investment Management, Securities
and Exchange Commission, 450 5th Street, N.W., Washington, D.C. 20549-
0506.
SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission (the
``Commission'') today is proposing for public comment new rules 2a19-3
[17 CFR 270.2a19-3], 10e-1 [17 CFR 270.10e-1], and 32a-4 [17 CFR
270.32a-4] and amendments to rules 0-1 [17 CFR 270.0-1], 2a19-1 [17 CFR
270.2a19-1], 10f-3 [17 CFR 270.10f-3], 12b-1 [17 CFR 270.12b-1], 15a-4
[17 CFR 270.15a-4], 17a-7 [17 CFR 270.17a-7], 17a-8 [17 CFR 270.17a-8],
17d-1 [17 CFR 270.17d-1], 17e-1 [17 CFR 270.17e-1], 17g-1 [17 CFR
270.17g-1], 18f-3 [17 CFR 270.18f-3], 23c-3 [17 CFR 270.23c-3], 30d-1
[17 CFR 270.30d-1], 30d-2 [17 CFR 270.30d-2], and 31a-2 [17 CFR
270.31a-2] under the Investment Company Act of 1940 [15 U.S.C. 80a]
(``Investment Company Act'' or ``Act''); amendments to Forms N-1A [17
CFR 274.11A], N-2 [17 CFR 274.11a-1], and N-3 [17 CFR 274.11b] under
the Investment Company Act and the Securities Act of 1933 [15 U.S.C.
77a-aa] (``Securities Act''); and amendments to Schedule 14A [17 CFR
240.14a-101] under the Securities Exchange Act of 1934 [15 U.S.C. 78a-
mm] (``Exchange Act'').
Table of Contents
Executive Summary
I. Background
II. Discussion
A. Enhancing the Independence of Fund Boards of Directors
1. Independent Directors as a Majority of the Board
(a) Proposed Board Composition Requirements
(b) Suspension of Board Composition Requirements
2. Selection and Nomination of Independent Directors
3. Independent Legal Counsel
B. Limits on Coverage of Directors Under Joint Insurance Policies
C. Exemption from Ratification of Independent Public Accountant
Requirement for Funds with Independent Audit Committees
D. Qualification as an Independent Director
1. Affiliation with a Broker-Dealer
2. Ownership of Index Fund Securities
E. Disclosure of Information about Fund Directors
1. Basic Information about Directors
(a) Location of Information
(b) Required Information
2. Ownership of Equity Securities in Fund Complex
3. Conflicts of Interest
(a) Statutory Scheme Governing Conflicts of Interest
(b) Need for Disclosure Changes
(c) General Approach to Disclosure
(d) Specific Disclosure in the Proxy Rules and SAI
4. Board's Role in Fund Governance
5. Separate Disclosure
6. Technical and Conforming Amendments
7. Compliance Date
F. Recordkeeping Regarding Director Independence
G. General Request for Comments
III. Cost-Benefit Analysis
IV. Paperwork Reduction Act
V. Summary of Initial Regulatory Flexibility Analysis
VI. Statutory Authority
Text of Proposed Rules and Forms
Executive Summary
The board of directors of an investment company (``fund'') has
significant responsibilities to protect investors under state law, the
Investment Company Act, and many of our exemptive rules. Independent
directors, in particular, serve as ``independent watchdogs,'' guarding
investor interests. These interests are paramount, for it is investors
who own the funds and for whose benefit they must be operated.
We recently hosted a Roundtable on the Role of Independent
Investment Company Directors, which highlighted the significance of
those directors in protecting the interests of fund shareholders. After
reviewing corporate governance issues and the recommendations of
participants at our Roundtable, we are proposing a number of rule and
form changes to enhance the independence and effectiveness of fund
boards of directors and provide investors with greater information
about fund directors.
First, we are proposing to require that, for funds relying on
certain exemptive rules:
Independent directors constitute either a majority or a
super-majority (two-thirds) of the fund's board of directors;
Independent directors select and nominate other
independent directors; and
Any legal counsel for the fund's independent directors be
an independent legal counsel.
Second, we are proposing rules and rule amendments that would:
Prevent qualified individuals from being unnecessarily
disqualified from serving as independent directors;
Protect independent directors from the costs of legal
disputes with fund management;
Permit us to monitor the independence of directors by
requiring
[[Page 59827]]
funds to keep records of their assessments of director independence;
Temporarily suspend the independent director minimum
percentage requirements if a fund falls below a required percentage due
to an independent director's death or resignation; and
Exempt funds from the requirement that shareholders ratify
or reject the directors' selection of an independent public accountant,
if the fund establishes an audit committee composed entirely of
independent directors.
Finally, we are proposing to require funds to provide better
information about directors, including:
Basic information about the identity and business
experience of directors;
Fund shares owned by directors;
Information about directors' potential conflicts of
interest; and
The board's role in governing the fund's operations.
In addition, today we are publishing a companion release that sets
forth the views of the Commission and the Commission's staff on a
number of interpretive matters.\1\ This release provides guidance on
certain discrete issues related to independent directors.
---------------------------------------------------------------------------
\1\ Interpretive Matters Concerning Independent Directors of
Investment Companies, Investment Company Act Release No. 24083 (Oct.
14, 1999) [``Interpretive Release''].
---------------------------------------------------------------------------
Together, these initiatives are designed to reaffirm the important
role that independent directors play in protecting fund investors,
strengthen their hand in dealing with fund management, reinforce their
independence, and provide investors with greater information to assess
the directors' independence.
I. Background
Today, millions of Americans rely on mutual funds to save and
invest for their families' futures.\2\ More than 77 million individual
investors own shares of mutual funds, which hold over $5.5 trillion in
assets--an increase of over 580 percent from ten years ago.\3\
Investments in mutual funds are a significant part of retirement plans
and college savings plans, as well as many traditional brokerage
accounts.\4\ Money market funds, which alone have over $1 trillion in
assets,\5\ often serve as a substitute for checking accounts and
provide an important vehicle for cash management for individual
investors as well as many institutions and businesses.\6\ International
and global funds give investors easy access to foreign markets.\7\
---------------------------------------------------------------------------
\2\ For simplicity, this release focuses on mutual funds (i.e.,
open-end funds). Our proposed rule amendments, however, would apply
to all management investment companies, except where noted.
\3\ See Investment Company Institute, Mutual Fund Fact Book 3
(1999) [``1999 Mutual Fund Fact Book'']. Total assets of mutual
funds were $5.525 trillion at the end of 1998, compared to $809.4
billion in 1988. In 1998, an estimated 44 percent of U.S. households
owned mutual funds, up from 5.7 percent in 1980 and 24.4 percent in
1988. Id. at 45. As of December 31, 1998, an estimated 77.3 million
individuals owned shares of mutual funds. Id. at 41. At the end of
1998, assets of all funds (open-end funds, closed-end funds, and
unit investment trusts) totaled $5.778 trillion. See id. at 3
(stating that assets of open-end funds totaled $5.525 trillion at
the end of 1998); Lipper Inc., Lipper Closed-End Fund Performance
Analysis 1-2 (Jan 1999) (stating that assets of closed-end funds
totaled $158 billion at the end of 1998); Investment Company
Institute, Release No. 99-36 (stating that assets of unit investment
trusts totaled $94.54 billion at the end of 1998).
\4\ At the end of 1998, assets totaling approximately $1.9
trillion, or 35 percent of all mutual fund assets, were held in
retirement accounts, up from $348 billion at the end of 1991. 1999
Mutual Fund Fact Book, Supra note 3, at 47-48; see also Jennifer
Karchmer, Planning for Retirement Has Given Mutual Fund Assets a
Steady Boost, Bond Buyer, May 24, 1999, at 6.
\5\ At the end of 1998, money market fund assets totaled
approximately $1.352 trillion. See 1999 Mutual Fund Fact Book, supra
note 3, at 4.
\6\ See generally Investment Company Institute, Money Market
Mutual Funds (1990).
\7\ Assets in funds investing primarily in foreign securities
totaled over $448.5 billion at the end of 1998. See Investment
Company Institute, Release No.99-07 (stating that assets of open-end
funds investing primarily in foreign securities totaled $416.5
billion at the end of 1998); Lipper Inc., Lipper Closed-End Fund
Performance Analysis--Fourth Quarter 1998 Report (stating that
assets of closed-end funds investing primarily in foreign securities
totaled $32 billion at the end of 1998).
---------------------------------------------------------------------------
Mutual funds are formed as corporations or business trusts under
state law and, like other corporations and trusts, must be operated for
the benefit of their shareholders.\8\ Mutual funds are unique, however,
in that they are ``organized and operated by people whose primary
loyalty and pecuniary interest lie outside the enterprise.'' \9\ As
described below, this ``external management'' of virtually all mutual
funds presents inherent conflicts of interest and potential for abuses.
---------------------------------------------------------------------------
\8\ See generally James M. Storey & Thomas M. Clyde, Mutual Fund
Law Handbook Sec. 7.2 (1998); Allan S Mostoff & Oliver P. Adler,
Organizing an Investment Company--Structural Considerations Sec. 2.4
in The Investment Company Regulation Deskbook (Amy L. Goodman ed.,
1997).
\9\ Division of Investment Management, SEC, Protecting
Investors; A Half Century of Investment Company Regulation 251
(``1992 Protecting Investors Report'']; see also 1 Tamar Frankel,
Regulation of Money Managers 10 (1978).
---------------------------------------------------------------------------
An investment adviser typically organizes a mutual fund and is
responsible for its day-to-day operations. The adviser generally
provides the seed money, officers, employees, and office space, and
usually selects the initial board of directors. In many cases, the
investment adviser sponsors several funds that share administrative and
distribution systems as part of a ``family of funds.'' As a result of
this extensive involvement, and the general absence of shareholder
activism, investment advisers typically dominate the funds they
advise.\10\
---------------------------------------------------------------------------
\10\ See SEC. Report on the Public Policy Implications of
Investment Company Growth, H.R. Rep. No. 2337, 89th Cong., 2d. Sess.
12 127, 148 (1966) [``Public Policy Report''] (stating that funds
generally are formed by their advisers and remain under their
control, and that advisers' influence permeates fund activities);
Wharton School of Finance and Commerce, a Study of Mutual Funds,
H.R. Rep. No. 2274, 87th Cong., 2d Sess. 463 (1962) [``Wharton
Report''] (discussing the dominant position of advisers in the
control of funds and the infrequency with which funds have a
separate existence from their advisers); see also Clarke Randall,
Fiduciary Duties of Investment Company Directors and Management
Companies Under the Investment Company Act of 1940, 31 Okla. L. Rev.
635, 636 (1978) (``The adviser's control and influence over the fund
is very nearly total.''); In the Matter of Steadman Security
Corporation, Investment Company Act Release No. 9830 [1977 Transfer
Binder] Fed. Sec. L. Rep. (CCH) para. 81,243, at n.81 (Jun. 29,
1977) (``[T]he investment adviser almost always controls the
fund.'').
---------------------------------------------------------------------------
Investment advisers to mutual funds are generally organized as
corporations, which have their own shareholders. These shareholders may
have an interest in the mutual fund that is quite different from the
interests of the fund's shareholders. For example, while fund
shareholders ordinarily prefer lower fees (to achieve greater returns),
shareholders of the fund's investment adviser might want to maximize
profits through higher fees. And while fund shareholders might prefer
that advisers use brokers that charge the lowest possible commissions,
advisers might prefer to use brokers that are affiliates of the
adviser. These types of conflicts (and others) resulted in the
pervasive abuses that led Congress in 1940 to enact legislation
regulating the activities of mutual funds.\11\
---------------------------------------------------------------------------
\11\ See section 1(b)(2) of the Act [15 U.S.C. 80a-1(b)(2)];
SEC, Report on Investment Trusts and Investment Companies, Part III
(1939); see also Storey & Clyde, supra note 8, at Sec. 2.2 Joseph
F,. Krupsky, The Role of Investment Company Directors, 32 Bus. Law.
1733, 1737-40 (1977); William J. Nutt, A Study of Mutual Fund
Independent Directors, 120 U. PA. L. Rev. 179, 181 (1971).
---------------------------------------------------------------------------
The Investment Company Act establishes a comprehensive regulatory
scheme designed to protect fund investors by addressing the conflicts
of interest between funds and their investment advisers or other
affiliated persons. The Act strictly regulates some of the most serious
conflicts. For example, the Act prohibits certain transactions between
a fund and its affiliates, including the investment adviser, unless
approved by the
[[Page 59828]]
Commission.\12\ The Act also relies on fund boards of directors to
police conflicts of interest.
---------------------------------------------------------------------------
\12\ Section 17(a) of the Act [15 U.S.C. 80a-17(a)].
---------------------------------------------------------------------------
Under state law, directors are generally responsible for the
oversight of all of the operations of a mutual fund.\13\ In addition,
the Investment Company Act assigns many specific responsibilities to
fund boards. For example, fund boards must evaluate and approve a
fund's advisory contract and any assignment of the contract, and may
unilaterally terminate the contract.\14\ Directors also approve the
fund's principal underwriting contract,\15\ select the fund's
independent accountant,\16\ and value certain securities held by the
fund.\17\ In addition, under the Act and our rules, directors have
responsibility for evaluating the reasonableness of advisory and
distribution-related fees charged the fund \18\ and managing certain
operational conflicts. Just recently, for example, we clarified that
boards must assume oversight responsibility for personal securities
transactions by employees of the fund and its adviser.\19\
---------------------------------------------------------------------------
\13\ See Jean Gleason Stromberg, Governance of Investment
Companies, in The Investment Company Regulation Deskbook
Secs. 4.1-.2 (Amy L. Goodman, ed. 1997).
\14\ See section 15(a) of the Act [15 U.S.C. 80a-15a)]
(requiring annual approval of the advisory contract by the funds's
board of directors or shreholders and requiring that the contract
empower the board to terminate the contract); section 15(c) of the
Act [15 U.S.C. 80a-15(c)] (requiring that a fund's independent
directors separately evaluate and approve any advisory contract with
the fund).
\15\ See Section 15(b) of the Act [15 U.S.C. 80a-15(b)]
(requiring approval of the principal underwriting contract by the
fund's board or shareholders); section 15(c) of the Act (requiring
that a fund's independent directors separately evaluate and approve
the fund's contract with its principal underwriter).
\16\ See section 32(a)(1) of the Act [15 U.S.C. 80a-31(a)(1)]
(requiring that a fund's independent directors select the fund's
independent public accountant).
\17\ See section 2(a)(41) of the Act [15 U.S.C. 80a-2(a)(41)]
(requiring, in effect, that any security for which no market
quotation is readily available be valued at fair value as determined
in good faith by the board of directors).
\18\ See sections 15 (a)-(c) of the Act (board review of fees
paid to a fund's adviser and principal underwriter); rule 12b-1
under the Act [17 CFR 270.12b-1] (board review of asset-based
distribution fees paid pursuant to a ``rule 12b-1 plan'').
\19\ See Personal Investment Activities of Investment Company
Personnel, Investment Company Act Release No. 23958 (Aug. 20, 1999)
[64 FR 46821 (Aug. 27, 1999)] (adopting amendments to rule 17j-1
under the Act [17 CFR 270.17j-1]).
---------------------------------------------------------------------------
The Act requires that independent directors constitute at least 40
percent of a fund's board,\20\ and sets the standards for when a person
will be disqualified from being an independent director (i.e., will be
considered an ``interested person'' under the Act).\21\ These
independent directors play an important role in representing and
guarding the interests of investors. As has been stated many times,
Congress intended these directors to be the ``independent watchdogs''
\22\ for investors and to ``supply an independent check on
management.'' \23\
---------------------------------------------------------------------------
\20\ Section 10(a) of the Act [15 U.S.C. 80a-10(a)] (prohibiting
more than 60 percent of a fund's directors from being interested
persons of the fund). We refer to directors who are not ``interested
persons'' of the fund as ``independent directors.'' See also section
10(b)(2) of the Act [15 U.S.C. 80a-10(b)(2)] (requiring, in effect,
that independent directors comprise a majority of a fund's board if
the fund's principal underwriter is an affiliate of the fund's
investment adviser); section 15(f)(1) of the Act [15 U.S.C. 80a-
15(f)(1)] (providing a safe harbor for the sale of an advisory
business if directors who are not interested persons of the
investment adviser constitute at least 75 percent of a fund's board
for at least three years following the assignment of the advisory
contract).
\21\ Section 2(a)(19) of the Act [15 U.S.C. 80a-2(a)(19)]
(defining ``interested person''); see infra note 170 (discussing the
elements of the definition of ``interested person'').
\22\ See Burks v. Lasker, 441 U.S. 471, 484 (1979) (quoting
Tannenbaum v. Zeller, 552 F.2d 402, 406 (2d Cir. 1977)).
\23\ S. Rep. No. 184, 91st Cong., 2d Sess. 31 (1969).
---------------------------------------------------------------------------
Many requirements of the Act and our rules that protect investors
from conflicts of interest specifically rely on action by these
independent directors. The Act, for example, requires independent
directors to separately evaluate and approve the fund's contract with
an investment adviser or principal underwriter.\24\ Our rules have
permitted innovative types of funds, more efficient fund operations,
and new distribution arrangements by exempting funds from prohibitions
related to conflicts of interest. While these rules have provided
important flexibility to allow mutual funds to meet the changing needs
of investors, they also rely on approval, oversight, and monitoring by
independent directors to protect investors.\25\
---------------------------------------------------------------------------
\24\See section 15(c) of the Act.
\25\See, e.g., rule 10f-3 [17 CFR 270.10f-3] (permitting funds
to purchase securities in a primary offering when an affiliated
broker-dealer is a member of the underwriting syndicate if the
fund's board, including a majority of its independent directors, (i)
approves procedures regulating purchases of these securities and
(ii) determines at least quarterly that the purchases complied with
the board-approved procedures). In addition, we have eliminated
certain rule provisions that arguably required directors to ``micro-
manage'' fund operations. See Custody of Investment Company Assets
Outside the United States, Investment Company Act Release No. 22658
(May 12, 1997) [62 FR 26923 (May 16, 1997)] (amending rule 17f-5 to
permit fund directors to delegate certain responsibilities related
to foreign custody arrangements and eliminating the requirement that
directors annually review those arrangements); Revision of Certain
Annual Review Requirements of Investment Company Boards of
Directors, Investment Company Act Release No. 19719 (Sept. 17, 1993)
[58 FR 49919 (Sept. 24, 1993)] (eliminating certain annual board
review requirements of rules 10f-3, 17a-7, 17e-1, 17f-4, and 22c-1).
See also Investment Company Institute, SEC No-Action Letter (Jun.
15, 1999) (revising the staff's previous position to permit a fund's
adviser, rather than the fund's board, to evaluate the
creditworthiness of repurchase agreement counterparties and
otherwise assume primary responsibility for monitoring and
evaluating the fund's use of repurchase agreements).
---------------------------------------------------------------------------
Earlier this year we held a two-day public Roundtable discussion on
the role of independent directors of mutual funds.\26\ Participants in
the Roundtable included independent directors, investor advocates,
executives of fund advisers, academics, corporate governance experts,
and experienced legal counsel. They examined the activities and
responsibilities of independent directors and reviewed the nature of
their independence. Participants also discussed various ways that the
Commission might promote greater effectiveness of independent
directors.
---------------------------------------------------------------------------
\26\ See SEC, Notice of Sunshine Act Meetings (Feb. 18, 1999)
[64 FR 8632 (Feb. 22, 1999)]; see also Transcripts from the
Roundtable on the Role of Independent Investment Company Directors,
February 23-24, 1999 [``Roundtable Transcripts'']. The Roundtable
Transcripts are available to the public in the Commission's public
reference room and the Commission's Louis Loss Library. They also
are available on the Commission's Internet web site http://
www.sec.gov/offices/invmgmt/roundtab.htm>.
---------------------------------------------------------------------------
We endorse the sentiments of the Roundtable participants who favor
enhancing the effectiveness and independence of fund boards of
directors. While those sentiments can be fully achieved only through
amendments to the Investment Company Act, we are impressed by the
consensus of the participants concerning the importance of the role of
independent directors and the conditions they believe are necessary to
enhance the effectiveness of those directors. We therefore are
proposing rule amendments designed to reaffirm the important role that
independent directors play in protecting fund investors, strengthen
their hand in dealing with fund management, reinforce their
independence, and provide investors with better information to assess
the independence of directors.
II. Discussion
A. Enhancing the Independence of Fund Boards of Directors
Panelists at our recent Roundtable discussed a number of possible
ways to enhance the independence and effectiveness of fund boards. Most
participants agreed that independent directors can best fulfill their
responsibilities when they constitute a substantial majority of the
board.
[[Page 59829]]
Participants also recommended that the selection of new independent
directors be entrusted to existing independent directors and that
independent directors have independent legal counsel.\27\ An industry
advisory group organized by the Investment Company Institute recently
made similar recommendations in a ``best practices'' report (``ICI
Advisory Group Report'').\28\
---------------------------------------------------------------------------
\27\ See infra notes 41, 63, and 76 (citing testimony of
Roundtable participants). We discuss the merits of each of these
recommendations below.
\28\ Investment Company Institute, Report of the Advisory Group
on Best Practices for Fund Directors: Enhancing A Culture of
Independence and Effectiveness (June 24, 1999). On July 7, 1999, the
Board of Governors of the Investment Company Institute unanimously
endorsed the recommended ``best practices.'' See ``ICI Board Adopts
Resolution Urging Fund Industry to Strengthen Governance,'' at
http://www.ici.org/issues/dtrs__best__prac.htm>.
---------------------------------------------------------------------------
The recommendations of the Roundtable participants have led us to
review our exemptive rules that provide funds and advisers relief from
various statutory prohibitions designed to prevent the most egregious
conflicts of interest. Roundtable participants repeatedly noted that
one of the most important functions of independent directors is to
oversee conflicts of interest.\29\ Although the rules that we have
adopted over the years have expanded the responsibilities of boards,
the rules generally do not contain conditions designed to enhance the
independence and effectiveness of fund boards, with two notable
exceptions.\30\
---------------------------------------------------------------------------
\29\ See, e.g., Roundtable Transcript of Feb. 24, 1999 at 174
(statement of John C. Coffee, Jr.) (stating that the need for
activism by independent directors is most evident in the context of
conflicts of interest); id. at 197 (statement of Richard M.
Phillips) (``[T]he focal point of independent directors is conflicts
of interest.'').
\30\ Rule 12b-1, one of the exceptions, permits the use of fund
assets to pay for distribution of fund shares, but only if the
fund's independent directors select and nominate other independent
directors. See rule 12b-1(c) under the Act [17 CFR 270.12b-1(c)]. In
adopting this requirement, we stated our view that ``as a general
proposition disinterested directors should not be entrusted with a
decision on the use of fund assets for distribution without
receiving the benefit of measures designed to enhance their ability
to act independently.'' Bearing of Distribution Expenses by Mutual
Funds, Investment Company Act Release No. 11414 (Oct. 28, 1980) [45
FR 73898 (Nov. 7, 1980)] [''Rule 12b-1 Adopting Release''], at text
following n.50. Rule 23c-3, the other exception, permits the
creation of so-called ``interval funds'' (i.e., closed-end funds
that periodically offer to repurchase their securities from
investors), but only if independent directors constitute a majority
of the board, and select and nominate other independent directors.
Rule 23c-3(b)(8) under the Act [17 CFR 270.23c-3(b)(8)]. These
requirements were included in the rule to ``ensure that the board of
directors provides independent decisions or scrutiny for actions or
decisions that may involve a conflict of interest between the
adviser and [the fund's] shareholders.'' Repurchase Offers by
Closed-End Management Investment Companies, Investment Company Act
Release No. 19399 (Apr. 7, 1993) [58 FR 19330 (Apr. 14, 1993)]
[``Rule 23c-3 Adopting Release''], at Section II.D.
---------------------------------------------------------------------------
Upon reflection, and in light of the recommendations of the
Roundtable participants, we believe that our exemptive rules that rely
on fund boards to approve and oversee arrangements or transactions that
involve conflicts of interest and are otherwise prohibited by the Act
also should contain provisions designed to enhance director
independence and effectiveness. We therefore are proposing amendments
to certain exemptive rules under the Investment Company Act to enhance
the independence of fund directors who are charged with overseeing the
fund's activities and transactions covered by those rules. These
amendments would require, for funds that rely (or whose affiliated
persons rely) on the rules, that: (i) independent directors constitute
either a majority or a super-majority (two-thirds) of their boards;
(ii) independent directors select and nominate other independent
directors; and (iii) any legal counsel for the independent directors be
an independent legal counsel.
Our proposals to enhance board independence would amend ten rules
under the Investment Company Act. We have selected those rules that (i)
exempt funds or their affiliated persons from provisions of the Act,
and (ii) have as a condition the approval or oversight of independent
directors. For convenience, we will refer to these rules as the
``Exemptive Rules.'' \31\ The Exemptive Rules typically relieve funds
from statutory prohibitions that preclude certain types of transactions
or arrangements that would involve serious conflicts of interest.\32\
In one case, a rule permits the board to approve an interim advisory
agreement without a shareholder vote that otherwise would be
required.\33\ Based on these criteria, we propose to amend the
following rules:
---------------------------------------------------------------------------
\31\ A number of the Exemptive Rules exempt fund affiliates,
rather than the fund, from certain statutory prohibitions. For ease
of reference, this Release generally refers to funds that rely on
the Exemptive Rules, rather than reiterating that funds or their
affiliated persons may be relying on the rules.
\32\ These rules also require boards of funds relying on the
rules to exercise vigilance in protecting funds and their investors.
See, e.g., Exemption for the Acquisition of Securities During the
Existence of an Underwriting or Selling Syndicate, Investment
Company Act Release No. 22775 (July 31, 1997) [62 FR 42401 (Aug. 7,
1997)], at n.52 and accompanying text (the fund's board should be
``vigilant'' not only in reviewing the fund's compliance with the
procedures required by rule 10f-3, but also ``in conducting any
additional reviews that it determines are needed to protect the
interests of investors'').
\33\ See rule 15a-4 [17 CFR 270.15a-4]. Under section 15(a) of
the Act, shareholders generally must approve a fund's contract with
its adviser.
---------------------------------------------------------------------------
Rule 10f-3 (permitting funds to purchase securities in a
primary offering when an affiliated broker-dealer is a member of the
underwriting syndicate);
Rule 12b-1 (permitting use of fund assets to pay
distribution expenses);
Rule 15a-4 (permitting fund boards to approve interim
advisory contracts without shareholder approval);
Rule 17a-7 (permitting securities transactions between a
fund and another client of the fund's adviser);
Rule 17a-8 (permitting mergers between certain affiliated
funds);
Rule 17d-1(d)(7) (permitting funds and their affiliates to
purchase joint liability insurance policies);
Rule 17e-1 (specifying conditions under which funds may
pay commissions to affiliated brokers in connection with the sale of
securities on an exchange);
Rule 17g-1(j) (permitting funds to maintain joint insured
bonds);
Rule 18f-3 (permitting funds to issue multiple classes of
voting stock); and
Rule 23c-3 (permitting the operation of interval funds by
enabling closed-end funds to repurchase their shares from investors).
The Commission requests comment on the criteria that we have used
to select these rules. Are there additional rules that we should
similarly amend? Conversely, should any of the Exemptive Rules not be
amended?
Although the Commission urges all funds to adopt these measures to
strengthen the independence of their boards, we are not proposing to
require all funds to adopt these measures. Funds that do not rely on
any of the Exemptive Rules will not be subject to these requirements.
They may continue, for example, to have only 40 percent of their boards
consist of independent directors.
As discussed above, an advisory group organized by the Investment
Company Institute (``ICI Advisory Group'') has issued a report
containing a set of ``best practices'' for ``enhancing a culture of
independence and effectiveness'' of fund directors.\34\ These best
practices generally include some of the practices that our proposed
rule amendments would require boards to adopt in order to rely on the
Exemptive Rules. We applaud the initiative, but, as the report
acknowledges, many of the ``best practices'' may be impracticable or
unnecessary for all funds to adopt. Moreover, it may not be appropriate
for us to address many of the
[[Page 59830]]
recommendations through rulemaking.\35\ Thus, we are not at this time
proposing to require that funds relying on the Exemptive Rules follow
all of these practices. Nonetheless, we believe that fund boards should
give serious consideration to the recommendations of the ICI Advisory
Group. We request comment whether we should amend the Exemptive Rules,
or other rules, to require funds relying on them to follow any of these
``best practices.'' Commenters who favor any of these practices also
should address the benefits and burdens of amending the Exemptive Rules
in this manner.
---------------------------------------------------------------------------
\34\ ICI Advisory Group Report, supra note 28.
\35\ In addition, because our rules apply to all funds (or, in
the case of the Exemptive Rules, all funds that rely on those
rules), we have designed our amendments by considering, among other
things, the costs, benefits, and paperwork burdens for funds and
investors (including small entities) that may result from the
changes. See, e.g., infra Section III (cost-benefit analysis);
Section IV (Paperwork Reduction Act analysis); Section V (Regulatory
Flexibility Act analysis). In each area of consideration, we have
requested comment on the costs, benefits, and burdens of the
proposed rule amendments.
---------------------------------------------------------------------------
1. Independent Directors as a Majority of the Board
(a) Proposed Board Composition Requirements. We believe that a fund
board that has at least a majority of independent directors is better
equipped to perform its responsibilities of monitoring potential
conflicts of interests and protecting the fund and its
shareholders.\36\ By virtue of its independence, and its ability to act
without the approval of the investment adviser (whose employees often
serve as interested, or ``inside,'' directors on fund boards), such a
board is better able to exert a strong and independent influence over
fund management.\37\ This is particularly important in circumstances
where the fund's interests conflict with those of the adviser.\38\
---------------------------------------------------------------------------
\36\ See 1992 Protecting Investors Report, supra note 9, at 267
(``[A]n increased measure of independence is necessary to allow
independent directors to perform these responsibilities
appropriately.''). In the context of business development companies,
Congress has recognized that having a majority of independent
directors is particularly important ``where board approval is made
expressly a substitute for Commission review or for a per se
restriction.'' H.R. Rep. No. 1341, 96th Cong., 2d Sess. 25 (1980).
See also S. Rep. No. 75, 94th Cong., 1st Sess. 71 (1975) (stating
that the requirement in section 15(f) that 75 percent of a fund's
board consist of directors who are not interested persons of the
adviser for three years following the sale of an advisory contract
is a ``safeguard [ ] to protect the investment company and its
shareholders'').
\37\ The original Senate bill that culminated in the Investment
Company Act would have required a majority of a fund's directors to
be independent from management. See S. 3580, 76th Cong., 3d Sess.
Sec. 10(a) (1940). That requirement was changed to 40 percent out of
concern that a board with an independent majority would repudiate
the recommendations of the investment adviser, depriving fund
shareholders of those recommendations. See Investment Trusts and
Investment Companies: Hearings on H.R. 10065 Before the House
Subcomm. on Interstate and Foreign Commerce, 76th Cong., 3d Sess.
109-10 (1940) (statement of David Schenker). Experience has shown
that this concern was unfounded. See 1992 Protecting Investors
Report, supra note 9, at 267. Rather, we believe that an independent
majority enhances board oversight without unnecessarily impeding
fund operations or significantly increasing costs.
\38\ We expressly recognized this when we adopted rule 23c-3. We
included the requirements that independent directors constitute a
majority of the board and select and nominate their successors to
``ensure that the board of directors provides independent decisions
or scrutiny for actions or decisions that may involve a conflict of
interest between the adviser and [fund] shareholders.'' Rule 23c-3
Adopting Release, supra note 30; cf. Peter Tufano & Matthew Sevick,
Board Structure and Fee-setting in the U.S. Mutual Fund Industry, J.
FiN. ECON. 321, 350 (1997) (``[T]he salutary benefits of * * * a
higher fraction of independent directors [on a fund's board] should
be most visible when management's and shareholders' interests are
most at odds.'').
---------------------------------------------------------------------------
Today most, but not all, mutual funds have boards with at least a
simple majority of independent directors.\39\ When our Division of
Investment Management studied mutual fund governance in 1992 it
recommended that, as a requirement for all funds, independent directors
constitute at least a majority of a fund's board.\40\ Many of the
Roundtable participants stated that, based on their experience, a fund
board generally is more effective if independent directors represent a
substantial majority of the board.\41\ Similarly, the ICI Advisory
Group Report recently endorsed boards having a ``super-majority'' of
independent directors. The Report concluded that a two-thirds majority
of independent directors on a board ``will be more effective than a
simple majority in enhancing the authority of independent
directors.''\42\
---------------------------------------------------------------------------
\39\ See ICI Advisory Group Report, supra note 28, at 5 (``The
vast majority of fund boards today consist of a majority of
independent directors.''); Investment Company Institute,
Understanding the Role of Mutual Fund Directors 5 (1998) (noting
that most fund boards have a majority of independent directors). In
some cases, fund boards have an independent majority in order to
comply with certain requirements of the Act and our rules. See,
e.g., section 10(b)(2) (requiring, in effect, that independent
directors comprise a majority of a fund's board if the fund's
principal underwriter is an affiliate of the fund's investment
adviser); section 15(f)(1) (providing a safe harbor for the sale of
an advisory business if directors independent of the adviser
constitute at least 75 percent of a fund's board for at least three
years following the assignment of the advisory contract); rule 6e-
3(T)(b)(15) [17 CFR 270.6e-3(T)(b)(15)] (exempting certain funds
underlying insurance products from various Investment Company Act
provisions provided that independent directors constitute a majority
of the boards of those funds); rule 23c-3(b)(8) (permitting the
operation of interval funds if, among other conditions, independent
directors comprise a majority of the board).
\40\ See 1992 Protecting Investors Report, supra note 9, at 267
(Division recommended that Investment Company Act be amended to
require that independent directors constitute more than 50 percent
of a fund's board); see also Wharton Report, supra note 10, at 35
(increasing the proportion of unaffiliated directors may enhance the
value of those directors as a check on management).
\41\ See Roundtable Transcript of Feb. 24, 1999 at 241
(statement of Aulana L. Peters) (``My experience * * * dictates that
for a board to have a chance of operating truly independently * * *
there should be at least two independent [ ] [directors] to one
[inside director].''); id. at 265 (statement of Gerald C. McDonough)
(recommending that fund boards be required to have ``a certain
majority, 60, 66 percent, * * * certainly a clear majority of truly
independent [directors]''); Roundtable Transcript of Feb. 23, 1999
at 136 (statement of Faith Colish) (endorsing a ``substantial
majority'' of independent directors as a positive corporate
governance feature for fund boards). See also Tufano & Sevick, supra
note 38 (using empirical analysis to suggest that funds with boards
that have a larger fraction of independent directors tend to have
lower fees).
\42\ See ICI Advisory Group Report, supra note 28, at 11.
---------------------------------------------------------------------------
We take the conclusions of the ICI Report as a serious
recommendation reflecting the collective experience and wisdom of the
Advisory Group, which consisted of prominent members of the mutual fund
industry.\43\ Although the Report did not address whether Congress or
the Commission should adopt a two-thirds majority as a regulatory
requirement, it recommended the standard as a ``best practice'' for all
funds to consider.\44\ It is unclear, however, why a super-majority
standard as a ``best practice'' would be appropriate for some fund
boards and not others.
---------------------------------------------------------------------------
\43\ As noted above, the Board of Governors of the ICI also
unanimously endorsed the recommendations of the ICI Advisory Group
Report. See supra note 28.
\44\ The Report also noted that, while many funds already have a
two-thirds majority of independent directors, the practice is ``far
from universal.'' ICI Advisory Group Report, supra note 28, at 11.
---------------------------------------------------------------------------
A simple majority requirement would permit, under state law, the
independent directors to control the ``corporate machinery,'' i.e., to
elect officers of the fund, call meetings, solicit proxies, and take
other actions without the consent of the adviser. Such a provision
would require few funds to change the current composition of their
boards, but would bring those that must change into conformity with the
better practice. A two-thirds requirement, on the other hand, could
change the dynamics of board decision-making in favor of the interests
of investors, but may require many funds to change the composition of
their boards.
In light of the potential benefits to funds, their boards, and
shareholders, we are proposing to amend the Exemptive Rules to require
funds relying on them to have boards with at
[[Page 59831]]
least a majority of independent directors. Comment is requested on
whether we should adopt a simple majority requirement, as the staff
recommended in 1992, or the two-thirds super-majority requirement
recommended by the ICI Advisory Group Report. We also request comment
whether we should adopt an even higher percentage requirement (e.g., 75
percent or 100 percent).\45\
---------------------------------------------------------------------------
\45\ See, e.g., section 15(f)(1) of the Act (providing a safe
harbor for the sale of an advisory business if directors who are
independent of the adviser constitute at least 75 percent of a
fund's board for at least three years following the assignment of
the advisory contract). The ICI Advisory Group Report discussed, but
did not recommend at a best practice, having fund boards comprised
exclusively of independent directors. See ICI Advisory Group Report,
supra note 28, at 11-12. As a result of the Glass-Steagall Act, most
bank-sponsored funds have boards comprised entirely of independent
directors. See section 32 of the Glass Steagall Act [12 U.S.C. 78]
(prohibiting directors of any entity issuing securities, such as a
fund, from simultaneously serving as an officer, director, or
employee of a national bank); see also Roundtable Transcript of Feb.
24, 1999 at 111 (statement of Richard J. Herring, independent
director of a family of bank-related mutual funds and business
school professor of international banking) (noting that a bank-
related fund board comprised entirely on independent directors
``works quite well'').
---------------------------------------------------------------------------
We note that the charters \46\ of some funds may contain provisions
that require the approval of greater than a majority of a fund's board
for some matters, and, in light of our proposed amendments, other funds
may amend their charters to provide that a board may act only upon the
vote of greater than a simple (or two-thirds) majority of its members.
Would the existence of these super-majority voting provisions in fund
charters undercut the effectiveness of a board with a majority of
independent directors by requiring the consent of the ``inside''
directors and thus, in many cases, give the adviser a veto over board
votes? We request comment regarding the prevalence and potential effect
of these voting provisions in fund charters.
---------------------------------------------------------------------------
\46\ We use the term ``charters'' generally to include the
organizational documents of a fund--typically articles of
incorporation or declarations of trust, and corporate by-laws.
---------------------------------------------------------------------------
If we adopt the proposed amendments, we expect to delay the
compliance date for one year to allow funds to bring their boards into
compliance with the majority independence condition to the Exemptive
Rules.\47\ As of the compliance date, any fund relying on an Exemptive
Rule would be required to have a board with the requisite percentage of
independent directors. We request comment on this transition period.
---------------------------------------------------------------------------
\47\ There are several methods by which funds could affect the
transition to majority independent representation on their boards.
For instance, funds could (i) increase the size of their boards and
elect new independent board members; (ii) decrease the size of their
boards and allow some inside directors to resign; or (ii) allow some
inside directors to resign and replace them with independent board
members. A fund's ability to alter the composition of its board
without holding a shareholder vote will be determined by state law
and by section 16(a) of the Act [15 U.S.C. 89a-16(a)], which states
that a fund's board may fill a board vacancy without a shareholder
vote if, after the new director takes officer, at least two-thirds
of the board has been elected by shareholders. Section 16(a) further
requires a shareholder meeting to elect directors if the number of
shareholder-elected board members decreases to less than half of the
board. Newly organized funds could begin operations during the one-
year transition period without a majority of independent directors
and still rely on the Exemptive Rules, but they, like other funds,
would be required to have boards with a majority of independent
directors if they rely on any of the Exemptive Rules after the
compliance date for the amendments.
---------------------------------------------------------------------------
(b) Suspension of Board Composition Requirements. If the death,
disqualification, or bona fide resignation of an independent director
causes the representation of independent directors on the board to fall
below that required under the Investment Company Act, section 10(e) of
the Act suspends the percentage requirement for a short time to allow
the vacancy to be filled.\48\ Under section 10(e), the relevant
percentage requirement is suspended for 30 days if the board may fill
the vacancy,\49\ or for 60 days if the vacancy must be filled by a
shareholder vote.\50\ Section 10(e) also authorizes the Commission to
set a longer period for filling a board vacancy in these
circumstances.\51\
---------------------------------------------------------------------------
\48\ Various provisions of the Investment Company Act require a
particular percentage or minimum number of independent directors.
See sections 10(a), 10(b)(2), 10(d) [15 U.S.C. 80a-10(d)], and
15(f)(1); see also supra notes 20, 39, and 45 (discussing sections
10(a), 10(b)(2), and 15(f)(1) and their percentage requirements).
Section 10(e) [15 U.S.C. 80a-10(e)] similarly suspends the board
composition requirements of sections 10(d)(1), 10(b)(3), and 10(c)
[15 U.S.C. 80a-10(b)(1), -10(b)(3), and -10(c)]. For convenience, we
refer to all of the above requirements as ``percentage
requirements.''
\49\ See section 16(a) of the Act (permitting directors to fill
a board vacancy if, after the new director takes officer, at least
two-thirds of the board has been elected by shareholders, but
requiring a shareholder meeting to elect directors if the number of
shareholder-elected board members decreases to less then half of the
board).
\50\ Section 10(e)(1) and (2) [15 U.S.C. 80a-10(e)(1) and (2)].
\51\ Section 10(e)(3) [15 U.S.C. 80a-10(e)(3)].
---------------------------------------------------------------------------
In our experience, the time provided by section 10(e) is
insufficient for most funds to select and nominate qualified
independent director candidates, and, if necessary, hold a shareholder
election. Many funds address this problem by avoiding the need to rely
on the section--they have a greater percentage of independent directors
than is required by the Act. This approach may become more difficult
if, as we propose, funds relying on the Exemptive Rules must have a
majority or a super-majority of independent directors.\52\ Moreover,
the consequence of a fund falling below the minimum required percentage
of independent directors would be more severe and more immediate
because the fund would lose the availability of the Exemptive
Rules.\53\
---------------------------------------------------------------------------
\52\ See supra Section II.A.1.a.
\53\ Currently, the loss of an independent director that causes
a fund to fall below a statutorily required percentage of
independent directors does not result in immediate consequences for
a fund. Issues arise only when the fund's next board vote is
required. Under the proposed amendments to the Exemptive Rules,
however, the fund would be unable, for example, to offer multiple
classes of shares, pay distribution fees under rule 12b-1, engage in
securities transactions with fund affiliates, or participate in a
joint liability insurance policy from the date of the loss of the
independent director until the fund replaces the independent
director.
---------------------------------------------------------------------------
The Commission is proposing new rule 10e-1 to address these
concerns. Proposed rule 10e-1 would suspend the board composition
requirements of the Act, and of the rules under the Act, for 60 days if
the board of directors may fill the vacancy or 150 days if a
shareholder vote is required.\54\ We believe these longer time periods
are appropriate in light of the need to select, nominate, and elect
qualified candidates for service as independent directors.\55\
---------------------------------------------------------------------------
\54\ See proposed rule 10e-1.
\55\ See infra Section II.A.2 (discussing the selection and
nomination of independent directors by other independent directors);
cf. Temporary Exemption for Certain Investment Advisers, Investment
Company Act Release No. 23325 (July 22, 1998) [63 FR 40231 (July 28,
1998)] (proposing amendments to rule 15a-4 in part to extend, from
120 days to 150 days, the period of time funds are permitted to
operate with an interim advisory contract that has not been approved
by shareholders to allow funds more time to seek shareholder
approval of an advisory contract).
---------------------------------------------------------------------------
We request comment whether the proposed 60-day and 150-day periods
are adequate to provide funds and their independent directors with the
time needed to approve new independent directors. Commenters who
believe that a longer or shorter period is appropriate should explain
why, and specify the number of days they believe would be adequate.
2. Selection and Nomination of Independent Directors
Independent directors who are truly independent are more effective
in their roles as ``watchdogs'' for fund shareholders. While the
Investment Company Act precludes independent directors from having
certain affiliations or relationships with the fund's adviser or
principal underwriter,\56\ no law can
[[Page 59832]]
guarantee that an independent director will be vigilant in protecting
fund shareholders. Fund shareholders therefore must depend on the
character, ability, and diligence of persons who serve as fund
directors to protect their interests.\57\
---------------------------------------------------------------------------
\56\ See section 2(a)(19)(B) [15 U.S.C. 80a-2(a)(19)(B)]
(outlining the types of affiliations and relationships that render a
director an ``interested person'' of a fund's adviser or principal
underwriter).
\57\ See Bearing of Distribution Expenses by Mutual Funds,
Investment Company Act Release No. 10862 (Sept. 7, 1979) [44 FR
54014 (Sept. 17, 1979)] (proposing rule 12b-1) (``[P]roper
fulfillment of directors' duties depends primarily on the character,
ability, and diligence of directors.''); William G. Bowen, Inside
the Boardroom: Governance by Directors and Trustees 47 (1994)
(``Effective governance by any board surely depends, most of all, on
having an outstanding group of members.''); Roundtable Transcript of
Feb. 23, 1999 at 14-15 (statement of Arthur Levitt, Chairman, SEC)
(``[B]oard independence does not come from a specific legal
structure * * * I believe passionately in boards made up of men and
women of good, sound independent judgment. Board independence comes
from directors who do their jobs aggressively.'').
---------------------------------------------------------------------------
One recognized method of enhancing the independence of directors is
to commit the selection and nomination of new independent directors to
the incumbent independent directors.\58\ Independent directors who are
selected and nominated by other independent directors, rather than by
the fund's adviser, are more likely to have their primary loyalty to
shareholders rather than the adviser.\59\ In addition, when independent
directors are self-selecting and self-nominating, they are less likely
to feel beholden to the adviser. Thus, they may be more willing to
challenge the adviser's recommendations when the adviser's interests
conflict with those of the shareholders.\60\
---------------------------------------------------------------------------
\58\ Selection and nomination refers to the process by which
board candidates are researched, recruited, considered, and formally
named. Some funds establish a nominating committee of the board that
is comprised entirely of independent directors to select and
nominate directors.
\59\ See ICI Advisory Group Report, supra note 28, at 14
(``[I]ndependent directors are uniquely qualified to evaluate
whether a present or prospective director is likely to contribute to
the continuing independence and effectiveness of the independent
directors as a group.'').
\60\ See ICI Advisory Group Report, supra note 28, at 14
(``[C]ontrol of the nominating process by the independent directors
helps dispel any notion that the directors are `hand picked' by the
adviser and therefore not in a position to function in a true spirit
of independence.'')
---------------------------------------------------------------------------
Two comprehensive studies that addressed mutual fund governance
recognized that the selection and nomination of independent directors
by other independent directors could enhance their independence.\61\ In
its guidebook for fund directors, the American Bar Association's
Section of Business Law has endorsed this practice,\62\ as did several
participants at our Roundtable.\63\ The recent ICI Advisory Group
report also recommended the self-selection and self-nomination of
independent directors.\64\ As noted above, two of our rules currently
require funds to have self-selecting and self-nominating independent
directors,\65\ and many fund groups have adopted this practice.\66\
---------------------------------------------------------------------------
\61\ See 1992 Protecting Investors Report, supra note 9, at 266-
67 (recommending that the Act be amended to require that independent
directors be self-nominating); Wharton Report, supra note 10, at
465-66 (noting that the selection of unaffiliated directors by
management limits those directors' independence).
\62\ See A.B.A., Section of Business Law, Fund Director's
Guidebook 27 (1996) [``Fund Director's Guidebook''] (``The
independence of a fund's independent directors is enhanced by
providing that persons nominated by the board for election as
independent directors be nominated by a committee of the fund's
incumbent independent directors.'').
\63\ See Roundtable Transcript of Feb. 24, 1999 at 182
(statement of John C. Coffee, Jr.) (``[W]e should have'' independent
nominating committees.); Roundtable Transcript of Feb. 23, 1999 at
136 (statement of Faith Colish) (``a very good idea''); Roundtable
Transcript of Feb. 24, 1999 at 63 (statement of Dawn-Marie Driscoll)
(``I'm a great believer in independent directors choosing other
independent directors who the adviser does not know. * * * The more
ways you can ensure independence, the better the process will
be.''); id. at 148 (statement of Ronald J. Gilson) (``A nominating
committee made up of independent directors makes an enormous amount
of sense.''); id. at 215 (statement of John R. Haire) (``[Self-
selection and self-nomination are] very helpful in the process of
seeing that * * * independent directors * * * bring to the board a
diversity of skills that are useful * * * in the role of overseeing
management.''); id. at 243 (statement of Aulana L. Peters) (``[I]t
is not a good idea to have the adviser or the CEO of the adviser * *
* be the sole decisionmaker on who should serve as a disinterested
member of the board.''). But see id. at 245 (statement of Aulana L.
Peters) (stating that the involvement of a fund's adviser in the
selection and nomination of independent directors may facilitate
increasing diversity on a fund's board).
\64\ See ICI Advisory Group Report, supra note 28, at 14-16.
\65\ Rule 12b-1 permits the use of fund assets to pay for
distribution of fund shares, but only if the fund's independent
directors select and nominate other independent directors. See supra
note 30 (discussing rule 12b-1). In discussing our decision to
include this condition in the rule, we noted that ``the likelihood
that a decision will be in the best interests of a fund and its
shareholders will be increased if the disinterested directors are
genuinely independent of management,'' and that ``formal
independence will breed an atmosphere in which actual independence
will develop.'' Rule 12b-1 Adopting Release, supra note 30, at
discussion of ``Independence of Directors.'' See also supra note 30
(discussing rule 23c-3, which permits the operation of interval
funds if independent directors are self-selecting, self-nominating,
and comprise a majority of the board). The Act also requires
independent directors to select and nominate individuals to fill
independent director vacancies for a period of three years following
the sale of an investment advisory contract. Section 16(b) [15
U.S.C. 80a-16(b)].
\66\ See ICI Advisory Group Report, supra note 28, at 15 (noting
that funds with rule 12b-1 plans, which are required to have self-
selecting and self-nominating independent directors, represent a
majority of all mutual funds and that many funds without rule 12b-1
plans also assign to independent directors the selection and
nomination of other independent directors); Joel H. Goldberg &
Gregory N. Bressler, Revisiting Rule 12b-1 Under the Investment
Company Act, 31 Rev. Sec. & Commodities Reg. 147, 147 (1998) (since
the adoption of rule 12b-1 in 1980, over 7,000 mutual funds have
adopted rule 12b-1 plans).
---------------------------------------------------------------------------
We are proposing to amend each of the Exemptive Rules to require
that funds relying on those rules have boards whose independent
directors select and nominate any other independent directors.\67\
Funds that have adopted distribution plans under rule 12b-1, which
already contains this requirement, would be unaffected by the
proposal.\68\ Funds whose independent directors were not nominated in
this manner would not immediately lose their ability to rely on the
Exemptive Rules. Rather, if we adopt the proposed amendments, these
funds would be required to adopt the practice before the compliance
date for the amendments, and the fund's incumbent independent directors
subsequently would select and nominate all independent directors of the
fund.\69\
---------------------------------------------------------------------------
\67\ See proposed rules 10f-3(b)(11)(i); 15a-4(c)(1); 17a-
7(f)(1); 17a-8(c)(1); 17d-1(d)(7)(v)(A); 17e-1(c)(1); 17g-
1(j)(3)(i); 18f-3(e)(1). In addition, we are proposing to amend
rules 12b-1 and 23c-3 to conform their current language regarding
the self-selection and self-nomination of independent directors to
the language of the proposed amendments. Proposed rules 12b-1(c)(1)
and 23c-3(b)(8)(i).
\68\ Our proposals to amend rules 12b-1 and 23c-3 to conform
their language regarding self-selection and self-nomination to the
language of our proposed amendments are not intended to have any
substantive effect on the operation of those rules. See proposed
rules 12b-1(c)(1), 23c-3(b)(8)(i).
\69\ Our proposed amendments would have no impact on the initial
selection of an organizing fund's directors because, at the time of
organization, the fund would not yet be registered under the
Investment Company Act and therefore would not be relying on our
Exemptive Rules. Any organizing fund that intends to rely on the
Exemptive Rules, however, should adopt a self-selection and self-
nomination practice, and once the fund begins operations,
independent directors should select and nominate other independent
directors as board vacancies occur.
---------------------------------------------------------------------------
We understand that committing the selection and nomination of
independent directors to a board committee composed entirely of
independent directors might, in some cases, conflict with applicable
state law.\70\ We believe that a fund could comply with our proposed
amendments in those circumstances if the fund's independent directors
choose the candidates and then present their recommendations to the
full board. We
[[Page 59833]]
request comment whether this approach adequately addresses any
potential conflicts between state law and our proposed amendments
regarding self-selection and self-nomination of independent directors.
---------------------------------------------------------------------------
\70\ See, e.g., ICI Advisory Group Report, supra note 28, at
n.28 (discussing Md. Code Ann., Corps. & Ass'ns Sec. 2-411(a)(2),
which prohibits the bylaws of a Maryland corporation from
authorizing the board to delegate to a committee the power to
recommend to stockholders any action that requires stockholder
approval). Section 2-411(a)(2) may have a greater effect on closed-
end funds, which, unlike mutual funds, generally must hold annual
meetings of shareholders at which shareholders elect directors.
---------------------------------------------------------------------------
Moreover, our proposals regarding the self-selection and self-
nomination of independent directors are not intended to limit the
abilities of public shareholders to nominate independent directors. To
the extent permitted under state law, shareholders may participate in
the nomination process.\71\
---------------------------------------------------------------------------
\71\ See Item 7(e)(2) of Schedule 14A (requiring that any proxy
sent to shareholders for the purpose of electing directors state
whether a registrant's nominating committee will consider nominees
recommended by shareholders and describe the procedures to be
followed by shareholders submitting nominee recommendations); see
also infra note 224 and accompanying text.
---------------------------------------------------------------------------
We request comment whether we should further amend the Exemptive
Rules to require that independent directors, rather than the entire
board, elect other independent directors in those instances when a
shareholder vote is not required.\72\ Commenters should discuss the
effect state law would have on a fund board's ability to delegate its
authority to elect directors to a subset of the board.
---------------------------------------------------------------------------
\72\ The ICI Advisory Group Report recommends that, to the
extent permitted by state law, fund boards delegate to a fund's
incumbent independent directors the authority to elect independent
directors in the absence of a shareholder vote. See Advisory Group
Report, supra note 28, at 15-16; see also supra note 47 (discussing
section 16(a) of the Act and the circumstances under which fund
directors may elect a board member without holding a shareholders
vote).
---------------------------------------------------------------------------
3. Independent Legal Counsel
Another recognized method of enhancing the independence and
effectiveness of independent directors is to provide them with
independent counsel.\73\ Because mutual funds are highly regulated and
their boards frequently are called upon to protect fund shareholders
from conflicts of interest, independent counsel can be particularly
helpful to independent directors of funds.\74\ Experienced counsel can
help to identify potential conflicts of interest and other compliance
issues. They can assist directors in ``marshal[ling] arguments to
balance those presented by management in matters involving conflicts of
interest,'' and evaluating legal issues with an independent and
critical eye.\75\ Often, independent counsel can draw on their
experience and knowledge to identify best practices of other funds that
might be appropriate for directors to adopt for their fund.
---------------------------------------------------------------------------
\73\ See generally Grover C. Brown, Michael J. Maimone, and
Joseph C. Schoell, Director and Advisor Disinterestedness and
Independence Under Delaware Law, 23 Del. J. Corp. L. 1157 (1998).
\74\ See ICI Advisory Group Report, supra note 28, at 18
(``[Independent] counsel can help to ensure that the directors
understand their responsibilities, ask the pertinent questions, and
receive the information necessary to carry out those
responsibilities.''); What's the Job of Your Fund Counsel?, Fund
Directions, Nov. 1995, at 4, 5 (Independent directors ``look to
their lawyer for assistance in resolving and acting upon any matters
where the adviser potentially has a conflict of interest with the
shareholders.' '') (quoting Edward T. O'Dell, partner, Goodwin,
Procter & Hoar LLP).
\75\ Joel H. Goldberg, Disinterested Directors, Independent
Directors and the Investment Company Act of 1940, 9 Loy. U. Chi.
L.J. 565, 585 (1978).
---------------------------------------------------------------------------
We believe counsel who does not also represent the fund's adviser
can best provide zealous representation of independent directors.
Several of our Roundtable participants made this point,\76\ as have
many legal commentators over the years.\77\ The recent ICI Advisory
Group Report recommended that independent directors have qualified
counsel who is independent from the fund's adviser and other service
providers.\78\ Courts too have recognized that independent legal
counsel improves the deliberative process of fund independent
directors.\79\ As a result, independent directors of many funds retain
legal counsel who does not also represent the adviser and, in some
cases, does not represent the fund.
---------------------------------------------------------------------------
\76\ See Roundtable Transcript of Feb. 24, 1999 at 178
(statement of John C. Coffee, Jr.) (``[T]he central lesson from
corporate governance generally is that independent directors can
function well as a committee if an probably only if they have the
effective assistance of a truly independent legal counsel who does
not generally represent the investment adviser and who does not have
any other conflict.''); id. at 190-97 (statement of Leslie L. Ogg)
(discussing the important role of service providers, including
separate counsel, to fund independent directors); id. at 52
(statement of David M. Butowsky) (stating that independent directors
should be counseled by someone ``who is completely independent of
any affiliation with management when reviewing found reorganizations
following the acquisition of an adviser); id. at 67 (statement of
Joseph Hankin) (noting that retaining counsel separate from fund
management is ``absolutely a prudent step'' when reviewing fund
mergers and advisory contracts); see also id. at 222-23 (statement
of David A. Sturms) (reviewing various structures of legal
representation of a fund, its independent directors, and its
adviser).
\77\ See, e.g., Martin Lipton, Directors of Mutual Funds:
Special Problems, 31 BUS. LAW. 1259, 1262 (1976) (``[M]utual funds
should have separate counsel. Either the independent directors of a
fund should have separate counsel or the fund itself should have
separate counsel. That is, separate counsel from counsel for the
management company. Independent counsel plays a very important
role.''); Goldberg, supra note 75, at 585 (``[T]he value of
[independent] counsel in helping to ensure independent consideration
of issues by disinterested directors is beyond dispute * * *.'');
Jean W. Gleason, Mutual Fund Governance: Independent Directors--
Their Role and Incentives and Tools for Fulfilling It, VI-A-9, VI-A-
16 (1994) (material prepared for the 1994 Mutual Funds and
Investment Management Conference) (``Access to, and use of, outside
experts [such as independent legal counsel] can provide increased
independence and allow for informed judgments [by independent
directors] * * *.''). See also Public Policy Report, supra note 10,
at 130-31 (listing the absence of separate legal counsel as one of
the factors contributing to the relative ineffectiveness of
unaffiliated directors).
\78\ See ICI Advisory Group Report, supra note 28, at 18-20. The
Advisory Group concluded that ``[c]ounsel to the independent
directors must be independent from the adviser and other fund
service providers in order to render objective advice on areas of
potential conflict between the fund and its service providers.'' Id.
at 18. See also Fund Director's Guidebook, supra note 62, at 23
(``[G]enerally it is important that the independent directors have
ready access to counsel who views the board and the fund, not the
adviser, as the client.'').
\79\ See Tannenbaum v. Zeller, 552 F.2d 402, 428 (2d Cir. 1977)
(stating that it would have been preferable if the fund's
independent directors received advise from an independent counsel,
rather than counsel who also represented the fund, the fund's
adviser, and the fund's distributor); Fogel v. Chestnutt, 533 F.2d
731, 750 (2d Cir. 1975) (``It would have been * * * better to have
the investigation of recapture methods and their legal consequences
performed by disinterested counsel furnished to the independent
directors.''); Schuyt v. Rowe Price Prime Reserve Fund, Inc., 663 F.
Supp. 962, 965, 982, 986 (S.D.N.Y.) (noting that ``[d]uring all
relevant times, the independent directors * * * had their own
counsel'' who was an ``important resource'' and who advice ``the
record indicates the directors made every effort to keep in mind as
they deliberated''), aff'd, 835 F.2d 45 (2d Cir. 1987); Cartenberg
v. Merill Lynch Asset Management, Inc., 528 F. Supp. 1038, 1064
(S.D.N.Y. 1981) (noting that the ``non-interested Trustees were
represented by their own independent counsel * * * who acted to give
them conscientious and competent advice''), aff'd, 694 F.2d 923 (2d
Cir. 1982). See also Palilsky v. Berndt, [1976-1977 Transfer Binder]
Fed. Sec. L. Rep. (CCH) para. 95,627, 15 90,133 (S.D.N.Y. June 24,
1976) (noting that a law firm, in advising both a fund and the
fund's adviser, ``was counseling people with contrary interests. * *
* The effect of the inadequate advice was to discourage any
independent inquiry by * * * [the] Board.'').
---------------------------------------------------------------------------
We are aware, however, that in some cases counsel has regularly
represented the fund, the fund's adviser, and the independent
directors. We have no doubt that such representation has been in
conformity with applicable codes of legal ethics, which permit a lawyer
to represent clients with conflicting interests after full disclosure
and client consent.\80\ We nevertheless are troubled by such conflicts
and how they affect the ability of independent directors to carry out
their responsibilities under the Act and the Exemptive Rules. We are
particularly concerned when lawyers represent both the independent
directors and management organizations in the negotiation of the
advisory contract, distribution arrangements (e.g., 12b-1 plans), and
other matters of fundamental importance to a fund and its shareholders.
Lawyers representing
[[Page 59834]]
fund management may not suggest courses of action to independent
directors that are opposed by their management clients. Thus, we are
proposing to amend the Exemptive Rules to require that counsel for a
fund's independent directors not also act as counsel to the fund's
adviser, principal underwriter, or administrator (or their control
persons).\81\
---------------------------------------------------------------------------
\80\ See American Bar Association, Center for Professional
Responsibility, Model Rules of Professional Conduct [``ABA Model
Rules''], Rule 1.7 (1998); see also Del. Prof. Cond. R. 1.7 (1998);
MASS. SUP. JUD. CT.R. 3:07, R.P.C. 1.7 (1999); Md. Rule 1.7 (1998).
\81\ Our proposals are not intended to regulate the practice of
law, but rather to delimit the ability of independent fund directors
to waive certain conflicts of interest. In other contexts,
fiduciaries have been similarly restricted in their ability to waive
conflicts. See, e.g., section 327 of the U.S. Bankruptcy Code [11
U.S.C. 327] (bankruptcy trustee generally cannot employ a counsel
who represents an interest adverse to the estate in bankruptcy, and
any counsel employed by the trustee must be a disinterested person);
Md. Regs. Code tit. 13 Sec. 105 (attorney to a receiver or assignee
in bankruptcy must meet prescribed independence standards, including
that the attorney does not represent an interest adverse to the
estate). See also rule 116.5 of the Bureau of Indian Affairs [25 CFR
116.5] (no person with a personal, financial, or business connection
to a trustee of restricted Indian property may act as an appraiser
of that property in connection with loans made from the trust).
---------------------------------------------------------------------------
We are not, however, proposing at this time to require independent
directors to retain legal counsel. Although we believe that independent
directors are in the best position to fulfill the roles assigned to
them by the Exemptive Rules if they have the assistance of independent
counsel, the services of counsel do not come without cost.\82\ We are
hesitant to propose a rule that might result in the engagement of legal
counsel simply to fulfill a legal requirement. Moreover, we believe
that a likely result of our proposed amendments would be that fund
directors will seek independent counsel. Comment is requested whether
we should amend the Exemptive Rules to require independent directors of
funds relying on those rules to retain independent legal counsel. Would
this requirement impose substantial costs on small fund groups? If we
adopt this condition to the Exemptive Rules, should we provide for an
exception for smaller fund groups? If so, what factors should determine
which fund groups are small?
---------------------------------------------------------------------------
\82\ In the 1992 Protecting Investors Report, the staff of the
Division of Investment Management considered, but did not recommend,
requiring funds to provide independent directors with their own
counsel. While the staff recognized the benefits of separate counsel
for independent directors, it was concerned about the costs
associated with requiring separate counsel in all cases. See 1992
Protecting Investors Report, supra note 9, at 268.
---------------------------------------------------------------------------
Under the proposed amendments, reliance on each of the Exemptive
Rules would be conditioned on any legal counsel for a fund's
independent directors being an ``independent legal counsel.'' \83\ A
person would be an ``independent legal counsel'' if the fund reasonably
believes the person and his law firm, partners, and associates \84\
have not acted as legal counsel for the fund's investment adviser,
principal underwriter, administrator \85\ (collectively, ``management
organizations''), or any of their control persons \86\ at any time
since the beginning of the fund's last two completed fiscal years.\87\
The independent directors could make an exception and permit a person
to serve as independent legal counsel even if the person has a remote
or minor conflict of interest because the person has provided legal
advice to management organizations or their control persons.\88\
---------------------------------------------------------------------------
\83\ See proposed rules 10f-3(b)(11)(ii); 12b-1(c)(2); 15a-
4(c)(2); 17a-7(f)(2); 17a-8(c)(2); 17d-1(d)(7)(v)(B); 17e-1(c)(2);
17g-1(j)(3)(ii); 18f-3(e)(2); 23c-3(b)(8)(ii).
\84\ The proposed definition of an independent legal counsel
would apply to a ``person.'' See proposed rule 0-1(a)(6)(i). The
term ``person'' would have the same meaning as in section 2(a)(28)
of the Act [15 U.S.C. 80a-2(a)(28)] and, in addition, would include
a partner, co-member, or employee of any person. See proposed rule
0-1(a)(6)(ii)(A). The term ``co-member'' is intended to address law
firms organized as limited liability companies. The interest-holders
of limited liability companies generally are called ``members.''
\85\ See infra note 89.
\86\ See infra note 91 and accompanying text.
\87\ See proposed rule 0-1(a)(6)(i)(A). We intend that the
phrase ``act as legal counsel'' as used in the proposed definition
of ``independent legal counsel'' will have the same meaning that it
has for purposes of section 2(a)(19)(B)(iv) [15 U.S.C. 80a-
2(a)(19)(B)(iv)]. The staff has interpreted the phrase ``acts as
legal counsel'' broadly. See 399 Fund, SEC No-Action Letter (Sept.
2, 1973) (fund directors would be an ``interested person'' because
his firm had entered an appearance on behalf of certain officers and
directors of the fund's adviser in litigation unrelated to the
fund); Alpha Investors Fund, Inc., SEC No-Action Letter (Jan. 9,
1972) (fund director would be an ``interested person'' because his
firm had performed two small legal projects for a company that owned
a 50 percent share of an adviser to a fund).
In some cases, ethics rules permit counsel to accept payment for
legal services from a non-client third party. See ABA Model Rules,
supra note 79, rule 1.8(f) (1998) (counsel may accept compensation
from a third party if (i) the client consents after consultation,
(ii) there is no interference with counsel's independence of
professional judgment or with the attorney-client relationship, and
(iii) counsel maintains client confidentiality); see also id. Rule
1.7 cmt. 10 (``Interest of Person Paying for a Lawyer's Service'').
Under our proposed amendments, we would not view a lawyer as
``acting as legal counsel'' to a fund's investment adviser merely
because the lawyer accepts payment of fees from the adviser for
legal services performed on behalf of the fund or its independent
directors as permitted by relevant professional ethics rules.
\88\ See infra Section 11.A.3(d) ``Exception''; proposed rule 0-
1(a)(6)(i)(B).
---------------------------------------------------------------------------
(a) Independent of Fund Management Organizations. The proposed
amendments would treat as fund management organizations, fund advisers
(including sub-advisers), principal underwriters, and fund
administrators.\89\ We are proposing to include fund administrators
because, in some fund complexes, an administrator performs many of the
management functions traditionally performed by a fund's adviser, and
thus may have the same types of conflicts as an investment adviser
sponsoring a fund.\90\ The limitations on dual representation also
would extend to control persons of fund management organizations:
persons who directly or indirectly control, are controlled by, or are
under common control with the adviser, principal underwriter, or fund
administrator.\91\ Counsel to both a parent company of the fund's
adviser and a fund's independent directors, for example, may face the
same conflicts as those faced by counsel to the fund's adviser and the
fund's independent directors.\92\ We request comment whether the
amendments should extend to other types of service providers in
addition to management organizations,\93\ and to persons other than
control persons (e.g., affiliated persons of a management
organization).
---------------------------------------------------------------------------
\89\ We are proposing to define ``administrator'' as any person
who provides significant administrative or business affairs
management services to a fund. Proposed rule 0-1(a)(5). This
definition is substantially similar to, and has the same meaning as,
the definition of administrator contained in Item 22(a)(1)(i) of
Schedule 14A and Item 15(h)(1) of Form N-1A.
\90\ Funds are increasingly turning to third-party fund
administrators to provide an array of services, including
shareholder servicing, recordkeeping, accounting, and fund
distribution. See Jackie Cohen, Priming the Pump for Better Mutual
Fund Sales, Bank Tech. News, June 1998, at 43; Katharine Fraser,
Fund Administrators Vie for Megabank Pacts, Am. Banker, May 27,
1998, at 10. As of December 31, 1998, third-party fund
administrators had approximately $527 billion in assets under
administration. See generally Lipper Inc., Lipper Directors'
Analytical Data: Executive Summary (1st ed. 1999) (providing
estimates of fund assets administered by entities other than funds,
from which estimates of fund assets administered by entities
unaffiliated with the fund may be derived).
\91\ The definition of ``control person'' would exclude funds.
This exclusion enables the same counsel to represent a fund and its
independent directors. See proposed rule 0-1(a)(6)(ii)(B); see also
infra note 94 and accompanying text.
\92\ This could be the case even if the legal work performed for
the control person is unrelated to the fund or its operations.
\93\ See ICI Advisory Group Report, supra note 28, at 19
(recommending counsel for the independent directors who is
independent from all of the fund's service providers).
---------------------------------------------------------------------------
Under the proposed amendments, a person could be an independent
legal counsel to a fund's independent directors regardless of the
nature and amount of legal services he or she provides to the fund
itself. A person acting as both fund counsel and independent director
counsel ordinarily should not have the types of conflicts of interest
that would diminish the counsel's ability to provide zealous
[[Page 59835]]
representation of independent directors.\94\ Similarly, our proposal
would not preclude counsel from representing the independent directors
of multiple funds affiliated with the same management organization. We
request comment on this provision.
---------------------------------------------------------------------------
\94\ See id. at 18-19 (`'The Adisory Group believes that counsel
for the independent directors also may serve as fund counsel
because, in virtually every situation except possibly litigation,
the interests of the fund and its directors are aligned.''). But see
Roundtable Transcript of Feb. 24, 1999 at 179 (statement of John C.
Coffee, Jr.) (noting that counsel to a fund invariably works closely
with, and generally receives work requests from, personnel of the
adviser who manages the fund, and that the close association with
the adviser that results from representing the fund could influence
the counsel's representation of the independent directors).
---------------------------------------------------------------------------
(b) Two-Year Period. Section 2(a)(19) of the Act prevents any
person who has acted as legal counsel to a fund's adviser or principal
underwriter during the last two years from serving as an independent
director of the fund.\95\ This section reflects Congress's belief that
acting as counsel to fund management organizations creates conflicts
that may affect a person's ability to represent shareholder interests.
Based upon similar considerations, the proposed amendments would
(subject to the exception discussed below) preclude a person from
acting as counsel for independent directors for two years after having
acted as legal counsel to a fund management organization or its control
person. As in section 2(a)(19), the disqualification would apply to any
partner or employee of a person who acted as legal counsel to the
management organization or its control person.\96\
---------------------------------------------------------------------------
\95\ Section 2(a)(19)(B)(vi). Section 2(a)(19)(A)(iv) of the Act
[15 U.S.C. 80a-2(a)(19)(A)(iv)] also precludes a person who has
acted as fund counsel from serving as an independent director of
that fund for at least two years. As discussed above, our proposal
would not preclude counsel to a fund from serving as counsel to a
fund's independent directors. See supra note 94 and accompanying
text.
\96\ See proposed rule 0-1(a)(6)(ii)(A); see also supra note 84.
---------------------------------------------------------------------------
(c) Reasonable Belief. The proposed amendments would require the
fund to have a ``reasonable belief'' that counsel to the independent
directors meets the requirements of the independent legal counsel
definition. If, despite the fund's reasonable belief, counsel does not
actually meet the requirements, the fund would not lose the ability to
rely on any of the Exemptive Rules. A fund could form a reasonable
belief based on a representation from counsel. If the fund relies on
counsel's representation, the fund also should obtain an undertaking
that the counsel will inform the fund and the independent directors if
it begins to act as legal counsel to the fund management organizations
or any of their control persons.
(d) Exception. As discussed above, these proposed amendments are
intended to assure that independent directors have the benefit of
counsel who is free from the types of conflicts that may affect the
advice provided to independent directors. The scope of the proposed
limitation, described above, is broad and covers direct and indirect
conflicts. As a result, the proposed amendments might preclude a person
from serving as counsel to a fund's independent directors because of a
remote or minor conflict involving, for example, a law-firm partner who
represented an affiliate of the fund's adviser in a minor real estate
transaction. Therefore, the proposed definition of ``independent legal
counsel'' includes an exception that would permit the independent
directors to retain the counsel if they determine that the counsel's
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.'' \97\
---------------------------------------------------------------------------
\97\ See proposed rule 0-1(a)(6)(i)(B).
---------------------------------------------------------------------------
The exception would not permit waivers in all instances, but only
in circumstances where the nature or extent of the conflict is minor.
We would expect that the independent directors, in making a
determination under the exception, would consider all relevant factors.
These factors could include whether the representation presented a
direct and ongoing conflict with the fund, the amount of legal fees
generated by the representation, and the nature and the extent of the
affiliation between a control person and a fund management
organization. The basis for any determination under this provision also
must be recorded in board meeting minutes.\98\
---------------------------------------------------------------------------
\98\ See id.
---------------------------------------------------------------------------
We request comment on the approach we have taken. Should
independent directors who engage legal counsel under the exception to
the general rule be required to make findings different from those
proposed? For example, the Blue Ribbon Committee on Improving the
Effectiveness of Corporate Audit Committees recommended that a director
who does not meet proposed independence standards be allowed to serve
as a member of a company's audit committee if the board, under
exceptional and limited circumstances, determines that membership on
the committee is required by the best interests of the company and its
shareholders, and the board discloses, in the next annual proxy
statement, the reasons why the director does not meet the independence
standards and the reasons for the board's determination.\99\ Should we
also require public disclosure of the independent directors'
determination regarding their counsel's conflict and the nature of that
conflict? If so, in what document should the disclosure be made?
---------------------------------------------------------------------------
\99\ See Report and Recommendations of the Blue Ribbon Committee
on Improving the Effectiveness of Corporate Audit Committees 11
(1999) [``Blue Ribbon Committee Report''].
---------------------------------------------------------------------------
(e) Transition Period. If we adopt the proposals after the comment
period, counsel for the independent directors of funds relying on any
of the Exemptive Rules would not be required to be ``independent legal
counsel'' until the compliance date established in the adopting
release. We believe that independent directors of most fund groups
would not be required to seek new counsel. In some cases, however, they
may. Comment is requested on the transition time that independent
directors would need to hire new counsel.
B. Limits on Coverage of Directors Under Joint Insurance Policies
The oversight responsibilities that the Act assigns to independent
directors \100\ may create tensions between those directors and the
fund's adviser \101\ that can lead to disputes.\102\ A dispute among
these parties that escalates to the level of a lawsuit can result in
significant legal expenses for the independent directors.\103\
---------------------------------------------------------------------------
\100\ See supra notes 12-24 and accompanying text; see also
section 36(a) of the Act [15 U.S.C. 80a-35(a)] (enabling federal
lawsuits to be brought against fund directors for breaches of
fiduciary duty involving personal misconduct).
\101\ See Roundtable Transcript of Feb. 24, 1999 at 234
(statement of Gerald C. McDonough) (``The adversarial role * * * of
independent [directors] and fund advisers is a healthy and desirable
one.'').
\102\ See David A. Sturms, The Debate: The System is Broken--Fix
It or Scrap It vs. The System Works--Don't Fix What Isn't Broken 4-7
(materials prepared for SEC Roundtable on the Role of Independent
Investment Company Directors, Feb. 23-24, 1999) (discussing recent
disputes between independent directors of funds and the funds'
advisers).
\103\ See ICI Advisory Group Report, supra note 28, at 26
(``[L]itigation [involving independent directors] can be extremely
expensive and may even carry with it a potential for personal
financial ruin.'').
---------------------------------------------------------------------------
Funds typically purchase ``errors and omissions'' insurance
policies (``D&O/E&O policies'') \104\ to cover expenses
[[Page 59836]]
incurred by directors and officers in the event of litigation.\105\
Often these policies are joint policies that cover numerous funds
within a fund family as well as the adviser and principal underwriter
of those funds. Although the Investment Company Act and our rules
generally prohibit joint transactions and other joint arrangements
involving a fund and its affiliates,\106\ rule 17d-1(d)(7) permits the
purchase of joint D&O/E&O policies.\107\
---------------------------------------------------------------------------
\104\ D&O/E&O policies generally insure directors and officers
of an insured entity (e.g., a fund) for claims made against them for
their designated acts, errors, or omissions. See generally Spiro K.
Bantis, ``What Mutual Fund D&O/E&O Policies Don't Cover''; Ellen
Metzger, Mutual Fund D&O/E&O Insurance: Considerations in Selecting
and Maintaining a Policy; Natalie Shirley, Claims--What to Do When
the Unthinkable Happens; Daniel T. Steiner, Selected Issues
Regarding Basic Policy Forms (collected materials from 1995 Mutual
Funds and Investment Management Conference, Mutual Fund D&O/E&O
Insurance 101).
\105\ Under the Act, a fund's organizational documents cannot
contain any provision protecting a director or officer of the fund
from any liability to the fund or its shareholders to which he is
subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the
conduct of his office. See section 17(h) of the Act [15 U.S.C. 80a-
17(h)]; see also Interpretive Release, supra note 1, Section II.C
(discussing section 17(h) and providing guidance regarding when a
fund may pay an advance of legal fees to its directors).
\106\ See section 17(d) [15 U.S.C. 80a-17(d)] (prohibiting an
affiliated person of a fund from effecting a joint transaction with
the fund in contravention of Commission rules); rule 17d-1 [17 CFR
270.17d-1] (prohibiting a fund affiliate from participating in any
joint enterprise, joint arrangement, or profit-sharing plan with a
fund without first obtaining a Commission order, except in certain
designated circumstances); see also Interpretive Release, supra note
1, Section II.B (discussing section 17(d) and rule 17d-1 and
explaining the view of the staff that actions taken by fund
directors within the scope of their duties for the fund generally
would not be joint transactions under section 17(d) and rule 17d-1).
\107\ 17 CFR 270.17d-1(d)(7). Reliance on rule 17d-1(d)(7)
currently is conditioned on a fund's board, and a majority of its
independent directors, annually determining that the joint policy is
in the best interests of the fund and that the proportion of the
policy's premium allocated to the fund is fair and reasonable.
---------------------------------------------------------------------------
Joint D&O/E&O policies historically have excluded claims in which
the parties under the policy sue each other.\108\ A policy that insures
both a fund's investment adviser and its independent directors
therefore may not cover the independent directors' expenses of
litigation with the fund's adviser. Without this coverage, independent
directors face substantial personal legal expenses in the event of a
lawsuit.\109\
---------------------------------------------------------------------------
\108\ See ICA Advisory Group Report, supra 28, at 26. The
general purpose of these standard ``insured versus insured''
exclusions is to prevent collusion among insureds.
\109\ See Paul H. Dykstra and Paulita Pike-Bokhari, The Yacktman
Battle: Manager Bites the Watchdogs, Investment Law., Nov./Dec.
1998, at 1, 9-10 (discussing the effect of an ``insured versus
insured'' exclusion of insurance coverage on independent directors
of the Yacktman Fund).
---------------------------------------------------------------------------
The exclusion of coverage under joint policies creates a potential
threat to directors' personal assets, which can hamper directors'
willingness to question management and weaken their resolve to protect
fund shareholders in the event of a conflict with the adviser. Because
we are concerned about the effect that these exclusions may have on the
ability of independent directors to carry out their statutory
responsibilities, we propose to amend rule 17d-1(d)(7) to make the rule
available only for joint liability insurance policies that do not
exclude coverage for litigation between the independent directors and
the fund's adviser.\110\ These proposals are intended to allow
independent directors to engage in the good faith performance of their
statutory responsibilities without concern for their personal financial
security.\111\
---------------------------------------------------------------------------
\110\ Proposed rule 17d-1(d)(7)(iii). The proposed amendments
would prohibit exclusions for bonafide (i.e., non-collusive) claims
made against any independent director by another person insured
under the joint insurance policy. The proposed amendments also would
prohibit exclusion of coverage for the fund if it is a co-defendant
with an independent director in a claim brought by a co-insured. We
believe that the ability of fund directors to perform their duties
may be further impaired if an adviser's lawsuit poses a threat to
fund assets as well as to director's personal assets.
\111\ Earlier this year, Chairman Levitt expressed concern about
standard ``insured versus insured'' exclusions. See Arthur Levitt,
Keeping Faith with the Shareholder Interest: Strengthening the role
of Independent Directors of Mutual Funds (remarks at the Mutual
Funds and Investment Management Conference, Palm Springs, CA, Mar.
22, 1999), available at http://www.sec.gov/news/speeches/
spch259.htm>. In response, the ICI Mutual Insurance Company (``ICI
Mutual''), which insures funds representing approximately 70 percent
of all mutual fund assets, recently announced that it has revised
its D&O/E&O policies to clarify that these types of claims are
covered under its standard insurance policy. See Aaron Lucchetti,
Direct and Protect, Wall St. J., April 2, 1999, at C23. ICI Mutual
now makes available a standard policy endorsement that permits
independent directors to recover defense costs, settlements, and
judgments in ``insured versus insured'' claims otherwise covered
under the policy. This change by ICI Mutual is a significant step
toward ensuring the ability of independent directors to vigorously
fulfill their duties under the Act without concerns of personal
liability. We believe, however, that all independent directors who
serve on funds that obtain joint liability insurance policies should
have the benefit of protections similar to those provided by ICI
Mutual.
---------------------------------------------------------------------------
We request comment on the proposed amendments to rule 17d-1(d)(7)
concerning the purchase of joint D&O/E&O policies. The ICI Advisory
Group Report recommended more broadly that fund boards should consider
obtaining D&O/E&O insurance policies and/or indemnification from the
fund ``that is adequate to ensure the independence and effectiveness of
independent directors.'' \112\ The proposed amendments do not require
that funds obtain insurance coverage or indemnification for independent
directors, so that funds will have the latitude to determine which
arrangements are appropriate for their circumstances. We request
comment whether we should further amend rule 17d-1(d)(7) to require
that joint insurance polices purchased under the rule be in an amount
adequate to ensure that independent directors can perform their duties
in an independent and effective manner, and what that amount might be.
---------------------------------------------------------------------------
ICI Advisory Group Report, supra note 28, at 26. the Report also
noted that independent directors may need to be covered by insurance
after their service on the board has ended for claims involving
their service as directors. Id. at 26-27.
---------------------------------------------------------------------------
C. Exemption From Ratification of Independent Public Accountant
Requirement for Funds With Independent Audit Committees
The Investment Company Act requires that a fund's independent
directors select the fund's independent public accountant.\113\ The Act
further requires that the selection of the fund's independent public
accountant be submitted to shareholders for ratification or rejection
at their next annual meeting.\114\
---------------------------------------------------------------------------
\113\ Section 32(a)(1).
\114\ Section 32(a)(2) [15 U.S.C. 80a-31(a)(2)].
---------------------------------------------------------------------------
We have observed that shareholders rarely contest votes over the
ratification of the selection of a fund's independent accountant. Many
believe shareholder ratification has become perfunctory. This may have
occurred because of the growth of funds,\115\ their organization into
large complexes, the increased complexity of accounting issues, or the
consolidation of accounting firms, which have made it impracticable for
shareholders to evaluate the qualifications and independence of fund
auditors. We are proposing, therefore, to exempt funds from the
shareholder ratification requirement if the auditor is subject to the
oversight and direction of an audit committee consisting entirely of
independent directors.
---------------------------------------------------------------------------
\115\ See supra note 3 and accompanying test.
---------------------------------------------------------------------------
Today, in many corporations and fund complexes, audit committees
play an important and growing role in assuring the integrity of
financial statements.\116\ The current listing
[[Page 59837]]
requirements of the primary U.S. securities exchanges require publicly
traded companies to have audit committees,\117\ and many commentators
have recognized the value of independent audit committees and the
significance of their function in a corporate governance
structure.\118\ Recently, the Blue Ribbon Committee on Improving the
Effectiveness of Corporate Audit Committees emphasized the important
role of audit committees and recommended enhanced responsibilities,
membership standards, and methods of operation designed to strengthen
their oversight function.\119\ The ICI Advisory Group Report,
furthermore, recommended that fund boards establish audit committees
comprised entirely of independent directors.\120\
---------------------------------------------------------------------------
\116\ See generally A.B.A., Section of Business Law, Corporate
Director's Guidebook 27-32 (2d ed. 1994) [``1994 Corporate
Director's Guidebook'']; See also Investment Company Institute,
Understanding the Role of Mutual Fund Directors 7 (1998) (noting
that although not required by law, it is common practice for mutual
funds to have an audit committee oversee the financial reporting and
internal controls of the fund and stating that the results of a 1998
survey conducted by Management Practice Inc. indicated that 100
percent of fund boards surveyed had an audit committee); Fund
Director's Guidebook, supra note 62, at 26 (stating that the audit
committees of many funds are comprised of all of the fund's
independent directors).
\117\ See e.g., New York Stock Exchange Listed Company Manual
para. 303.00.
\118\ See, e.g., Roundtable Transcript of Feb. 23, 1999 at 236
(statement of Manuel H. Johnson) (noting that an audit committee
comprised entirely of independent directors serves as a check and
balance); 1994 Corporate Director's Guidebook, supra note 116, 27
(``The Audit Committee should be composed solely of independent
directors.''); Fund Director's Guidebook, supra note 62, at 25-26
(noting that the boards of many public companies, including funds,
have established audit committees at the urging of many governmental
and non-governmental institutions that have determined that audit
committees can play a meaningful role in ensuring corporate
accountability), The Role and Composition of the Board of Directors
of the Large Publicly Owned Corporation: Statement of the Business
Roundtable, 33 Bus. Law. 2083, 2108, 2109 (1978) (``[W]e believe it
highly desirable * * * that the board be served by an Audit
Committee.'' THe audit committee should be ``composed entirely of
non management directors.'') Report of the National Commission on
Fraudulent Financial Reporting 12 (Oct. 1987) [``Treadway Report'']
(``The audit committee on the board of directors plays a role
critical to the integrity of the company's financial reporting. [We]
recommend[] that all public companies be required to have audit
committees composed entirely of independent directors.''); Advisory
Panel on Auditor Independence, Strengthening the Professionalism of
the Independent Auditor 14 (Sep. 13, 1994) (Special Report to the
Oversight Board of the SEC Practice Section, AICPA [``Kirk Panel
Report''] (noting that it is important that companies have audit
committees of independent directors).
\119\ Blue Ribbon Committee Report, supra note 99. With respect
to independence of audit committee members, the Blue Ribbon
Committee Report states:
[I]t is widely recognized that each member of the audit
committee should be an independent director. Several recent studies
have produced a correlation between audit committee independence and
two desirable outcomes: a higher degree of active oversight and a
lower incident of financial statement fraud. In addition, common
sense dictates that a director without any financial, family, or
other material personal ties to management is more likely to be able
to evaluate objectively the propriety of management's accounting
internal control and reporting practices.
Id. at 22.
\120\ ICI Advisory Group Report, supra note 28, at 22-23.
---------------------------------------------------------------------------
We believe that the ongoing oversight provided by an independent
audit committee can provide greater protection to shareholders than the
current requirement for shareholder ratification of a fund's
independent auditors. We therefore are proposing a rule that would
exempt a fund from the Act's requirement that shareholders ratify or
reject the selection of the fund's independent public accountant if the
fund has an audit committee comprised wholly of independent
directors.\121\ In order for a fund to rely on the proposed exemption,
(i) the audit committee must be responsible for overseeing the fund's
accounting and auditing processes,\122\ (ii) the fund's board of
directors must adopt an audit committee charter setting forth the
committee's structure, duties, powers, and methods of operation,\123\
and (iii) the fund must maintain a copy of the charter.\124\
---------------------------------------------------------------------------
\121\ See proposed rule 32a-4(b). A closed-end fund listed on a
stock exchange also is subject to the exchange's listing
requirements regarding audit committees. See, e.g., Supra note 117
and accompanying text.
\122\ Proposed rule 32a-4(a).
\123\ Proposed rule 32a-4(c).
\124\ Proposed rule 32a-4(d). Under the current requirements of
rule 31a-1(b)(4) [17 CFR 270.31a-1(b)(4)], funds also would be
required to maintain minute books of the audit committee's meetings.
---------------------------------------------------------------------------
We request comment regarding the conditions of the proposed rule.
Should the exemption require that the charter set forth certain
specific responsibilities and methods of operation? Should funds
relying on the exemption be required to provide a copy of their audit
committee charter as an exhibit to their registration statement, and
should the board be required to review the charter on an annual basis?
Should the exemption require fund audit committees to obtain an annual
representation from the fund's independent public accountant certifying
its independence, as the ICI Advisory Group suggested? \125\ Should the
exemption include other conditions that are similar to the
recommendations of the ICI Advisory Group and Blue Ribbon Committee on
Improving the Effectiveness of Corporate Audit Committees?
---------------------------------------------------------------------------
\125\ See ICI Advisory Group Report, supra note 28, at 22-23.
Cf. Independence Standards Board Standard No. 1: Independence
Discussions with Audit Committees (Jan. 1999) (requiring, for all
funds with fiscal years ending after July 19, 1999, that a fund's
auditor provide an annual representation of the auditor's
independence).
---------------------------------------------------------------------------
The proposed rule assumes that the appropriate form for the
instrument governing an audit committee is a charter. Should the rule
explicitly recognize that the audit committee provisions could be
included in a document other than the charter, such as the fund's by-
laws, articles of incorporation, or declaration of trust?
D. Qualification as an Independent Director
In addition to the amendments to enhance the independence of fund
boards, we are proposing amendments to prevent qualified individuals
from being unnecessarily disqualified from serving as independent
directors. The Investment Company Act sets standards for who may be
considered an independent director.\126\ While these standards are
meant to exclude individuals with affiliations or business interests
that can impair their independence, there are circumstances in which
the standards may cause certain individuals to be unnecessarily
disqualified from serving as an independent director. For this reason,
Congress directed the Commission to apply the standards ``in a flexible
manner'' and adopt appropriate exemptions.\127\ Today we are proposing
(i) to amend the rule that permits directors to be considered
independent directors even if they are affiliated with a broker-dealer,
and (ii) a new rule that would prevent directors from being
disqualified as independent directors solely because they own shares of
index funds that hold limited interests in their fund's adviser or
principal underwriter.
---------------------------------------------------------------------------
\126\ For example, the Act provides that no person can be an
independent director to a fund if he is affiliated with the fund
itself, or with the fund's investment adviser or principal
underwriter. Section 2(a)(19)(A)(i), (A)(iii), (B)(i) [15 U.S.C.
80a-2(a)(19)(A)(i), (A)(iii), (B)(i)]. See generally infra note 170.
\127\ See H.R. Rep. No. 1382, 91st Cong., 2d Sess. 15 (1970).
---------------------------------------------------------------------------
1. Affiliation With a Broker-Dealer
Section 2(a)(19) of the Act provides that no person can be an
independent director if he is, or is affiliated with, a registered
broker-dealer.\128\ This provision is designed to prevent independent
directors from being influenced by a business relationship with broker-
dealers.\129\ Rule 2a19-1 under the Act provides relief from this
provision under certain conditions, but only if no more than a minority
of a
[[Page 59838]]
fund's independent directors are broker-dealers or affiliated with
broker-dealers.\130\ When we proposed this condition in 1984, we
explained that allowing all of the fund's independent directors to be
affiliated with broker-dealers would be inconsistent with Congress's
intent to separate independent directors from the brokerage
industry.\131\
---------------------------------------------------------------------------
\128\ Section 2(a)(19)(A)(v), (B)(v) [15 U.S.C. 80a-
2(a)(19)(A)(v), (b) (v)].
\129\ See The First Australia Fund, Inc., SEC No-Action Letter,
at n.8 and accompanying text (Oct. 8, 1987) (``The broad scope of
section 2(a)(19) with respect to brokers and dealers appears to have
been prompted by the many subtle relationships that exist between
persons who are active in the securities markets.'') (citing Public
Policy Report, supra note 10, at 162-88). Congress also may have
adopted this broad prohibition reaction to the nature of fund
brokerage arrangements when fixed commission rates were prevalent.
See Certain Persons Not Deemed Interested Persons; Definition of
Regular Broker or Dealer, Investment Company Act Release No. 13920
(May 2, 1984) [49 FR 19519 (May 8, 1984)] at n.1 [``Rule 2a19-1
Proposing Release''].
\130\ Rule 2a19-1(a)(3) [17 CFR 270.2a19-1(a)(3]. Rule 2a19-1
also requires that the broker-dealer not execute any portfolio
transactions for, engage in any principal transactions with, or
distribute shares for, the fund's ``complex,'' and that the board
determine that the fund and its shareholders will not be adversely
affected if the broker-dealer does not perform those functions for
the fund. Rule 2a19-1(a)(1), (2) [17 CFR 270.2a19-1(a)(1), (2)]. The
rule defines ``complex'' to the fund on whose board the director
serves, its investment adviser and principal underwriter, and other
funds having the same adviser or principal underwriter. Rule 2a19-
1(b) [17 CFR 270.2a19-1(b).
\131\ See Rule 2a19-1 Proposing, supra note 129, at n.36 and
accompanying text.
---------------------------------------------------------------------------
In recent years, some directors have been unable to qualify as
independent directors due to the condition that no more than a minority
of a fund's independent directors may be affiliated with a broker-
dealer. This condition has been especially troublesome for funds with
small boards of directors. For example, if a three-member board has
only two independent directors, neither director can rely on rule 2a19-
1 because it would result in more than a minority of the independent
directors relying on the rule. In these types of circumstances, the
Commission has granted exemptions from this condition of the rule.\132\
---------------------------------------------------------------------------
\132\ See Bergstrom, Capital Corporation, Investment Company Act
Release Nos. 23629 (Dec. 31, 1998) [64 FR 1035 (Jan. 7, 1999)]
(notice) and 23666 (Jan. 26, 1999) [68 SEC Docket 3501 (Feb. 23
1999)] (order); Counsellors Tandem Securities Fund, Inc. and
Warburg, Pincus Counsellors, Inc., Investment Company Act Release
Nos. 15636 (Mar. 24, 1987) [52 FR 10278 (Mar. 31, 1987)] (notice)
and 15697 and 15697 (Apr. 22, 1987) [38 SEC Docket 318 (May 5,
1987)] (order).
---------------------------------------------------------------------------
We are proposing to amend rule 2a19-1 to provide that no more than
one-half of a fund's independent directors may be broker-dealers or
their affiliates.\133\ This condition should make the rule more
flexible for funds with small boards of directors, while continuing to
ensure that not all of a fund's independent directors are broker-
dealers or their affiliates.\134\ We seek comment on whether rule 2a19-
1 should be expanded further.
---------------------------------------------------------------------------
\133\ Proposed amendment to rule 2a19-1(a)(3).
\134\ We also are proposing to amend the title of rule 2a19-1 to
refer specifically to broker-dealers, the subject of the rule.
---------------------------------------------------------------------------
2. Ownership of Index Fund Securities
Section 2(a)(19) disqualifies an individual from being considered
an independent director if he knowingly has any direct or indirect
beneficial interest in a security issued by the fund's investment
adviser or principal underwriter, or by a controlling person of the
adviser or underwriter.\135\ A fund director, for example, who owns
securities issued by the fund's adviser (or its parent company) could
not be an independent director. This provision was designed to ensure
that an independent director does not have a financial interest in the
organizations that are closely associated with the fund or that would
benefit from payments that the independent director is charged with
scrutinizing.\136\
---------------------------------------------------------------------------
\135\ Section 2(a)(19)(B)(iii) [15 U.S.C. 80a-2(a)(19)(B)(iii)].
\136\ See H.R. Rep. No. 1382, 91st Cong., 2d Sess. 13-14 (1970)
(expressing policy concerns about the use of ``affiliated person''
in the Act because, among other things, it permitted a director to
be classified as ``unaffiliated'' even though he had substantial
business relationships with the fund, its adviser, or its
underwriter); Public Policy Report, supra note 10, at 332-34 (same);
see also section 15(c) of the Act (requiring independent directors
to scrutinize and approve the fund's contracts with investment
advisers and principal underwriters).
---------------------------------------------------------------------------
If a director owns securities of an index fund \137\ that seeks to
replicate a securities market index that includes securities of the
fund's adviser (or principal underwriter or a controlling person of the
adviser or principal underwriter), an issue could arise whether the
director knowingly has an indirect beneficial interest in the
securities of the adviser (or principal underwriter or controlling
person).\138\ We believe that this attenuated interest in the adviser's
or underwriter's securities is not the type of interest Congress
intended to prohibit independent directors from owning when it adopted
section 2(a)(19). An index fund's investment decision-making process is
dictated by the goal of mirroring the performance of a market index,
and thus is largely mechanical.\139\ Because index fund portfolios
typically are spread among a large number of issuers, ownership of
their shares is unlikely to have a material effect on the independent
judgment of a fund director.
---------------------------------------------------------------------------
\137\ An index fund is a type of fund that selects the
securities in its portfolio in an effort to replicate the investment
performance of the securities in a market index. Nearly 20 percent
of the index funds registered with the Commission track the
performance of the Standard & Poor's 500 Composite Stock Price
Index. For a discussion of other types of indexes, see
John Waggoner, Index Funds Race Into New Venues; Investors Can Track
Europe or Racing Firms, USA Today, Nov. 27, 1998, at 3B.
\138\ Cf. The Massachusetts Company, SEC No-Action Letter (Jan.
29, 1972) (fund director who serves as a trustee of an irrevocable
trust that holds shares of a controlling person of the fund's
adviser and underwriter would be an interested person of the fund
under section 2(a)(19)(B)(iii)).
\139\ Cf., e.g., The Victory Stock Index Fund, SEC No-Action
Letter (Feb. 7, 1995) (staff would not recommend enforcement action
under section 12(d)(3) or rule 12d3-1 when an index fund purchased
securities of an affiliated person of the fund's adviser or
principal underwriter, because, among other things, the ``non-
volitional nature of the index fund's purchases'' made it unlikely
that the fund's portfolio securities would be selected in the
interest of the fund's adviser or principal underwriter, rather than
the fund's shareholders).
---------------------------------------------------------------------------
In order to resolve concerns that may have arisen about the status
of independent directors who own index funds, we are proposing a new
rule that would conditionally exempt an individual from being
disqualified as an independent director merely because he owns shares
of an index fund that invests in the adviser or underwriter of the
fund, or their controlling persons.\140\ The exemption would be
available if the value of securities issued by the adviser or
underwriter (or controlling person) does not exceed five percent of the
value of any index tracked by the index fund.\141\ The purpose of this
condition is to assure that an independent director's indirect interest
in the adviser's securities will not be substantial enough to impair
his independence and create a conflict of interest.
---------------------------------------------------------------------------
\140\ The proposed rule would not address an independent
director's ownership of securities of an actively managed fund. The
holdings of this type of fund can vary from day to day without the
knowledge of the fund's shareholders, and periodic disclosure of
fund holdings may be out of date by the time an investor receives
them. We therefore believe it is clear that an independent director
who owns shares of an actively managed fund ordinarily would not
``knowingly'' have an indirect beneficial interest in the issuers of
securities the fund holds.
\141\ Proposed rule 2a19-3.
---------------------------------------------------------------------------
The proposed rule would define an ``index fund'' as a fund with an
investment objective to replicate the performance of a securities index
or indices.\142\ We request comment on the proposed definition of index
fund. Does it encompass the types of funds for which relief is
appropriate? Should other types of investment vehicles be included in
the proposed rule? We also request comment on the proposed limit on the
percentage of the value of securities of the adviser or principal
underwriter (or their controlling persons) represented in any index
tracked by the fund. Should the rule allow an independent director to
own index fund shares when the value of the securities issued by the
adviser or underwriter (or their controlling persons) in the index
constitutes more than five percent of the value of any index tracked by
the fund? Should the limit be less than five percent?
---------------------------------------------------------------------------
\142\ Id.
---------------------------------------------------------------------------
[[Page 59839]]
E. Disclosure of Information About Fund Directors
Participants at the Roundtable agreed that independent directors
can vigilantly represent the interests of mutual fund shareholders only
when they are truly independent of those who operate and manage the
fund.\143\ We agree with the Roundtable participants and believe that
the effectiveness of fund boards of directors is enhanced by a high
degree of independence of each independent director.
---------------------------------------------------------------------------
\143\ See, e.g., statement of Bruce K. MacLaury, Roundtable
Transcript of Feb. 23, 1999, at 42 (``It should be apparent that
boards work best when the possibilities for conflict of interest are
minimized so that truly independent directors can exercise their
best judgment on behalf of the interest of the shareholders.'');
statement of Dawn-Marie Driscoll, Roundtable Transcript of Feb. 24,
1999, at 63 (``[I]ndependence is one of the most important
characteristics of an independent director. The more ways that you
can ensure independence the better the process will be.'');
statement of Thomas R. Smith, Jr., Roundtable Transcript of Feb. 24,
1999, at 253 (``There is something beyond what is in the statute
that you consider when you pick new directors. You've got to look at
material business relationships, and, quite frequently, in the
selection process you will rule somebody out, although technically
they are independent, because of relationships.'').
---------------------------------------------------------------------------
We believe that shareholders have a significant interest in knowing
who the independent directors are, whether the independent directors'
interests are aligned with shareholders' interests, whether the
independent directors have any conflicts of interest, and how the
directors govern the fund. This information helps a mutual fund
shareholder to evaluate whether the independent directors can, in fact,
act as an independent, vigorous, and effective force in overseeing fund
operations.
The Commission has long recognized the importance of providing
mutual fund shareholders with relevant information about fund directors
and has required funds to provide shareholders with certain information
about fund directors. Currently, information about directors is
available in fund registration statements and proxy statements for the
election of directors. Generally, funds are required to provide basic
information about directors in the statement of additional information
(``SAI'') and proxy statements, including name and age; positions with
the fund; principal occupations during the past five years; and
compensation from the fund and fund complex.\144\ Moreover, funds are
required to disclose in proxy statements for the election of directors
a director's positions with, interests in, and transactions with, the
fund and certain persons related to the fund.\145\
---------------------------------------------------------------------------
\144\ Items 13(b) and (d) of Form N-1A; Items 18.1 and 18.4 of
Form N-2; Items 20(a) and (c) of Form N-3; Items 401(a) and (e) of
Regulation S-K, through Item 22(b)(4) of Schedule 14A.
Funds also are required to disclose for each director the
positions held with affiliated persons or principal underwriters of
the fund. Item 13(c) of Form N-1A; Item 18.2 of Form N-2; Item 20(b)
of Form N-3. Funds also must provide the percentage of the fund's
equity securities owned as a group by all officers, directors, and
advisory board members. Item 14(c) of Form N-1A and Item 19.3 of
Form N-2. See also Items 23(f) and 25 of Form N-1A; Items 24.2.i and
29 of Form N-2; Items 21(a)(ii) and (f)(ii), 28(b)(10), and 32 of
Form N-3.
\145\ See Item 22(b)(1) of Schedule 14A (requiring disclosure of
director's positions with the investment adviser and a director's
securities holdings or material interest in the investment adviser
and any person controlling, controlled by, or under common control
with the investment adviser); Item 401 of Regulation S-K, through
Item 22(b)(4) of Schedule 14A (requiring disclosure of director's
positions with the fund); Item 22(b)(2) of Schedule 14A (requiring
disclosure of any material interests of a director in the fund's
principal underwriter or administrator); Item 22(b)(3) of Schedule
14A (requiring disclosure of any material interests of a director in
any material transactions with the fund, the investment adviser, the
principal underwriter, or the administrator, and any person
controlling, controlled by, or under common control with the
investment adviser, principal underwriter, or administrator); Item
404(a) of Regulation S-K, through Item 22(b)(4) of Schedule 14A
(requiring disclosure of a director's material interests in
transactions with the fund involving amounts over $60,000). Funds
also must disclose in proxy statements a director's holdings in the
fund. Item 403(b) of Regulation S-K, through Item 6(d) of Schedule
14A. See also Items 5, 7(e), (f), and (g), and 22(b)(5) and (b)(6)
of Schedule 14A (requiring other information about directors).
---------------------------------------------------------------------------
For some time, however, we have been concerned that mutual fund
investors do not in all cases have access to significant information
about fund directors when they need it. When we adopted our recent
comprehensive revisions to the mutual fund prospectus, we noted that
mandating more information about fund directors than is available under
our existing rules may be appropriate in light of independent
directors' role as ``watchdogs'' for fund shareholders.\146\ Critics
have charged that shareholders do not know the very people who are
entrusted with safeguarding their interests.\147\ Some have complained
that fund shareholders do not know whether the interests of independent
directors are aligned with shareholders or with fund management.\148\
---------------------------------------------------------------------------
\146\ Registration Form Used by Open-End Management Investment
Companies, Investment Company Act Release No. 23064 (Mar. 13, 1998)
[63 FR 13916, 13931 (Mar. 23, 1998)] (``1998 Form N-1A Release'').
\147\ John Markese, president of the American Association of
Individual Investors, discussed his view that there is a
``disconnect'' between shareholders and the independent directors at
our recent Roundtable. Roundtable Transcript of Feb. 23, 1999, at
48-49. See also Paul J. Lim, Despite Plan to Fortify Independent
Directors, Shareholders Must be Their Own Watchdogs, L.A. Times, Mar
. 28, 1999, at C3; Russ Wiles, ``Fund Directors Losing Clout,'' The
Arizona Republic D1 (Mar. 28, 1999).
\148\ See, e.g., Edward Wyatt, Empty Suits In the Board Room;
Under Fire, Mutual Fund Directors Seem Increasingly Hamstrung, N.Y.
Times, June 7, 1998, at C1; Steven D. Kaye, Whose board is it?, U.S.
News & World Rep., Feb. 2, 1998, at 64; Jason Zweig, How Funds Can
Do Better, MONEY, Feb. 1998, at 42.
---------------------------------------------------------------------------
We have reevaluated our disclosure requirements in light of these
criticisms and have concluded that, while our fundamental approach is
sound, there are several gaps in the information that shareholders
currently receive about directors. Historically, the primary vehicle
for providing information about mutual fund directors was the proxy
statement prepared in connection with shareholder meetings. In recent
years, the proxy statement has become an ineffective vehicle for
communicating information to fund shareholders on a regular basis
because funds generally are no longer required to hold annual
meetings.\149\
---------------------------------------------------------------------------
\149\ See John Nuveen & Co., Inc. SEC No-Action Letter (Nov. 18,
1986) (``Nuveen Letter'') (annual meetings to elect directors not
required by Investment Company Act). The Nuveen Letter took the
position that annual meeting requirements generally are a question
of state law.
For historical and other reasons, most funds are organized under
the laws of Massachusetts or Maryland. The organizational and
operational requirements of Massachusetts business trusts are not
specified by statute, and a fund's essential structure is contained
in the trust agreement, which generally includes a provision
eliminating the need for annual shareholder meetings to elect
directors. See generally Jones, Moret and Storey, The Massachusetts
Business Trust and Registered Investment Companies, 13 DEL. J. CORP.
L. 421 (1988). Under Maryland corporate law, fund charters or by-
laws are not required to provide that annual meetings be held in any
year in which election of directors is not required by the
Investment Company Act. MD. CODE ANN., CORPS. & ASS'NS Code Sec. 2-
501(b) (1999). In addition, Delaware, Minnesota, and California also
have business trust or special corporate law structures that have
the effect of not requiring shareholder meetings other than those
required by the Investment Company Act. DEL. CODE ANN. tit. 12,
Sec. 3806 (1999); Minn. Stat. Sec. 302A.431 (1999); CAL. CORP. CODE
Sec. 600(b) (West 1999).
Closed-end funds registered on national securities exchanges,
however, are required to hold an annual meeting to elect directors
under the rules of the exchanges. See, e.g., American Stock Exchange
Listing Standards, Policies, and Requirements Sec. 704; New York
Stock Exchange Listed Company Manual Sec. 302.00. Closed-end fund
shareholders therefore generally would receive annual proxy
statements.
---------------------------------------------------------------------------
In addition, although mutual funds are required to disclose certain
information that bears on a director's potential conflicts, the SAI
requirements and proxy rules do not require disclosure of other
circumstances that could raise similar conflict of interest concerns,
such as those involving a director's immediate family members. The
current rules also do not require disclosure of information that may
show
[[Page 59840]]
that a director's interests are aligned with shareholder interests,
including a director's securities holdings in funds in the fund
complex.
Therefore, we are proposing amendments to our disclosure rules to
close these gaps. Our proposals would require mutual funds to:
Provide basic information about directors to shareholders
annually so that shareholders will know the identity and experience of
their representatives;
Disclose to shareholders fund shares owned by directors to
help shareholders evaluate whether directors' interests are aligned
with their own;
Disclose to shareholders information about directors that
may raise conflict of interest concerns; and
Provide information to shareholders on the board's role in
governing the fund.
These proposals would supplement the information that currently is
available in the mutual fund SAI and in proxy statements. For ease of
reference, we have attached as Appendix A a table cross-referencing the
proposed disclosure requirements in the proxy rules and the SAI of Form
N-1A with existing requirements.\150\
---------------------------------------------------------------------------
\150\ Form N-1A is the registration form used by open-end
management investment companies to register under the Investment
Company Act and to offer their shares under the Securities Act. We
also are proposing parallel changes to Forms N-2 (closed-end funds)
and N-3 (managed separate accounts offering variable annuity
contracts).
---------------------------------------------------------------------------
1. Basic Information About Directors
(a) Location of Information. The Commission is proposing to require
mutual funds to disclose basic information about directors in an easy-
to-read tabular format.\151\ We are proposing to combine in one table
certain information currently required for directors in the SAI and
proxy statements.\152\ This new table would be required in three
places: the fund's annual report to shareholders, SAI, and proxy
statement for the election of directors. This would ensure that the
information is available to prospective investors upon request. It also
would ensure that mutual fund shareholders receive basic information
about the identity and experience of their directors both annually and
whenever they are asked to vote to elect directors.
---------------------------------------------------------------------------
\151\ Proposed Item 22(b)(1) of Schedule 14A; proposed Items
13(a)(1) and 22(b)(5) of Form N-1A; proposed Item 18.1 and
Instruction 4.e. to Item 23 of Form N-2; proposed Item 20(a) and
Instruction 4(v) to Item 27 of Form N-3. For convenience in
discussing the proposed requirements, we are not specifically
referring to nominees for election as directors. The proposed
requirements, however, would be applicable to nominees in proxy
solicitations for the election of directors. The disclosure
requirements in Item 22 of Schedule 14A also are applicable to
information statements prepared in accordance with Regulation 14C
and Schedule 14C [17 CFR 240.14c-101].
\152\ See Item 13(b) of Form N-1A; Item 18.1 to Form N-2; Item
20(a) of Form N-3; Items 401(a) and (e) of Regulation S-K, through
Item 22(b)(4) of Schedule 14A. As currently required, funds would
continue to include in the table information about officers and
advisory board members of the fund, as well as directors. See Items
13(b) of Form N-1A; Item 18.1 of Form N-2; Item 20(a) of Form N-3;
Items 401(b) and (e) of Regulation S-K, through Item 22(b)(4) of
Schedule 14A.
---------------------------------------------------------------------------
We are not proposing to require that basic information about
directors be included in the prospectus. We considered, and rejected,
this idea during our recent top-to-bottom overhaul of the mutual fund
prospectus.\153\ At the time of our prospectus overhaul, however, we
directed the Division of Investment Management to consider whether
information about directors should be included in fund annual reports,
and we have now concluded that it should.\154\
---------------------------------------------------------------------------
\153\See 1998 Form N-1A Release, supra note 146, at 13930-13931.
\154\ See Id.
---------------------------------------------------------------------------
Our proposals would, for the first time, require that basic
information about mutual fund directors be included in the annual
report to shareholders.\155\ Because the proxy statement is no longer
received by most fund shareholders annually, we are proposing to
include basic information about directors in the annual report to
ensure that shareholders will receive it regularly. We also are
proposing to require funds to include in the annual report a statement
that the SAI includes additional information about fund directors and
is available without charge upon request.\156\ The statement must
include a toll-free (or collect) telephone number for shareholders to
call for additional information.
---------------------------------------------------------------------------
\155\ Proposed Item 22(b)(5) of Form N-1A; proposed Instruction
4.e. to Item 23 of Form N-2; proposed Instruction 4(v) to Item 27 of
Form N-3.
\156\ Proposed Item 22(b)(6) of Form N-1A; proposed Instruction
4.e. to Item 23 of Form N-2; proposed Instruction 4(vi) to Item 27
of Form N-3.
---------------------------------------------------------------------------
We request comment on the appropriate location for basic
information about mutual fund directors. Please address whether basic
information should be included in the prospectus, SAI, annual report,
and/or proxy statement. Should we, for example, reconsider our decision
not to include any of the basic information about directors in the
prospectus?
(b) Required Information. The proposed table would require for each
director: (1) Name, address, and age; (2) current positions held with
the fund; (3) term of office and length of time served; (4) principal
occupations during the past five years; (5) number of portfolios
overseen within the fund complex; and (6) other directorships held
outside of the fund complex.\157\ The table also would require for each
``interested'' director, as defined in section 2(a)(19) of the Act, a
description of the relationship, events, or transactions by reason of
which the director is an interested person.\158\
---------------------------------------------------------------------------
\157\ As is currently required, the fund also would be required
to explain any family relationship between the persons listed in the
table. See current Item 401(d) of Regulation S-K, through Item
22(b)(4) of Schedule 14A; Item 13(b) of Form N-1A; Item 18.1 of Form
N-2; Item 20(a) of Form N-3; proposed Item 22(b)(1) of Schedule 14A;
proposed Item 13(a)(1) of Form N-1A; proposed Item 18.1 of Form N-2;
proposed Item 20(a) of Form N-3.
\158\ Proposed Instruction 4 to Item 22(b)(1) of Schedule 14A;
proposed Instruction 2 to Item 13(a)(1) of Form N-1A; proposed
Instruction 2 to Item 18.1 N-2; proposed Instruction 2 to Item 20(a)
of Form N-3.
---------------------------------------------------------------------------
Currently, mutual funds must disclose the number of other
registered investment companies in the fund complex that a director
oversees.\159\ The Commission now is proposing to require disclosure of
the total number of portfolios, rather than registered investment
companies, that a director oversees.\160\ In today's environment, where
a complex may choose between organizing a single series company with
multiple portfolios or multiple investment companies each with a single
portfolio, we believe that requiring disclosure of the number of
portfolios that a director oversees would provide a more accurate
picture of the director's responsibilities.
---------------------------------------------------------------------------
\159\ See Item 401(e)(2) and Instruction to Item 401(e)(2) of
Regulation S-K, through Item 22(b)(4) of Schedule 14A; Item 13(c)
and Instruction to Item 13(c) of Form N-1A; Item 18.2 and
Instruction to Item 18.2 of Form N-2; Item 20(b) and Instruction to
Item 20(b) of Form N-3.
\160\ Proposed Item 22(b)(1) of Schedule 14A; proposed Item
13(a)(1) of Form N-1A; proposed Item 18.1 of Form N-2; proposed Item
20(a) of Form N-3.
---------------------------------------------------------------------------
The Commission seeks comment on whether the proposed basic
information would provide shareholders with sufficient information
about the directors who are charged with protecting shareholder
interests. If the disclosure would not achieve this purpose, is there
other basic information about directors that should be required? If
proposed disclosure of any item is not necessary or useful to
investors, please explain the reason why. Should the same basic
information be included in the SAI, annual report, and proxy statement?
2. Ownership of Equity Securities in Fund Complex
As discussed above, some have complained that shareholders do not
know whether directors' interests are
[[Page 59841]]
aligned with those of shareholders.\161\ Although a director need not
necessarily hold securities of funds in a fund complex to be an
effective advocate for shareholders, the interests of a director who
holds shares in the complex will tend to be aligned with the interests
of other shareholders.\162\ We are therefore proposing to require
disclosure of the aggregate dollar amount of equity securities of funds
in the fund complex owned beneficially and of record by each
director.\163\
---------------------------------------------------------------------------
\161\See supra note 148 and accompanying text.
\162\ See Peter McKenna, Mutual Funds Are Built to Last With
Embedded Checks, Balances, Investor's Business Daily, May 1, 1998,
at B4 (quoting fund industry consultant Geoffrey H. Bobroff) (``It's
useful to see how many shares are owned by members of the board. * *
* Most investors like board members to share the fund's risk and
possible reward.'').
\163\ Proposed Item 22(b)(4) of Schedule 14A; proposed Item
13(b)(4) of Form N-1A; proposed Item 18.7 of Form N-2; proposed Item
20(f) of Form N-3.
---------------------------------------------------------------------------
We are not proposing to require separate disclosure of a director's
holdings of equity securities in the fund itself. We are concerned that
this information might have limited meaning because of the many reasons
that a director could have for not holding shares of any specific fund,
e.g., that its investment objective did not fill a need in the
director's portfolio.
Funds would provide information on director holdings in an easy-to-
read tabular format including: (1) Name of director; (2) identity of
fund complex; and (3) aggregate dollar amount of equity securities
owned of funds in the complex. The information, as of the most recent
practicable date, would be provided in the fund's SAI and in any proxy
statement relating to the election of directors. This would ensure that
the information is available to prospective investors upon request and
is provided to shareholders whenever they are asked to vote to elect
directors.\164\
---------------------------------------------------------------------------
\164\ As noted earlier, supra note 149, closed-end funds are not
required to update their registration statements annually; however,
shareholders would receive the information annually in proxy
statements for the election of directors.
---------------------------------------------------------------------------
``Fund complex'' is currently defined in the proxy rules as two or
more funds that (1) hold themselves out to investors as related
companies for purposes of investment and investor services; or (2) have
a common investment adviser or an investment adviser that is an
affiliated person of the investment adviser of any of the other
funds.\165\ The Commission is proposing to use this definition to
determine a director's holdings in a fund complex.\166\
---------------------------------------------------------------------------
\165\See Item 22(a)(1)(v) of Schedule 14A.
\166\ See proposed Instruction 1(a) to Item 13 of Form N-1A;
proposed Instruction 1.b. to Item 18 of Form N-2; proposed
Instruction 1.a. to Item 20 of Form N-3. The proposed definition of
``fund complex'' also would apply to the proposed disclosure
requirement for basic information about directors. See supra note
157 and accompanying text (proposing to require disclosure for each
director of the number of portfolios overseen within the fund
complex and other directorships held outside of the fund complex).
---------------------------------------------------------------------------
We request comment on whether information on director holdings of
shares in a fund complex would be useful to shareholders. If so, should
the Commission use the definition of ``fund complex'' that is currently
contained in the proxy rules? Or should the Commission use another
definition, such as ``family of investment companies'' used in Form N-
SAR? \167\ Should disclosure of director holdings be limited to
holdings in the fund itself, the group of funds overseen by a director,
or some other group of funds? The Commission also requests comment on
whether there is other information that bears on the alignment of
interests of shareholders and directors and should be disclosed.
---------------------------------------------------------------------------
\167\ See Item H of Form N-SAR [17 CFR 274.101] (defining
``family of investment companies'' to mean any two or more
investment companies that share the same investment adviser or
principal underwriter and hold themselves out to investors as
related companies for purposes of investment and investor services);
see also Rule 11a-3 under the Act [17 CFR 270.11a-3] (defining
``group of investment companies'' to mean any two or more open-end
investment companies that hold themselves out to investors as
related companies for purposes of investment and investor services
and that either (1) have a common investment adviser or principal
underwriter or (2) the investment adviser or principal underwriter
of one of the companies is an affiliated person of the investment
adviser or principal underwriter of each of the other companies).
---------------------------------------------------------------------------
3. Conflicts of Interest
(a) Statutory Scheme Governing Conflicts of Interest. As described
above, Congress provided that at least 40 percent of the board of
directors of an investment company must be independent and assigned a
special role to the independent directors--to supply a check on
management and act as independent watchdogs for investors.\168\ Under
the Investment Company Act, an independent director is an individual
who is not an ``interested person'' of the fund.\169\
---------------------------------------------------------------------------
\168\ See supra notes 20, 22, and 23 and accompanying text.
\169\ See section 10(a) of the Act.
---------------------------------------------------------------------------
In section 2(a)(19) of the Act, Congress enumerated individuals who
are ``interested persons'' of a fund and who, therefore, are not
considered independent directors. These individuals include: (1) Any
affiliated person of the fund, (2) any member of the immediate family
of any natural person who is an affiliated person of the fund, (3) any
interested person of any investment adviser of or principal underwriter
for the fund, (4) any person or partner or employee of any person who
at any time since the beginning of the last two completed fiscal years
of the fund has acted as legal counsel for the fund, and (5) any broker
or dealer registered under the Exchange Act or any affiliated person of
a broker or dealer.\170\
---------------------------------------------------------------------------
\170\ Sections 2(a)(19)(A)(i)-(v) of the Act [15 U.S.C. 80a-
2(a)(19)(A)(i)-(v)]. Section 2(a)(3) of the Act [15 U.S.C. 80a-
2(a)(3)] defines affiliated person of another person to mean: (1)
any person directly or indirectly owning, controlling, or holding
with power to vote, 5 per centum or more of the outstanding voting
securities of such other person; (B) any person 5 per centum or more
of whose outstanding voting securities are directly or indirectly
owned, controlled, or held with power to vote, by such other person;
(C) any person directly or indirectly controlling, controlled by, or
under common control with, such other person; (D) any officer,
director, partner, copartner, or employee of such other person; (E)
if such other person is an investment company, any investment
adviser thereof or any member of an advisory board thereof; and (F)
if such other person is an unincorporated investment company not
having a board of directors, the depositor thereof.
Section 2(a)(19) of the Act [15 U.S.C. 80a-2(a)(19)] defines
immediately family member to mean any parent, spouse of a parent,
child, spouse of a child, spouse, brother, or sister, and includes
step and adoptive relationships.
Sections 2(a)(19)(B)(i)-(v) of the Act [15 U.S.C. 80a-
2(a)(19)(B)(i)-v] define an interested person of an investment
adviser or principal underwriter of a fund to include: (1) Any
affiliated person of the investment adviser or principal
underwriter; (2) any member of the immediate family of any natural
person who is an affiliated person of the investment adviser or
principal underwriter; (3) any person who knowingly has any direct
or indirect beneficial interest in, or who is designated as trustee,
executor, or guardian of any legal interest in, any security issued
either by the investment adviser or principal underwriter or by a
controlling person of the investment adviser or principal
underwriter; (4) any person or partner or employee of any person who
at any time since the beginning of the last two completed fiscal
years of the fund has acted as legal counsel for the investment
adviser or principal underwriter; and (5) any broker or dealer
registered under the Exchange Act or any affiliated person of a
broker or dealer.
---------------------------------------------------------------------------
Congress also gave the Commission authority to determine by order
that a director is an interested person even though he is not covered
by the categories enumerated in the statute.\171\ The Commission may
determine that a natural person is an interested person of a fund by
reason of having had, at any time since the beginning of the last two
completed fiscal years of the fund, a material business or professional
relationship with the fund, the principal executive officer of the
fund, any other investment company having the same investment adviser
or principal underwriter, or the principal executive officer of the
other investment
[[Page 59842]]
company.\172\ We also may determine that a natural person is an
interested person of an investment adviser or principal underwriter of
a fund (and therefore of the fund itself) by reason of having had, at
any time since the beginning of the last two completed fiscal years of
the fund, a material business or professional relationship with the
investment adviser or principal underwriter or with the principal
executive officer or any controlling person of the investment adviser
or principal underwriter.\173\ For example, in appropriate
circumstances, the Commission may find that a director who was an
employee of a fund's investment adviser within the past two years is an
``interested person'' under section 2(a)(19)(B)(vi) of the Act by
reason of having a material business or professional relationship with
the investment adviser.\174\
---------------------------------------------------------------------------
\171\ See H.R. Rep. No. 1382, 91st Cong., 2d Sess. 14-15 (1970).
\172\ Section 2(a)(19)(A)(vi) of the Act [15 U.S.C. 80a-
2(a)(19)(A)(vi)]. The statute also provides that no person shall be
deemed an interested person of a fund solely by reason of being a
member of its board of directors or advisory board or an owner of
its securities, or his membership in the immediate family of any
person who is a member of the fund's board of directors or advisory
board or an owner of its securities. Id.
\173\ Section 2(a)(19)(B)(vi) of the Act [15 U.S.C. 80a-
2(a)(19)(B)(vi)].
Section 2(a)(9) of the Act [15 U.S.C. 80a-2(a)(9)] defines
control to mean the power to exercise a controlling influence over
the management or policies of a company, unless such power is solely
the result of an official position with such company. Any person who
owns beneficially, either directly or through one or more controlled
companies, more than 25 percent of the voting securities of a
company shall be presumed to control such company. Any person who
does not own more than 25 percent of the voting securities of any
company shall be presumed not to control such company.
\174\ See Interpretive Release, supra note 1.
---------------------------------------------------------------------------
(b) Need for Disclosure Changes. The proxy rules currently require
significant information about conflicts of interest of directors.\175\
The proxy rules require disclosure of positions held with the
investment adviser and any securities holdings or material interests in
the investment adviser and any person controlling, controlled by, or
under common control with the investment adviser.\176\ A mutual fund
also must disclose any material interests of a director in the fund's
principal underwriter or administrator.\177\ In addition, a fund must
disclose any material interests of a director in any material
transactions with the fund, the investment adviser, the principal
underwriter, the administrator, or any person controlling, controlled
by, or under common control with the investment adviser, principal
underwriter, or administrator.\178\
---------------------------------------------------------------------------
\175\ See supra note 145 and accompanying text.
\176\ See Item 22(b)(1) of Schedule 14A.
\177\ See Item 22(b)(2) of Schedule 14A.
\178\ See Item 22(b)(3) of Schedule 14A, and Item 404(a) of
Regulation S-K, through Item 22(b)(4) of Schedule 14A.
---------------------------------------------------------------------------
We are proposing to enhance the disclosure required in the proxy
rules because we believe that there are other situations that could
involve conflicts of interest. We also are proposing to include the
proposed conflicts disclosure about directors in the SAI because mutual
funds no longer prepare proxy statements on a regular basis.\179\
---------------------------------------------------------------------------
\179\ See supra note 149 and accompanying text.
---------------------------------------------------------------------------
We believe disclosure of directors' potential conflicts of interest
would serve three purposes. First, this disclosure would bring to the
attention of shareholders circumstances that may affect the directors'
allegiance to shareholders. With this information, shareholders may
decide for themselves whether an independent director has any potential
conflicts of interest that could affect the director's ability to
protect the interests of shareholders.
Second, disclosure would provide the public, including the press
and other third-party information providers, access to information
about directors' potential conflicts of interest. The resulting public
dissemination may discourage the selection of independent directors who
have relationships or engage in activities that raise questions about
their independence.
Third, the information would assist the Commission in evaluating
whether it should exercise its authority to determine that a director
is ``interested'' under section 2(a)(19)(A)(vi) or (B)(vi) of the Act
even though he is not within one of the categories of ``interested
persons'' specifically enumerated by Congress in other provisions of
section 2(a)(19).\180\ The legislative history of section 2(a)(19)
states that the Commission could issue an order determining that a
director is an interested person if the Commission found that a
director's ``business or professional relationship [with certain
related persons] was material in the sense that it might tend to impair
the independence of such director.'' \181\ In providing the Commission
with this authority, Congress contemplated that the Commission would
look at each situation on a case-by-case basis.\182\ The proposed
disclosure would assist the Commission in determining whether it would
be appropriate to make a further inquiry into a director's
independence.
---------------------------------------------------------------------------
\180\ See supra note 170 and accompanying text.
\181\ See H.R. Rep. No. 1382, 91st Cong., 2d Sess. 14-15 (1970).
Ordinarily, a business or professional relationship would not be
deemed to impair independence where the benefits flow from the
director of an investment company to the other party to the
relationship. Id.
\182\ Id. Over the years, Division of Investment Management
staff analyzed issues arising under sections 2(a)(19)(A)(vi) or
(B)(vi) of the Act on the particular facts of each case to determine
whether a director's relationships might tend to impair the
independence of the director. See, e.g., Travelers Equities Fund
Inc., SEC No-Action Letter (Jan. 11, 1982); Securities Groups, SEC
No-Action Letter (Apr. 20, 1981); Equitable of Iowa Variable Annuity
Account A, SEC No-Action Letter (Jan. 6, 1980); American Medical
Association, SEC No-Action Letter (Dec. 5, 1979); American Medical
Association Tax-Exempt Income Fund, Inc., SEC No-Action Letter (Jun.
18, 1978); Cal-Western Separate Account A, SEC No-Action Letter
(Mar. 8, 1976); Southwestern Investors, Inc., SEC No-Action Letter
(Jun. 13, 1971).
Beginning in 1984, the staff stated that it did not believe that
it was appropriate for the staff to consider no-action requests
under section 2(a)(19)(A)(vi) or (B)(vi) as a matter of policy.
Capital Supervisors Helios Fund, Inc., SEC No-Action Letter (Jun.
13, 1984); see also Daniel Calabria, SEC No-Action Letter (Sept. 12,
1984). See also Interpretive Release, supra note 1.
---------------------------------------------------------------------------
We believe that the proposed disclosure would give shareholders the
tools to help determine how effectively the directors serve their
interests and encourage the selection of directors that are independent
in the spirit intended by Congress. We first discuss our general
approach to the disclosure requirements and then discuss the specific
requirements.
(c) General Approach to Disclosure--(1) Circumstances Raising
Potential Conflicts of Interest. The Commission is proposing to require
disclosure of three types of circumstances that could affect the
allegiance of mutual fund directors to their shareholders: positions,
interests, and transactions and relationships of directors. In
specifying the circumstances where disclosure is required, we have
drawn on the current proxy rules, which require disclosure of
positions, interests, and transactions of directors.\183\
---------------------------------------------------------------------------
\183\ See Items 22(b)(1) (positions with the interests in the
investment adviser), 22(b)(2) (interests in the principal
underwriter or administrator), 22(b)(3) (interests in transactions
with the investment adviser, principal underwriter, or
administrator), and 22(b)(4) (interests in transactions with the
fund) of Schedule 14A.
---------------------------------------------------------------------------
The Commission is proposing to require disclosure of positions held
by a director with the fund and persons related to the fund.\184\ A
director who holds such a position may be influenced to act in the
interest of persons related to the fund rather than the interest of
fund shareholders. We also are proposing to require disclosure of
directors' interests, including securities holdings, in entities
related to the fund.\185\ A director who holds an
[[Page 59843]]
interest in an entity related to the fund may be tempted to place his
financial interest in the entity ahead of shareholders' interests in
the fund. Finally, we are proposing to require disclosure of directors'
transactions and relationships with the fund and persons related to the
fund.\186\ A director who is involved in a transaction or relationship
with the fund or related persons may have financial or other interests
that compete with those of fund shareholders.
---------------------------------------------------------------------------
\184\ Proposed Item 22(b)(3) of Schedule 14A; proposed Item
13(b)(3) of Form N-1A; proposed Item 18.6 of Form N-2; proposed Item
20(e) of Form N-3.
\185\ Proposed Items 22(b)(5) and (6) of Schedule 14A; proposed
Items 13(b)(5) and (6) of Form N-1A; proposed Items 18.8 and 18.9 of
Form N-2; proposed Items 20(g) and (h) of Form N-3.
\186\ Proposed Items 22(b)(7) and (8) of Schedule 14A; proposed
Items 13(b)(7) and (8) of Form N-1A; proposed Items 18.10 and 18.11
of Form N-2; proposed Items 20(i) and (j) of Form N-3.
---------------------------------------------------------------------------
The Commission requests comment on whether disclosure of directors'
positions, interests, and transactions and relationships is
appropriate. Are there other types of circumstances that also raise
conflict of interest concerns and should be disclosed?
(2) Persons Covered by Disclosure Requirements; Directors and
Immediate Family Members. The Commission is proposing to follow the
approach taken in the current proxy rules and require conflicts of
interest disclosure about all directors, both interested and
independent.\187\ The Commission requests comment on whether this
approach is appropriate, or whether there are any proposed requirements
that should apply only to independent directors. If so, which
requirements should apply only to independent directors?
---------------------------------------------------------------------------
\187\ See Items 22(b)(1) (positions and interests); 22(b)(2)
(interests); 22(b)(3) (transactions); and 22(b)(4) (transactions) of
Schedule 14A.
---------------------------------------------------------------------------
The Commission also proposes to extend the disclosure requirements
to the immediate family members of directors because the involvement of
family members with the fund or persons related to the fund could raise
the same conflicts of interest for a director as if the director was
involved directly in the situation. The Commission proposes to define
``immediate family member'' to mean any spouse, parent, child, sibling,
mother- or father-in-law, son- or daughter-in-law, or sister- or
brother-in-law, including step and adoptive relationships.\188\ This
definition is similar to the definition of immediate family member in
the current proxy rules.\189\ We are proposing to add step and adoptive
relationships, based on the definition of ``immediate family member''
in section 2(a)(19) of the Act. Our proposed definition would be
slightly broader than the definition in section 2(a)(19) of the Act,
which does not include mother- or father-in-law or sister- or brother-
in-law relationships. We request comment on whether the proposed
definition is appropriate, or whether it should be expanded or
narrowed.
---------------------------------------------------------------------------
\188\ Proposed Item 22(a)(1)(vi) of Schedule 14A; proposed
Instruction 1(b) to Item 13 of Form N-1A; proposed Instruction 1.b.
to Item 18 of Form N-2; proposed Instruction 1.b. to Item 20 of Form
N-3.
\189\ See Instruction 2 to Item 404(a) of Regulation S-K,
through Item 22(b)(4) of Schedule 14A.
---------------------------------------------------------------------------
Related Persons. The Commission is proposing to require disclosure
about circumstances involving directors, on the one hand, and the fund
and persons related to the fund, on the other. We looked to the Act for
guidance in determining which related persons should be covered by our
disclosure requirements. The Commission's statutory authority to
determine that a director is an ``interested person'' is based on
finding a relationship with the fund; its investment adviser, principal
underwriter, or a person controlling the investment adviser or
principal underwriter; another investment company with the same
investment adviser or principal underwriter; or the principal executive
officer of the fund, its investment adviser or principal underwriter,
or another investment company with the same investment adviser or
principal underwriter.\190\
---------------------------------------------------------------------------
\190\ See sections 2(a)(19)(A)(vi) and (B)(vi) of the Act [15
U.S.C. 80a-2(a)(19)(A)(vi) and (B)(vi)].
---------------------------------------------------------------------------
We are proposing to require disclosure with respect to
circumstances involving these persons and other persons that we have
concluded may pose similar conflicts of interest. The additional
persons include: (1) a fund's administrator or a person directly or
indirectly controlling the administrator; (2) a person directly or
indirectly controlled by or under common control with the fund's
investment adviser, principal underwriter, or administrator; (3) any
other investment company with the same administrator as the fund; (4)
any other investment company with an investment adviser, principal
underwriter, or administrator that directly or indirectly controls, is
controlled by, or is under common control with an investment adviser,
principal underwriter, or administrator of the fund; and (5) any
officer of (i) the fund; (ii) the investment adviser, principal
underwriter, or administrator of the fund; (iii) a person directly or
indirectly controlling, controlled by, or under common control with the
fund's investment adviser, principal underwriter, or administrator;
(iv) an investment company with the same investment adviser, principal
underwriter, or administrator as the fund; or (v) an investment company
with an investment adviser, principal underwriter, or administrator
that directly or indirectly controls, is controlled by, or is under
common control with an investment adviser, principal underwriter, or
administrator of the fund.\191\
---------------------------------------------------------------------------
\191\ Separate accounts offering variable insurance products
that are registered as management companies also would be required
to disclose circumstances involving the insurance company that
sponsors the separate account. We are proposing to define
``sponsoring insurance company'' in the proxy rules to mean the
insurance company that establishes and maintains the separate
account and that owns the assets of the separate account. Proposed
Item 22(a)(1)(x) of Schedule 14A.
---------------------------------------------------------------------------
We are following the approach of the current proxy rules in
proposing to require disclosure regarding directors' relationships with
mutual fund administrators. As administrators take on an increasing
role in the operations of funds, the relationships of independent
directors with these entities may affect the directors' ability to
safeguard the interests of fund shareholders.\192\
---------------------------------------------------------------------------
\192\ See supra notes 89-90 and accompanying text.
---------------------------------------------------------------------------
As in the current proxy rules, we are proposing to require mutual
funds to disclose circumstances involving the director and persons
controlling, controlled by, or under common control with some parties
related to the fund.\193\ We believe that situations involving a
director and persons controlled by or under common control with persons
related to the fund could pose conflicts of interest that are similar
to situations involving controlling persons, which are referenced in
section 2(a)(19) of the Act. We are concerned that the burden on mutual
funds of expanding disclosure beyond these persons, however, may
outweigh the value of the information to investors. The Commission
requests comment on whether it should extend the proposed disclosure
requirements beyond persons controlling, controlled by, or under common
control with parties related to the fund, or limit the proposed
disclosure requirements to
[[Page 59844]]
controlling persons as specified in section 2(a)(19) of the Act.
---------------------------------------------------------------------------
\193\ See Items 22(b)(1) of Schedule 14A (requiring funds to
disclose directors' ownership of any securities and any other
material direct or indirect interest in the investment adviser or
any person controlling, controlled by, or under common control with
the investment adviser unless the director is a general partner or
director of the investment adviser) and 22(b)(3) of Schedule 14A
(requiring funds to disclose any material interest, direct or
indirect, of any director or nominee for election as director in any
material transactions or any proposed material transactions to which
the investment adviser, principal underwriter, the administrator, or
a person controlling, controlled by, or under common control with
those entities (other than a fund) was or is to be a party).
---------------------------------------------------------------------------
As noted above, we also are proposing to require disclosure of
circumstances involving any officer of (1) the fund; (2) the investment
adviser, principal underwriter, or administrator of the fund; (3) a
person directly or indirectly controlling, controlled by, or under
common control with the fund's investment adviser, principal
underwriter, or administrator; (4) an investment company with the same
investment adviser, principal underwriter, or administrator as the
fund; or (5) an investment company with an investment adviser,
principal underwriter, or administrator that directly or indirectly
controls, is controlled by, or is under common control with an
investment adviser, principal underwriter, or administrator of the
fund. We are proposing to require disclosure for all officers who
perform policy-making functions, not only the principal executive
officer as referred to in sections 2(a)(19)(A)(vi) and (B)(vi) of the
Act, because we believe that situations involving a director and other
officers may raise conflict of interest concerns that are similar to
those involving a director and the principal executive officer. Form N-
1A defines ``officer'' to mean president, vice-president, secretary,
treasurer, controller, or any other officer who performs policy-making
functions.\194\ We are proposing to add this definition to the proxy
rules.\195\
---------------------------------------------------------------------------
\194\ Instruction 1 to Item 13(b) of Form N-1A; see also
Instruction 1 to Item 18.1 of Form N-2 and Instruction 1 to Item
20(a) of Form N-3.
\195\ Proposed Item 22(a)(1)(vii) of Schedule 14A; proposed
Instruction 1(c) to Item 13 of Form N-1A; proposed Instruction 1.c.
to Item 18 of Form N-2; proposed Instruction 1.c. to Item 20 of Form
N-3.
---------------------------------------------------------------------------
The Commission requests comment on the scope of its general
approach to disclosure outlined above, including whether there are any
other circumstances that could raise potential conflicts of interest
that should be disclosed, and whether the scope of persons covered by
the disclosure requirements is appropriate. Having discussed the
general concepts of our proposal, we now turn to the specific proposed
requirements for disclosure in the SAI and proxy statements for the
election of directors.
(d) Specific Disclosure in the Proxy Rules and SAI--(1) Positions.
The Commission is proposing to require disclosure of any positions,
including as an officer, employee, director, or general partner, held
during the past five years by directors and their immediate family
members with: (1) the fund; (2) an investment company having the same
investment adviser, principal underwriter, or administrator as the fund
or an investment adviser, principal underwriter, or administrator that
controls, is controlled by, or is under common control with the fund's
investment adviser, principal underwriter, or administrator; \196\ (3)
an investment adviser, principal underwriter, administrator, or
affiliated person of the fund; or (4) any person controlling,
controlled by, or under common control with the fund's investment
adviser, principal underwriter, or administrator.\197\
---------------------------------------------------------------------------
\196\ This category would include a foreign fund (i.e., an
investment company that is organized under the laws of a
jurisdiction other than the United States). The proposed rule also
would require disclosure of positions with a person that would be an
investment company but for the exclusions provided by sections
3(c)(1) and 3(c)(7) of the Investment Company Act. See proposed Item
22(b)(3)(ii) of Schedule 14A; proposed Item 13(b)(3)(ii) of Form N-
1A; proposed Item 18.6(b) of Form N-2; proposed Item 20(e)(ii) of
Form N-3.
\197\ Proposed Item 22(b)(3) of Schedule 14A; proposed Item
13(b)(3) of Form N-1A; proposed Item 18.6 of Form N-2; proposed Item
20(e) of Form N-3. Cf. Item 13(b) of Form N-1A, Item 18.1 of Form N-
2, and Item 20(a) of Form N-3 (requiring disclosure of directors'
positions with the fund); Item 13(c) of Form N-1A, Item 18.2 of Form
N-2; and Item 20(b) of Form N-3 (requiring disclosure of directors'
positions with affiliated persons of the fund and the principal
underwriter); Item 22(b)(1) of Schedule 14A (requiring the fund to
identify each director or nominee who is, or was during the past
five years, an officer, employee, director, general partner, or
shareholder of the investment adviser); and Item 401(a) and (b) of
Regulation S-K, through Item 22(b)(4) of Schedule 14A (requiring
disclosure of directors' and executive officers' positions and
offices with the fund). We have proposed to include disclosure of
positions with affiliated persons of the fund consistent with
current SAI requirements.
Separate accounts offering variable insurance products that are
registered as management companies also would be required to
disclose directors' positions with the insurance company that
sponsors the separate account. See supra note 191.
---------------------------------------------------------------------------
We request comment on the proposed disclosure of director
positions. Should we limit the disclosure required to certain
positions, such as managerial or policy-making positions? Have we
appropriately specified the entities with respect to which positions
should be disclosed? Should any entities be added to or eliminated from
the required disclosure? Should disclosure be required for five years
as proposed consistent with the current proxy rules, or for a longer or
shorter period? \198\
---------------------------------------------------------------------------
\198\ See Item 22(b)(1) of Schedule 14A.
---------------------------------------------------------------------------
(2) Interests. The Commission is proposing to require disclosure of
securities currently owned, and material direct or indirect interests
held during the past five years, by each director and his immediate
family members in (i) an investment adviser, principal underwriter, or
administrator of the fund; or (ii) a person (other than a registered
investment company) directly or indirectly controlling, controlled by,
or under common control with an investment adviser, principal
underwriter, or administrator.\199\ Information about securities owned
would be provided in a table, including the value of the securities and
percent of each class owned.\200\ The value of the securities and
percent of each class owned would be provided in the aggregate for each
director and his immediate family members.\201\ This information would
be provided as of the most recent practicable date.\202\
---------------------------------------------------------------------------
\199\ Separate accounts offering variable insurance products
that are registered as management companies also would be required
to disclose directors' interests in the insurance company that
sponsors the separate account. See supra note 191.
\200\ Proposed Items 22(b)(5) and (6) of Schedule 14A; proposed
Items 13(b)(5) and (6) of Form N-1A; proposed Items 18.8 and 18.9 of
Form N-2; proposed Items 20(g) and (h) of Form N-3. Cf. Item
22(b)(1) of Schedule 14A (generally requiring disclosure of
directors' current ownership of securities, and material interests
during the past five years, in the investment adviser or any person
controlling, controlled by, or under common control with the
investment adviser); Item 22(b)(2) of Schedule 14A (requiring
disclosure of director's material interests during the past five
years in a fund's principal underwriter and administrator).
\201\ Proposed Instruction 4 to Item 22(b)(5) of Schedule 14A;
proposed Instruction 4 to Item 13(b)(5) of Form N-1A; proposed
Instruction 4 to Item 18.8 of Form N-2; proposed Instruction 4 to
Item 20(g) of Form N-3.
\202\ Proposed Instruction 1 to Item 22(b)(5) of Schedule 14A;
proposed Instruction 1 to Item 13(b)(5) of Form N-1A; proposed
Instruction 1 to Item 18.8 of Form N-2; proposed Instruction 1 to
Item 20(g) of Form N-3.
---------------------------------------------------------------------------
We request comment on the proposed disclosure of director
interests. Have we appropriately defined the scope of the interests
required to be disclosed? Should disclosure be required of current
securities ownership, and of material interests for the past five
years, as in the current proxy rules, or should longer or shorter
periods be used? Should securities ownership be aggregated or presented
separately for a director and his immediate family members? Should the
Commission establish any de minimis threshold for the disclosure of
material interests? If so, what should it be, e.g., interests exceeding
$5,000, $10,000, $50,000, or some other amount?
(3) Transactions and Relationships
Transactions and Relationships Generally. The Commission is
proposing to require disclosure of transactions and relationships of
directors with the fund and parties related to the fund. The parties
related to the fund that would be covered by this requirement are: (i)
an officer of the fund; (ii) an investment company
[[Page 59845]]
having the same investment adviser, principal underwriter, or
administrator as the fund or having an investment adviser, principal
underwriter, or administrator that directly or indirectly controls, is
controlled by, or is under common control with an investment adviser,
principal underwriter, or administrator of the fund; \203\ (iii) an
officer of an investment company described in (ii); (iv) an investment
adviser, principal underwriter, or administrator of the fund; (v) an
officer of an investment adviser, principal underwriter, or
administrator of the fund; (vi) a person directly or indirectly
controlling, controlled by, or under common control with an investment
adviser, principal underwriter, or administrator of the fund; or (vii)
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 (together ``Related
Parties'').\204\
---------------------------------------------------------------------------
\203\ This category would include a foreign fund (i.e., an
investment company that is organized under the laws of a
jurisdiction other than the United States). The proposed rule also
would require disclosure of transactions with a person that would be
an investment company but for the exclusions provided by sections
3(c)(1) and 3(c)(7) of the Investment Company Act. See proposed Item
22(b)(7)(iii) of Schedule 14A; proposed Item 13(b)(7)(iii) of Form
N-1A; proposed item 18.10(c) of Form N-2; proposed Item 20(i)(iii)
of Form N-3.
\204\ Proposed Items 22(b)(7) and (8) of Schedule 14A; proposed
Items 13(b)(7) and (8) of Form N-1A; proposed Items 18.10 and 18.11
of Form N-2; proposed Items 20(i) and (j) of Form N-3. Cf. Item
22(b)(3) of Schedule 14A (generally requiring disclosure of
directors' material interests in material transactions since the
beginning of the most recently completed fiscal year, or proposed
material transactions, to which the investment adviser, principal
underwriter, administrator, or a person controlling, controlled by,
or under common control with those entities was or is to be a
party). See also Item 404(a) of Regulation S-K [17 CFR 229.404(a)],
through Item 22(b)(4) of Schedule 14A (requiring disclosure of
transactions since the beginning of the last fiscal year, or
proposed transactions, to which the fund was or is to be a party, in
which any director or immediate family member had, or will have, a
material interest and which the amount involved exceeds $60,000).
Separate accounts offering variable insurance products that are
registered as management companies also would be required to
disclose directors' transactions with the insurance company that
sponsors the separate account. See supra note 191.
---------------------------------------------------------------------------
We are proposing to require disclosure of any material interest,
direct or indirect, of any director or his immediate family member in
any material transaction, or material series of similar transactions,
since the beginning of the last two completed fiscal years (or
currently proposed), to which the fund or a Related Party was or is to
be a party.\205\ Transactions would include loans, lines of credit, and
other indebtedness.
---------------------------------------------------------------------------
\205\ Proposed Item 22(b)(7) of Schedule 14A; proposed Item
13(b)(7) of Form N-1A; proposed Item 18.10 of Form N-2; proposed
Item 20(i) of Form N-3.
---------------------------------------------------------------------------
For material interests in material transactions, a mutual fund
would be required to state the name of the director or family member
whose interest is described, the nature of the circumstances by reason
of which the interest is required to be described, the nature of the
interest, the approximate dollar amount involved in the transaction,
and, where practicable, the approximate dollar amount of the
interest.\206\ For indebtedness, a mutual fund would be required to
indicate the largest aggregate amount of indebtedness outstanding at
any time during the period, the nature of the indebtedness and the
transaction in which it was incurred, the amount outstanding as of the
latest practicable date, and the rate of interest paid or charged.\207\
---------------------------------------------------------------------------
\206\ Proposed Instructions 1 and 2 to Item 22(b)(7) of Schedule
14A; proposed Instructions 1 and 2 to Item 13(b)(7) of Form N-1A;
proposed Instructions 1 and 2 to Item 18.10 of Form N-2; proposed
Instructions 1 and 2 to Item 20(i) of Form N-3.
\207\ Proposed Instruction 9 to Item 22(b)(7) of Schedule 14A;
proposed Instruction 9 to Item 13(b)(7) of Form N-1A; proposed
Instruction 8 to Item 18.10 of Form N-2; proposed Instruction 8 to
Item 20(i) of Form N-3.
---------------------------------------------------------------------------
We also are proposing to require disclosure of any material
relationship, direct or indirect, of any director or his immediate
family member that exists, or has existed at any time since the
beginning of the last two completed fiscal years, or is currently
proposed, with the fund or a Related Party. Relationships would include
payments for property or services, provision of legal or investment
banking services, and any consulting or other relationship that is
substantially similar in nature and scope to any of the foregoing
relationships.\208\
---------------------------------------------------------------------------
\208\ Proposed Item 22(b)(8) of Schedule 14A; proposed Item
13(b)(8) of Form N-1A; proposed Item 18.11 of Form N-2; proposed
Item 20(j) of Form N-3.
---------------------------------------------------------------------------
For material relationships, a fund would be required to state the
name of the director or family member whose relationship is described,
the nature of the circumstances by reason of which the relationship is
required to be described, the nature of the relationship, and the
amount of business done between the director or family member and the
fund or Related Party since the beginning of the last two completed
fiscal years or proposed to be done during the current fiscal
year.\209\
---------------------------------------------------------------------------
\209\ Proposed Instructions 1 and 2 to item 22(b)(8) of Schedule
14A; proposed Instructions 1 and 2 to Item 13(b)(8) of Form N-1A;
proposed Instructions 1 and 2 to Item 18.11 of Form N-2; proposed
Instructions 1 and 2 to item 20(j) of Form N-3.
---------------------------------------------------------------------------
A fund would not be required to disclose routine, retail
transactions and relationships between directors or immediate family
members and the fund or Related Parties. For example, a mutual fund
need not disclose that a director holds a credit card or bank or
brokerage account with a fund or Related Party, unless the director is
accorded special treatment, such as preferred access to initial public
offerings.\210\
---------------------------------------------------------------------------
\210\ Proposed Instruction 10 to Item 22(b)(7) and Instruction 8
to Item 22(b)(8) of Schedule 14A; proposed Instruction 10 to Item
13(b)(7) and Instruction 8 to Item 13(b)(8) of Form N-1A; proposed
Instruction 9 to Item 18.10 of and instruction 7 to Item 18.11 of
Form N-2; proposed Instruction 9 to Item 20(i) and Instruction 7 to
Item 20(j) of Form N-3. See H.R. Rep. No. 1382, 91st Cong., 2d Sess.
14-15 (1970) (``[A] director ordinarily would not be considered to
have a material business relationship with the investment adviser
simply because he is a brokerage customer who is not accorded
special treatment.''); Interpretive Release, supra note 1.
---------------------------------------------------------------------------
Indirect, as well as direct, material interests in material
transactions and material relationships would be required to be
disclosed. A director or family member who has a position or a
relationship with, or interest in, a company that engages in a
transaction or has a relationship with a fund or Related Party may have
an indirect interest in the transaction or an indirect relationship by
reason of the position, relationship, or interest.\211\ The interest in
the transaction or the relationship of the director or family member,
however, would not be deemed material if the interest or the
relationship arises solely from the holding of an equity interest
(excluding a general partnership interest) or a creditor interest in a
company that engages in a transaction or has a relationship with the
fund or Related Party if the transaction or the relationship is not
material to the company.
---------------------------------------------------------------------------
\211\ Proposed Instruction 7 to Item 22(b)(7) and Instruction 5
to Item 22(b)(8) of Schedule 14A; proposed Instruction 7 to Item
13(b)(7) and Instruction 5 to Item 13(b)(8) of Form N-1A; proposed
Instruction 6 to Item 18.10 and Instruction 4 to Item 18.11 of Form
N-2; proposed Instruction 6 to Item 20(i) and Instruction 4 to Item
20(j) of Form N-3.
---------------------------------------------------------------------------
We request comment on the proposed disclosure of director
transactions and relationships. Have we appropriately defined the scope
of transactions and relationships to be disclosed? Should disclosure be
required for the period since the beginning of the last two completed
fiscal years, as proposed based on the time period specified in section
2(a)(19) of the Act,\212\ or only since the beginning of the most
recently completed fiscal year as required in the
[[Page 59846]]
current proxy rules, or for some other time period?
---------------------------------------------------------------------------
\212\ See sections 2(a)(19)(A)(vi) and 2(a)(19)(B)(vi) of the
Act.
---------------------------------------------------------------------------
We also request comment on whether we should specify a minimum
dollar amount involved in a transaction or relationship that would
trigger the disclosure requirements rather than simply requiring
disclosure of ``material'' transactions or relationships. If so, what
should the threshold be, e.g., transactions exceeding $60,000, or some
other amount?\213\ Similarly, should we require disclosure of
transactions or relationships only when the interest of a director or
his immediate family member is greater than a specified dollar amount?
If so, what should the dollar amount be, e.g., interests exceeding
$5,000, $10,000, $50,000, or some other amount?
---------------------------------------------------------------------------
\213\ Cf. Item 404(a) of Regulation S-K, through Item 22 (b)(4)
of Schedule 14A (requiring disclosure of a director's or immediate
family member's material interest in a transaction with the fund
only when the amount involved in the transaction is greater than
$60,000).
---------------------------------------------------------------------------
We also request comment on whether we should limit disclosure of
transactions or relationships where the interest of a director or his
immediate family member arises indirectly through ownership of an
interest in a company that is involved in a transaction or relationship
with a fund or Related Party. For example, should disclosure of a
transaction or relationship not be required when a director and his
immediate family members, in the aggregate, have less than a specified
threshold interest in a company that is a party to the transaction or
relationship with the fund or Related Party? \214\ If so, what should
the threshold percentage be, e.g. 5%, 10%, or some other amount? Or
should the Commission set a threshold dollar amount ownership interest
in the company? If so, what should the dollar amount be, e.g., $5,000,
$10,000, $50,000, or some other amount? In determining whether the
threshold is exceeded, should a director's interests be aggregated with
those of his immediate family members, other directors or nominees,
executive officers, security holders who own more than 5% of any class
of the registrant's voting securities, or any other persons? \215\
---------------------------------------------------------------------------
\214\ Currently, Instruction 8(A) of Item 404(a) of Regulation
S-K states that a director's interest in a material transaction is
not material when he and all other directors, nominees, executive
officers, security holders who own more than 5% of any class of the
registrant's voting securities, and immediate family members, in the
aggregate, own less than a 10% equity interest in another person
that is a party to the transaction.
\215\ See supra note 214 (Instruction 8(A) of Item 404(a) of
Regulation S-K.
---------------------------------------------------------------------------
Cross-Directorships. Finally, the Commission is proposing to
require a mutual fund to disclose 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.\216\ The fund would be
required to identify (i) the company involved; (ii) the individual who
serves or has served as a director of the company and the period of
service as director; (iii) the investment adviser, principal
underwriter, or administrator, or person controlling, controlled by, or
under common control with the investment adviser, principal
underwriter, or administrator where the individual named in (ii) holds
or held office and the office held; and (iv) the director of the fund
or immediate family member who is or was an officer of the company, the
office held, and the period of holding office.
---------------------------------------------------------------------------
\216\ Proposed Item 22(b)(9) of Schedule 14A; proposed Item
13(b)(9) of Form N-1A; proposed Item 18.12 of Form N-2; proposed
Item 20(k) of Form N-3.
Separate accounts offering variable insurance products that are
registered as management companies also would be required to
disclose cross-directorships involving the insurance company that
sponsors the separate account. See supra note 191.
---------------------------------------------------------------------------
We believe that cross-directorships could potentially create a
conflict of interest for a director because the position that he or his
immediate family member holds in another company could be affected by
an officer of the investment adviser, principal underwriter, or
administrator, or an officer of a party controlling, controlled by, or
under common control with the investment adviser, principal
underwriter, or administrator.\217\ We request comment on the proposed
disclosure of cross-directorships. Have we appropriately defined the
scope of the circumstances to be disclosed? Should disclosure be
required for a shorter or longer period than since the beginning of the
last two completed fiscal years of the fund?
---------------------------------------------------------------------------
\217\ Cf. Report and Recommendations of the Blue Ribbon
Committee on Improving the Effectiveness of Corporate Audit
Committee at 11 (1999) (director not independent when he is employed
as an executive of another company where any of the corporation's
executives serves on that company's compensation committee).
---------------------------------------------------------------------------
4. Board's Role in Fund Governance
The Commission is proposing to modify disclosure of matters related
to the board's role in governing a fund currently required in the proxy
rules and the SAI. We believe that this information would help
shareholders more readily determine whether the directors are
effectively representing shareholders' interests, independent of fund
management.
The proxy rules require a mutual fund to discuss in reasonable
detail the material factors and conclusions that formed the basis for
the board of directors' recommendation that the shareholders approve an
investment advisory contract, including a discussion of any benefits
derived or to be derived by the investment adviser from the
relationship with the fund such as soft dollar arrangements by which
brokers provide research to the fund or its investment adviser in
return for allocating fund brokerage.\218\ We are proposing to require
similar disclosure in the SAI so that investors will be able to
evaluate the board's basis for approving the renewal of an existing
investment advisory contract.\219\
---------------------------------------------------------------------------
\218\ Item 22(c)(11) of Schedule 14A.
\219\ Proposed Item 13(b)(10) of Form N-1A; proposed Item 18.13
of Form N-2; proposed Item 20(l) and Form N-3.
---------------------------------------------------------------------------
Director responsibility for evaluating and approving a mutual
fund's advisory contract is one of the most important fund governance
obligations assigned to directors under the Investment Company
Act.\220\ In approving an investment advisory contract, independent
directors must review the level of fees charged to a fund by an
investment adviser. Participants at the Roundtable discussed the
important role of independent directors in negotiating these fees and
expenses.\221\ We believe that a discussion of the factors considered
by the board in retaining an investment adviser will help investors
understand and evaluate the board's basis for that action.
---------------------------------------------------------------------------
\220\ See sections 15 (a) and (c) of the Investment Company Act
[15 U.S.C. 80a-15 (a) and (c)].
\221\ See Negotiating Fees and Expenses Panel, Roundtable
Transcript of Feb. 23, 1999 at 26-91.
---------------------------------------------------------------------------
We also are proposing to modify disclosure in the proxy rules and
the SAI relating to a fund's committees of the board of directors. The
proxy rules currently require mutual funds to disclose information
about standing audit, nominating, and compensation committees.\222\ In
the SAI, mutual funds
[[Page 59847]]
are required to identify members of any executive or investment
committee, and provide a concise statement of the duties and functions
of each committee.\223\
---------------------------------------------------------------------------
\222\ The fund must state whether it has a standing audit,
nominating, compensation, or similar committee, identify each
committee member, state the number of committee meetings held by
each committee during the last fiscal year, and describe briefly the
functions performed by the committees. Item 7(e)(1) of Schedule 14A.
If the fund has a nominating or similar committee, the fund must
state whether the committee will consider nominees recommended by
security holders and, if so, describe the procedures to be followed
by security holders in submitting such recommendations. Item 7(e)(2)
of Schedule 14A.
\223\ Instruction 3 to Item 13(b) of Form N-1A; Instruction 3 to
Item 18.1 of Form N-2; Instruction 3 to Item 20(a) of Form N-3.
---------------------------------------------------------------------------
We are proposing to modify this disclosure to require mutual funds
to identify each standing committee of the board in the SAI and proxy
statements for the election of directors. As in the current proxy
rules, funds would be required to provide a concise statement of the
functions of each committee; identify the members of the committee;
indicate the number of committee meetings held during the last fiscal
year; and state whether its nominating committee will consider nominees
recommended by fund shareholders and, if so, describe the procedures
for submitting recommendations.\224\
---------------------------------------------------------------------------
\224\ Proposed Item 22(b)(13) of Schedule 14A; proposed Item
13(b)(2) of Form N-1A; proposed Item 18.5 of Form N-2; proposed Item
20(d) of Form N-3. Cf. Item 7(e)(1) of Schedule 14A.
Because this proposed disclosure requirement covers information
that is similar to that already required for proxy statements in
Item 7(e) of Schedule 14A, the Commission is proposing to amend Item
7 to state that investment companies must furnish the information on
committees proposed in Item 22(b)(13) in lieu of the information
currently required in Item 7(e). See proposed Items 7 (d) and (e) of
Schedule 14A. We also recently proposed to require additional
information about a closed-end fund's audit committee. See Audit
Committee Disclosure, Securities Exchange Act Release No. 41987
(Oct. 7, 1999) [64 FR 55648 (Oct. 14, 1999)] (proposed Item 7(e)(3)
of Schedule 14A).
---------------------------------------------------------------------------
5. Separate Disclosure
Currently, mutual funds must indicate with an asterisk the
directors who are interested persons of the fund within the meaning of
section 2(a)(19) of the Act for certain disclosure items in the proxy
statements and the SAI.\225\ To provide more prominent disclosure about
independent directors, we are proposing to require funds to present all
disclosure for independent directors separately from disclosure for
interested directors in the SAI, proxy statements for the election of
directors, and annual reports to shareholders.\226\ For example, when
information is furnished in a table, funds should provide separate
tables (or separate sections of a single table) for independent
directors and for interested directors. When presenting information in
narrative form, funds should clearly indicate, by heading or other
means, which directors are interested and which are independent.
---------------------------------------------------------------------------
\225\ See Instruction 1 to Item 22(b)(4) of Schedule 14A (table
containing information about director's background and experience
and table containing information about directors' transactions with
the fund); Instruction 4 to Item 13(b) of Form N-1A (management
information table).
\226\ Proposed Instruction 3 to Item 22(b) of Schedule 14A;
proposed Instruction 2 to Item 13 of Form N-1A; proposed Instruction
2 to Item 18 of Form N-2; proposed Instruction 2 to Item 20 of Form
N-3.
---------------------------------------------------------------------------
6. Technical and Conforming Amendments
The Commission is proposing to clarify that Item 22 of Schedule 14A
applies to business development companies.\227\ This proposed change
reflects current requirements.
---------------------------------------------------------------------------
\227\ Proposed Item 22(a)(1)(viii) of Schedule 14A. Business
development companies are subject to special provisions under the
Act designed to accommodate their venture capital investments. See
sections 54-65 of the Investment Company Act [15 U.S.C. 80a-53 to
80a-64]. Business development companies are required to have a
majority of directors who are not ``interested persons.'' See
section 56 of the Investment Company Act [15 U.S.C. 80a-55].
---------------------------------------------------------------------------
The Commission is proposing changes to cross-references in Items 8
and 10 of Schedule 14A to reflect the proposed amendments to Item 22 of
Schedule 14A. We also are proposing to amend current Item 22(b)(4) of
Schedule 14A. This item requires funds to provide the information
required by Items 401, 404(a) and (c), and 405 of Regulation S-K.
Because proposed Item 22(b)(7) of Schedule 14A requires much of the
information now required by Item 401 of Regulation S-K, we are
proposing to modify Item 22(b)(4) of Schedule 14A to require funds to
provide the information required by Items 401(f) and (g), 404(a) and
(c), and 405 of Regulation S-K.\228\
---------------------------------------------------------------------------
\228\ We also are proposing to redesignate Item 22(b)(4) as Item
22(b)(10). Funds would not be required to provide information for
directors, nominees, and their immediate family members as required
by Items 404(a) and (c) of Regulation S-K, through Item 22(b)(10) of
Schedule 14A, because we are proposing to require the information
under Item 22(b)(7) of Schedule 14A. Proposed Instruction to Item
22(b)(10) of Schedule 14A.
---------------------------------------------------------------------------
Because we have defined the term ``officer'' to mean the president,
vice-president, secretary, treasurer, controller, or any other officer
who performs policy-making functions, we are proposing to change the
reference in the compensation table from ``executive officer'' to
``officer.'' \229\ In addition, we are proposing to amend the
definition of ``administrator'' in the proxy rules to conform to the
proposed definition of ``administrator'' in rule 0-1(a)(5).\230\
---------------------------------------------------------------------------
\229\ Proposed Item 22(b)(12) of Schedule 14A; proposed Item
13(c) of Form N-1A, proposed item 18.14 of Form N-2; proposed Item
20(m) of Form N-3.
\230\ See Proposed Item 22(a)(1) of Schedule 14A.
---------------------------------------------------------------------------
We also are proposing conforming changes to the SAI. Because we are
proposing enhanced disclosure about directors' positions, we are
proposing to require disclosure of officers' positions, which remains
unchanged, as a separate item.\231\ We are proposing amendments to the
SAI to conform to the proxy rules by requiring a brief description of
any arrangement or understanding between a director or officer and any
other person pursuant to which he was selected as a director or
officer.\232\
---------------------------------------------------------------------------
\231\ See Item 13(c) of Form N-1A; Item 18.2 of Form N-2; Item
20(b) of Form N-3; proposed Item 13(a)(2) of Form N-1A; proposed
Item 18.2 of Form N-2; proposed Item 20(b) of Form N-3 (requiring
disclosure of officers' positions with affiliated persons of the
fund and the principal underwriter).
\232\ Proposed Item 22(b)(2) of Schedule 14A; proposed Item
13(a)(3) of Form N-1A; proposed Item 18.3 of Form N-2; proposed Item
20(c) of Form N-3. See Items 401(a) and 401(b) of Regulation S-K and
Instruction 1 to Items 401(a) and 401(b) of Regulation S-K, through
Item 22(b)(4) of Schedule 14A.
---------------------------------------------------------------------------
We also are proposing changes to rule 30d-1 under the Investment
Company Act.\233\ Rule 30d-1(d) allows a fund to send to shareholders a
copy of its currently effective prospectus or SAI, or both, instead of
a shareholder report required by the rule, provided that the prospectus
or SAI, or both, include certain financial information and information
about directors' compensation. We are proposing to amend the rule to
require a prospectus or SAI, or both, serving as a shareholder report
to include all the information that would otherwise be required in the
shareholder report.\234\
---------------------------------------------------------------------------
\233\ 17 CFR 270.30d-1.
\234\ Proposed rule 30c-1(d) under the Investment Company Act.
We also are proposing to amend rule 30d-1(a) to require funds to
include in their shareholder reports any information (not just
financial statements) required to be included in those reports by
the company's registration statement form under the Investment
Company Act. Proposed rule 30e-1(a) under the Investment Company
Act. We are redesignating rules 30d-1 and 30d-2 as rules 30e-1 and
30e-2 respectively to reflect the National Securities Markets
Improvement Act of 1996 amendments to section 30 of the Act. [Pub.
L. No. 104-290, 110 Stat. 3416 (1996) (codified in various sections
of the United States Code)].
---------------------------------------------------------------------------
7. Compliance Date
If we adopt the proposed disclosure requirements, we expect to
require all new registration statements and post-effective amendments
that are annual updates to effective registration statements, proxy
statements for the election of directors, and reports to shareholders
filed on or after the effective date of the amendments to comply with
the proposed amendments. The Commission requests comment on this
proposed compliance date.
F. Recordkeeping Regarding Director Independence
To assure that independent directors are able to fully carry out
the important
[[Page 59848]]
duties assigned to them, the Act and our rules establish standards
concerning their financial and other interests.\235\ A fund must
determine whether the individuals who serve as independent directors in
fact satisfy these standards when it prepares certain disclosure
documents for investors.\236\ The process that a fund uses to make
these determinations should reflect diligent efforts to evaluate each
director's relevant business and personal relationships that might
affect his independent judgment.
---------------------------------------------------------------------------
\235\ See supra notes 21, 170 and accompanying text.
\236\ A fund must indicate which individuals are independent
directors in its registration statement, as well as in proxy
statements for the election of directors. See supra note 225 and
accompanying text.
---------------------------------------------------------------------------
We are proposing to amend our rule requiring funds to preserve
certain records to enable the Commission to monitor funds' assessments
of the independence of their directors. The proposed amendment would
require funds to preserve any record of the initial determination that
a director qualifies as an independent director, and each subsequent
determination of whether the director continues to qualify as an
independent director.\237\ We propose that funds preserve these
documents for a period of six years, the first two years in an easily
accessible place.\238\
---------------------------------------------------------------------------
\237\ Proposed rule 31a-2(a)(4). The proposed rule states that
these records must include any questionnaire and any other document
used to determine that a director qualifies as independent.
\238\Id.
---------------------------------------------------------------------------
Because funds already should be collecting relevant information
when they make and review their determinations of director
independence,\239\ we believe that our proposed recordkeeping
requirement would not impose substantial costs or other burdens on
funds. Comment is requested on the necessity of this information, and
on the costs of maintaining these records. We also request comment on
the effects that this proposed recordkeeping requirement would have on
funds' internal compliance policies and procedures. Are there feasible
alternatives to the proposal that would enable the Commission to
monitor funds' assessments of the independence of their directors,
while minimizing the burdens imposed on funds? \240\
---------------------------------------------------------------------------
\239\ See, e.g., ICI Advisory Group Report, supra note 28, at 21
(recommending that funds require independent directors to complete a
questionnaire each year on business, financial, and family
relationships that could affect their independence).
\240\ See section 31(a)(2) of the Act [15 U.S.C. 80a-30(a)(2)]
(requiring Commission to consider and request public comment on
minimizing recordkeeping compliance burdens).
---------------------------------------------------------------------------
G. General Request for Comments
The Commission requests comment on the new rules, rule amendments,
and form amendments proposed in this Release, suggestions for
additional provisions or changes to existing rules or forms, and
comments on other matters that might have an effect on the proposals
contained in this Release. We also request comment whether the
proposals, if adopted, would promote efficiency, competition, and
capital formation. We will consider those comments in satisfying our
responsibilities under section 2(c) of the Investment Company Act,
section 2(b) of the Securities Act, and section 3(f) of the Exchange
Act.\241\ For purposes of the Small Business Regulatory Enforcement
Fairness Act of 1996,\242\ we also request information regarding the
potential effect of the proposals on the U.S. economy on an annual
basis. Commenters are requested to provide empirical data to support
their views.
---------------------------------------------------------------------------
\241\ Section 2(c) of the Investment Company Act [15 U.S.C. 80a-
2(c)], section 2(b) of the Securities Act [15 U.S.C. 77b(b)], and
section 3(f) of the Exchange Act [15 U.S.C. 78c(f)] require the
Commission, when it engages in rulemaking and is required to
consider whether an action is consistent with the public interest,
to consider, in addition to the protection of investors, whether the
action will promote efficiency, competition, and capital formation.
\242\ Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------
As discussed above, the ICI Advisory Group Report recommended
several measures that are similar to our proposed amendments as well as
several additional practices and policies. We request comment whether
we should adopt any of these ``best practices'' recommendations as
further measures to enhance the effectiveness of independent
directors.243
---------------------------------------------------------------------------
\243\ See supra notes 34-35 and accompanying and following text.
---------------------------------------------------------------------------
III. Cost-Benefit Analysis
The Commission is sensitive to the costs and benefits imposed by
its rules.
A. Proposed Amendments to the Exemptive Rules
The Commission is proposing to amend the Exemptive Rules
244 to require that, for funds relying on those rules: (i)
independent directors constitute either a majority or a super-majority
(two-thirds) of their boards; (ii) independent directors select and
nominate other independent directors; and (iii) any legal counsel for
the fund's independent directors be an independent legal counsel. These
proposals are designed to enhance the independence and effectiveness of
fund directors who are charged with overseeing the fund's activities
and transactions that are covered by the Exemptive Rules. Boards that
meet these conditions should be more effective at exerting an
independent influence over fund management. Their independent directors
should be more likely to have their primary loyalty to the fund's
shareholders rather than the adviser, and should be better able to
evaluate the complex legal issues that are often faced by fund boards
with an independent and critical eye. These proposed amendments,
therefore, would provide substantial benefits to shareholders by
helping to ensure that independent directors are better able to fulfill
their role of representing shareholder interests and supplying an
independent check on management.
---------------------------------------------------------------------------
\244\ See supra text following note 33.
---------------------------------------------------------------------------
The proposed amendments to the Exemptive Rules may impose some
costs on funds that choose to rely on those rules. Funds that do not
rely on an Exemptive Rule, however, will not be subject to the proposed
conditions, or any costs associated with those conditions. These costs
are discussed below.
Independent directors as a majority of the board. First, the
Commission is making two alternative proposals regarding the
representation of independent directors on fund boards. Under one
proposal, funds relying on the Exemptive Rules would be required to
have independent directors constitute a simple majority of their
boards. Because, as noted above, most mutual funds today have boards
with independent majorities,245 it appears that this
proposal would not impose substantial costs on funds as a group. Under
the alternative proposal, funds relying on the Exemptive Rules would be
required to have independent directors constitute two-thirds of their
boards. Because fewer funds currently have boards of which two-thirds
of the directors are independent, this alternative proposal could have
higher costs for funds as a group.246
---------------------------------------------------------------------------
\245\ See supra note 39 and accompanying text.
\246\ See supra note 44. As noted above, however, the ICI
Advisory Group Report has recommended that independent directors
constitute two-thirds of a fund's board. See supra note 42 and
accompanying text. It is therefore likely that in the future the
number of funds following this practice will increase, even absent
the Commission's proposal.
---------------------------------------------------------------------------
Under either of these alternative proposals, funds that currently
do not have the required percentage of independent directors on their
boards (whether a simple majority or two-
[[Page 59849]]
thirds) and that would like to rely on the Exemptive Rules may incur
some costs. The Commission, however, has no reasonable basis for
estimating those costs. Those funds could come into compliance with
either alternative proposal in a number of ways. For example, funds
could: (i) decrease the size of their boards and allow some inside
directors to resign; (ii) maintain the current size of their boards and
replace some inside directors with independent directors; or (iii)
increase the size of their boards and elect new independent directors.
Where new independent directors are elected, whether to replace
inside directors or to fill new positions that expand the size of the
board, the fund would incur the costs of preparing a proxy statement
and holding a shareholder meeting to elect those independent directors,
as well as the costs of compensating those directors.247 The
Commission, however, has no reasonable basis for determining how many
funds that currently do not have independent directors as a simple
majority of their boards would choose to comply with either proposal
through electing new independent directors. Similarly, we have no
reasonable basis for determining how many funds that currently have
independent directors as a simple majority, but not as a two-thirds
majority, would choose to comply with the alternative proposal through
electing new independent directors. We also have no reasonable basis
for estimating the average compensation that would be paid to those
newly elected independent directors, or the costs to those funds of
preparing proxy statements and holding shareholder meetings to elect
those directors.
---------------------------------------------------------------------------
\247\ Under some circumstances a vacancy on the board may be
filled by the board of directors. See section 16(a) of the Act. In
those cases, the fund would only incur the costs of compensating the
new independent directors.
---------------------------------------------------------------------------
We request comment on the potential costs of each of these
alternative proposals. Comment is specifically requested on the
differences in costs to funds of the two alternatives.
Independent director self-selection and self-nomination. Second,
the proposed amendments to the Exemptive Rules would require that
independent directors select and nominate any other independent
directors. It appears that this proposal would not impose significant
new costs on funds, because many funds already have adopted this
practice.\248\ Although some funds do not currently follow this
practice and would need to adopt it in order to rely on the Exemptive
Rules, we are not aware of any costs that would result from requiring a
fund's incumbent independent directors to select and nominate other
independent directors. Comment is requested on the costs associated
with independent director self-selection and self-nomination. Are those
costs greater than the costs that would otherwise be incurred by a fund
in selecting qualified independent directors?
---------------------------------------------------------------------------
\248\ See supra note 66 and accompanying text.
---------------------------------------------------------------------------
Independent legal counsel. Finally, the proposed amendments to the
Exemptive Rules would require that any legal counsel to a fund's
independent directors be an independent legal counsel.\249\ The
proposal would not require independent directors to retain legal
counsel, but only that any person that does act as counsel to the
independent directors qualify as an independent legal counsel.
Independent directors who are represented by counsel who does not meet
the proposed definition of ``independent legal counsel'' thus would be
required to retain different counsel if their fund chooses to rely on
any of the Exemptive Rules. The Commission, however, has no reasonable
basis for determining whether this substitution of counsel is likely to
cause the independent directors' costs of legal counsel to increase. We
request comment on the costs associated with this proposal. Do law
firms frequently offer fee arrangements that include, for example,
discounts for providing services to both a fund's independent directors
and the fund's adviser, which could disqualify the firm from serving as
an independent legal counsel?
---------------------------------------------------------------------------
\249\ As discussed above, we are proposing to amend rule 0-1 to
include a definition of ``independent legal counsel.'' See supra
note 87 and accompanying text; see also infra notes 250-256 and
accompanying text (discussing the costs and benefits of this
proposed definition).
---------------------------------------------------------------------------
B. Definition of Independent Legal Counsel
Rule 0-1 defines certain terms for purposes of the rules and
regulations under the Investment Company Act. The Commission is
proposing to amend this rule to add a definition of the term
``independent legal counsel.'' Under the proposed definition, a person
is an independent legal counsel if (i) a fund reasonably believes that
the person has not acted as legal counsel to the fund's adviser,
principal underwriter, administrator,\250\ or any of their control
persons \251\ during the last two years, or (ii) a majority of the
fund's independent directors determines that the person's
representation of the fund's adviser, principal underwriter,
administrator, or a control person is or was so limited that it would
not adversely affect the person's ability to provide impartial,
objective and unbiased legal counsel to the independent directors. The
basis of the independent directors' determination must be recorded in
the minutes of the directors' meeting.
---------------------------------------------------------------------------
\250\ In connection with this proposal, we also are proposing to
amend rule 0-1 to define an ``administrator'' as any person who
provides significant administrative or business affairs management
services to a fund. This definition is substantially similar to the
definition of administrator that is currently contained in Item
22(a)(1)(i) of Schedule 14A and Item 15(h)(1) of Form N-1A. Adding
this definition to rule 0-1 should benefit funds by helping to
clarify the scope of the proposed definition of independent legal
counsel. We are not aware of any costs that would be associated with
this definition of administrator.
\251\ We are proposing to amend 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. This definition should benefit funds by helping to
clarify the scope of the proposed definition of independent legal
counsel. We are not aware of any costs that would be associated with
this definition.
---------------------------------------------------------------------------
The proposed definition of ``independent legal counsel'' should
help to ensure that independent directors' counsel is able to provide
impartial legal advice concerning the complex legal issues faced by
those directors. This proposal thus should benefit both shareholders
and independent directors by helping those directors to better fulfill
their role as shareholder representatives. Shareholders also would
benefit from the requirement that the independent directors'
determinations be recorded in the minute books of the fund, because
this requirement would make it possible for the Commission staff to
review independent directors' determinations that their counsel
qualifies as independent legal counsel.
The proposed definition would impose costs on some funds that rely
on the Exemptive Rules and thus would be required to use this
definition.\252\ We assume that approximately 3,200 funds rely on at
least one of the Exemptive Rules annually.\253\ We further assume that
the independent directors of approximately one-third of those funds
(1,065) would be required to make the specified determination in order
for their counsel to meet the definition of
[[Page 59850]]
``independent legal counsel.'' \254\ We estimate that each of these
1,065 funds would be required to spend, on average, 0.75 hours annually
to comply with the proposed requirement that this determination be
recorded in the fund's minute books,\255\ for a total annual burden of
approximately 799 hours. Based on this estimate, the total annual cost
to funds of this proposed definition would be approximately
$70,505.\256\ The Commission is not aware of any other costs that would
be associated with this proposal. Comment is requested on these
estimated costs.
---------------------------------------------------------------------------
\252\ Among other things, the proposed amendments to the
Exemptive Rules would require that, for funds relying on those
rules, any legal counsel for the independent directors of the fund
be an ``independent legal counsel.''
\253\ Based on statistics compiled by Commission staff from
January 1, 1997 through December 31, 1998, we estimate that there
are approximately 3,560 funds that could rely on one or more of the
Exemptive Rules. Of those funds, we assume that approximately 90
percent (3,200) actually rely on at least on Exemptive Rule
annually.
\254\ We assume that the independent directors of the remaining
two-thirds of those funds (2,135) either would not have legal
counsel, or would have legal counsel who meets the requirements of
the first part of the proposed definition, so that no determination
by the independent directors would be necessary.
\255\ This estimate is based on a staff assessment of the burden
associated with this proposed recordkeeping requirement in light of
the estimated hour burdens currently associated with other rules
under the Act that impose similar collection of information
requirements.
\256\ To calculate this total annual cost, the Commission staff
assumed that two-thirds of the total annual industry hour burden
(532 hours) would be incurred by professionals with an average
hourly wage rate of $125 per hour, and one-third of that annual hour
burden (267 hours) would be incurred by clerical staff with an
average hourly wage rate of $15 per hour ((532 x $125/hour) + (267
x $15/hour) = $70,505).
---------------------------------------------------------------------------
C. Suspension of Board Composition Requirements
Proposed rule 10e-1 would increase the periods for which the
independent director minimum percentage requirements of the Act, and of
the rules under the Act, are temporarily suspended if the death,
disqualification, or bona fide resignation of an independent director
causes the representation of independent directors on the board to fall
below that required by the Act or our rules. This proposal would
benefit funds by helping to ensure that a fund that dips below the
independent director minimum percentage requirements in these
circumstances does not immediately face the severe consequences of
losing the availability of the Exemptive Rules.
We are not aware of any costs to funds that would result from this
proposal. Because we believe that the periods for which the rule would
suspend the independent director minimum percentage requirements are
consistent with concerns for investor protection, it also appears that
this proposal would not have any costs for investors.
D. Limits on Coverage of Directors Under Joint Insurance Policies
Rule 17d-1(d)(7) under the Act permits funds to purchase joint
liability insurance policies without first obtaining a Commission order
permitting this joint arrangement, provided that certain conditions are
met. The Commission is proposing amendments to this rule that would
make the rule available only for joint liability insurance policies
that do not exclude coverage for independent directors' litigation
expenses in the event that they are sued by the fund's adviser. This
proposal should benefit shareholders by making it possible for
independent directors to engage in the good faith performance of their
responsibilities under the Act and our rules without concern for their
personal financial security. For the same reasons, the proposal also
should benefit independent directors.
Because obtaining this type of coverage may cause the premiums
charged by some insurance providers for joint liability insurance
policies to increase, this proposed amendment may have some costs for
funds.\257\ The Commission, however, has no reasonable basis for
estimating the possible increase in premiums that may result from this
proposal. Comment is requested on these costs.
---------------------------------------------------------------------------
\257\ As discussed above, the ICI Mutual Insurance Company
(``ICI Mutual''), which insures funds representing approximately 70
percent of all open-end fund assets, recently announced that it is
making available to funds a standard policy endorsement that permits
independent directors to recover defense costs, settlements, and
judgments in ``insured vs. insured'' claims otherwise covered under
the policy. See supra note 111. According to an ICI Mutual
representative, that company is not charging funds any additional
premiums for this coverage. It is possible, however, that other
insurance providers will charge funds additional premiums for
providing this type of coverage.
---------------------------------------------------------------------------
E. Exemption From Ratification of Independent Public Accountant
Requirement for Funds With Independent Audit Committees
Section 32(a)(2) of the Act requires that the selection of a fund's
independent public accountant be submitted to shareholders for
ratification or rejection. Proposed rule 32a-4 would exempt a fund from
this requirement if the fund has an audit committee consisting entirely
of independent directors to oversee the fund's auditor. This proposed
exemption could provide significant benefits to shareholders. Many
believe shareholder ratification of a fund's independent auditor has
become a perfunctory process, with votes that are rarely contested. As
a consequence, we believe that the ongoing oversight provided by an
independent audit committee can provide greater protection to
shareholders than shareholder ratification of the choice of auditor.
Proposed rule 32a-4 may impose certain costs on those funds that
choose to rely on the exemption. It appears that these costs likely
would be minimal and would be justified by the relief provided by the
exemption. To rely on the exemption, among other things, a fund's board
of directors must adopt an audit committee charter that sets forth the
committee's structure, duties, powers, and methods of operation. The
fund also must preserve that charter, and any modifications to the
charter, permanently in an easily accessible place.\258\ We estimate
that there are approximately 3,490 investment companies that may rely
on the proposed rule.\259\ We assume that approximately 15 percent
(524) of those funds are likely to rely on the exemption. For each of
those funds, we estimate that the adoption of the audit committee
charter would require, on average, 2 hours of director time and 2 hours
of professional time,\260\ for a total one-time burden of approximately
2,096 hours, and a total one-time cost of approximately $655,000.\261\
We also estimate that each of the funds relying on the rule would be
required to spend approximately 0.2 hours annually to comply with the
proposed requirement that they preserve permanently their audit
committee charters,\262\ for an additional total annual hour burden of
105 hours, and an additional total annual cost of approximately
$5,425.\263\ We request comment on these estimated costs.
---------------------------------------------------------------------------
\258\ These conditions are designed to enable the Commission
staff to monitor the duties and responsibilities of an independent
audit committee formed by a fund relying on the exemption.
\259\ This estimate is based on statistics compiled by
Commission staff from January 1, 1997 through December 31, 1998.
\260\ This estimate is based on a review of the estimated hour
burdens currently associated with other rules under the Act that
impose similar collection of information requirements.
\261\ To calculate this one-time cost, the Commission staff used
$500 per hour as the average cost of directors' time and $125 per
hour as an average hourly wage for professionals ((2 hours x 524
funds x $500/hour) + (2 hours x 524 funds x $125/hour) =
$655,000).
\262\ This estimate is based on a review of the estimated hour
burdens associated with other rules under the Act that impose
similar collection of information requirements.
\263\ To calculate the total annual cost of the proposed rule,
the Commission staff assumed that one-third of the total annual hour
burden (35 hours) would be incurred by professionals with an hourly
wage rate of $125 per hour, and two-thirds of that annual hour
burden (70 hours) would be incurred by clerical staff with an hourly
wage rate of $15 per hour ((35 x $125/hour) + (70 x $15/hour) =
$5,425).
---------------------------------------------------------------------------
In addition, some funds pay their directors an extra fee for each
committee
[[Page 59851]]
on which they serve.\264\ Those funds may incur the additional costs of
audit committee fees if they establish an audit committee in order to
rely on the proposed exemption. Of those funds likely to rely on the
exemption, however, we have no basis for determining the number that
would pay their independent directors a separate fee for service on the
audit committee, or the likely amount of those fees.\265\ Comment is
requested on these additional costs that may be associated with this
proposed exemption.
---------------------------------------------------------------------------
\264\ In some cases, funds pay these additional committee fees
only if the committee meeting is held on a day when a board meeting
is not scheduled.
\265\ We also have no basis for determining how many funds would
choose to avoid those fees by scheduling audit committee meetings
for the same day as a board meeting.
---------------------------------------------------------------------------
F. Qualifications as an Independent Director
The proposed amendment to rule 2a19-1 and proposed new rule 2a19-3
should benefit shareholders, funds, and independent directors by
working to prevent qualified individuals from being unnecessarily
disqualified from serving as independent directors. The proposed
amendment to rule 2a19-1 would make the rule more flexible for all
funds, particularly funds with small boards of directors. Proposed rule
2a19-3 would benefit both funds and their independent directors by
clarifying the status of independent directors who own shares of index
funds.
The Commission is not aware of any costs to funds that would result
from these proposals. There also should be no costs to investors
because, consistent with concerns for investor protection, these
proposals would not permit individuals who have affiliations or
business interests that could impair their independence to serve as
independent directors.
G. Disclosure of Information About Fund Directors
As discussed above, the purpose of the proposed amendments to the
proxy rules and Forms N-1A, N-2, and N-3 is to provide fund investors
with improved information about directors. Because independent
directors are the shareholders' representatives and advocates,
shareholders have a significant interest in knowing who the independent
directors are, whether the independent directors' interests are aligned
with shareholders' interests, whether the independent directors have
any conflicts of interest, and how the directors govern the fund. This
information would help a fund shareholder to evaluate whether his
designated representatives can, in fact, act as independent, vigorous,
and effective representatives.
We believe that the proposed amendments would benefit investors in
several ways. The proposed requirement that mutual funds disclose basic
information about directors in an easy-to-read tabular format in the
fund's annual report to shareholders, SAI, and proxy statements for the
election of directors would benefit shareholders by ensuring that
shareholders receive information about the identity and experience of
their directors both annually and whenever they are asked to elect
directors. Moreover, this information would benefit prospective
investors who may obtain the information upon request.
Our proposal to require disclosure in the SAI of the aggregate
dollar amount of equity securities of funds in the fund complex owned
beneficially and of record by each director will allow shareholders and
prospective investors to better calculate whether the interests of
directors are aligned with their interests. In addition, shareholders
also would benefit by receiving this information in the proxy
statements whenever they are asked to elect directors.
Our proposal to improve the disclosure of possible conflict of
interest circumstances for directors will enable investors to decide
for themselves whether an independent director would be an effective
advocate. Disclosure of this type of information also would result in
its public dissemination, bring these circumstances to the attention of
fund shareholders, and encourage the selection of independent directors
who are independent in the spirit of the Act. Finally, this information
would assist the Commission in determining whether to exercise its
authority under section 2(a)(19) of the Act to find that a person is an
interested person of a fund by reason of having had, at any time since
the beginning of the last two completed fiscal years of the fund, a
material business or professional relationship with the fund and
certain persons related to the fund.
The proposed modifications to the disclosure requirements of
matters related to the board's role in governing a mutual fund would
benefit shareholders by allowing them to determine more readily whether
the directors are effectively representing shareholders' interests,
independent of fund management.
The proposed amendments would impose certain costs on the fund
industry. The costs associated with the proposed amendments would
include the resources expended by funds in determining what information
needs to be disclosed about fund directors (in the case of proxy
statements, also nominees) and preparing the disclosure documents.
Proxy Statements. The current hour burden for preparing proxy
statements is 96.2 hours per proxy statement, and we estimate that
approximately \1/3\ of those hours--or 32 hours--are expended
collecting and disclosing information about directors and
nominees.\266\ We estimate the additional burden hours that would be
imposed by the proposed disclosure requirements to be 10 hours per
proxy statement.\267\
---------------------------------------------------------------------------
\266\ This estimate is based on Commission staff assessment of
the different types of information currently required to be
disclosed in proxy statements.
\267\ This estimate is based upon a Commission staff assessment
of the proposed amendments in light of the current hour burden and
current reporting requirements. As stated above, the additional
hours are based on the additional time funds would devote to
determining what information needs to be disclosed and preparing the
disclosure documents.
---------------------------------------------------------------------------
We estimate the annual industry cost of the proposed amendments to
the proxy statements to be 10,000 hours, or $1.25 million, based on an
estimated 1,000 proxy statements that are filed annually.\268\
---------------------------------------------------------------------------
\268\ The estimated number of proxy statements is based on the
approximate number of proxy statements filed with the Commission in
calendar year 1998. The total industry cost of the proposed
amendments to the proxy statement is calculated by multiplying the
annual number of proxy statements (1,000) by the additional hour
burden imposed by the proposed amendments (10 hours) by the hourly
wage rate ($125). The hourly wage rate is based upon consultations
with a sample of filers and represents the Commission's estimate for
an appropriate wage rate for the legal, financial, and accounting
skills commonly used in preparation of registration statements,
shareholder reports, and proxy statements.
---------------------------------------------------------------------------
Registration Statements. Because the information proposed to be
disclosed in the registration statement would be the same as in the
proxy statements, we believe the hour burden for the proposed
amendments per registration statement would be approximately the
current hour burden for collecting and disclosing director information
under the current proxy rules plus the hour burden for the proposed
amendments to the proxy rules. As stated above, we estimate the current
hour burden for collecting and disclosing information about directors
and nominees in proxy statements to be 32 hours per proxy statement and
the burden hours for collecting and disclosing the enhanced information
about directors and nominees to be 10 hours per proxy statement, for a
total of 42 hours.
[[Page 59852]]
Form N-1A. The hour burden for Form N-1A is on a per portfolio
basis and not per registration statement filed with the Commission.
Based on the Commission staff's experience with Form N-1A, we estimate
that there are approximately 1.75 portfolios per registration statement
filed on Form N-1A. The average hour burden per portfolio for
disclosing the information about directors would be the hour burden per
registration statement (42) divided by the average number of portfolios
per registrant (1.75), or 24 hours per portfolio.\269\ Because mutual
funds would only have to update information in post-effective
amendments, we expect that the hour burden would be \1/6\ of the hours
expended for the initial registration statement, or 4 hours per
portfolio for post-effective amendments.\270\
---------------------------------------------------------------------------
\269\ Our estimated hour burden may significantly overstate the
burden for those portfolios that are part of a fund complex in which
multiple registered investment companies have the same board of
directors because the burden of collecting and disclosing
information about the common board would be spread over a larger
number of portfolios.
\270\ Although funds would only have to update the information
about current directors and add information about new directors, we
anticipate that funds would incur some burden hours in regularly
collecting information from directors, determining what information
needs to be disclosed, and preparing the updated disclosure.
The hour burden for the post-effective amendment to a
registration statement filed by an existing fund after the rules
take effect generally would be higher than for subsequent post-
effective amendments because the fund would need to compile and
disclose the required information for the first time.
---------------------------------------------------------------------------
We estimate that 280 portfolios file initial registration
statements and 7,875 portfolios file post-effective amendments annually
on Form N-1A.\271\ Thus, we estimate the annual industry cost of the
proposed amendments to Form N-1A to be 38,220 hours, or $4.78
million.\272\
---------------------------------------------------------------------------
\271\ These estimates are based on filings received in calendar
year 1998.
\272\ The total annual industry cost is calculated by
multiplying he total annual industry hour burden ((280 portfolios
x 24 hours) + (7,875 portfolios x 4 hours)) by the hourly wage
rate of $125.
---------------------------------------------------------------------------
Form N-2. The hour burden for Form N-2 is on a per registration
statement basis because funds registering on Form N-2 register one
portfolio per registration statement. Because the proposed disclosure
would be the same for Form N-2 as for Form N-1A, except that it would
be for one portfolio per registration statement, we estimate the
additional hour burden for the proposed amendments to be 42 hours for
each initial registration statement. Because funds would only have to
update information in post-effective amendments, we expect that the
hour burden would be approximately \1/6\ of the hours expended for the
initial registration statement, or 7 hours per post-effective
amendment.\273\
---------------------------------------------------------------------------
\273\ Although funds would only have to update the information
about current directors and add information about new directors, we
anticipate that funds would incur some burden hours in regularly
collecting information from directors, determining what information
needs to be disclosed, and preparing the updated disclosure.
The hour burden for the first post-effective amendment to a
registration statement filed by an existing fund after the rules
take effect generally would be higher than for subsequent post-
effective amendments because the fund would need to compile and
disclose the required information for the first time.
---------------------------------------------------------------------------
We estimate that 110 funds file initial registration statements and
20 file post-effective amendments annually on Form N-2.\274\ Thus, we
estimate annual industry cost of the proposed amendments to Form N-2 to
be 4,760 hours, or $595,000.\275\
---------------------------------------------------------------------------
\274\ These estimates are based on filings received in calendar
year 1998.
\275\ The total annual industry cost is calculated by
multiplying the total annual industry hour burden ((110 funds x 42
hours) + (20 funds x 7 hours)) by the hourly wage rate of $125.
---------------------------------------------------------------------------
Form N-3. The hour burden for Form N-3 is on a per portfolio basis
and not per registration statement filed with the Commission. Based on
the Commission staff's experience with Form N-3, we estimate that there
are approximately 4 portfolios per investment company registering on
Form N-3. The average hour burden per portfolio for disclosing the
information about directors would be the hour burden per registration
statement (42) divided by the approximate number of portfolios per
registrant (4), or 10.5 hours per portfolio. Because funds would only
have to update information in post-effective amendments, we expect that
the hour burden would be \1/6\ of the hours expended for the initial
registration statement, or 1.75 hours per portfolio for post-effective
amendments.\276\
---------------------------------------------------------------------------
\276\ Although funds would only have to update the information
about current directors and add information about new directors, we
anticipate that funds would incur some burden hours in regularly
collecting information from directors, determining what information
needs to be disclosed, and preparing the updated disclosure.
The hour burden for the first post-effective amendment to a
registration statement filed by an existing fund after the rules
take effect generally would be higher than for subsequent post-
effective amendments because the fund would need to compile and
disclose the required information for the first time.
---------------------------------------------------------------------------
We estimate that 20 portfolios file initial registration statements
and 40 portfolios file post-effective amendments annually on Form N-
3.\277\ Thus, we estimate the annual industry cost of the proposed
amendments to Form N-3 to be 280 hours, or $35,000.\278\
---------------------------------------------------------------------------
\277\ These estimates are based on filings received in calendar
year 1998.
\278\ The total annual industry cost is calculated by
multiplying the total annual industry hour burden ((20 portfolios
x 10.5 hours) + (40 portfolios x 1.75 hours)) by the hourly wage
rate of $125.
---------------------------------------------------------------------------
Shareholder Reports. Because the disclosure of basic tabular
information, which is proposed to be required in annual shareholder
reports, is a subset of the information that would be required in the
initial registration statement of a fund and any post-effective
amendments, we expect that the annual burden for complying with the
proposed amendments to the shareholder report requirements would be
minimal. Based upon the amount of information proposed to be disclosed,
we estimate that the hour burden would be one-half hour per investment
company for each annual shareholder report. We estimate that there are
3,490 management investment companies that are subject to the annual
report requirements.\279\ Thus, we estimate the annual industry cost of
the proposed amendments for annual shareholder reports to be 1,745
hours, or $218,125.\280\
---------------------------------------------------------------------------
\279\ This estimate is based on statistics compiled by
Commission staff from January 1, 1997 through December 31, 1998.
\280\ The industry cost of the proposed annual shareholder
reporting requirements is calculated by multiplying the total annual
hour burden for the industry (0.5 hours x 3,490 registered
management investment companies) by the hourly wage rate of $125.
---------------------------------------------------------------------------
H. Recordkeeping Regarding Director Independence
The Commission also is proposing to amend rule 31a-2 under the Act,
which requires funds to preserve certain records for specified periods
of time. The proposed amendments to rule 31a-2 would require funds to
preserve for a period of at least six years any record of: (i) the
initial determination that a director qualifies as an independent
director, and (ii) each subsequent determination of whether the
director continues to qualify as an independent director. This proposal
would benefit both shareholders and the Commission by enabling the
Commission's staff to monitor a fund's assessments of the independence
of its directors. This would make it possible for the Commission to
ascertain whether a fund's assessments reflect diligent efforts to
evaluate each director's relevant business and personal relationships
that might affect the director's independent judgment. The proposed
amendment would impose certain minimal costs on funds. The Commission
staff estimates that each investment company currently spends
[[Page 59853]]
about 27.8 hours per year complying with the record preservation
requirements of rule 31a-2.\281\ Approximately 3,490 investment
companies would be affected by the proposal to amend the rule to
require funds to preserve records regarding the independence of their
directors.\282\ The Commission staff estimates that each of those
investment companies would be required to spend an additional 0.2 hours
annually to comply with the proposed amendment,\283\ for a total
additional burden for all funds of approximately 698 hours. Based on
this estimate, the total annual cost for all funds of the proposed
amendment to rule 31a-2 would be $36,100.\284\ The Commission is not
aware of any other costs that would result from the proposed amendments
to rule 31a-2. Comment is requested on the costs associated with this
proposal.
---------------------------------------------------------------------------
\281\ Commission staff surveyed representatives of several funds
to determine the current burden hour estimate for rule 31a-2.
\282\ This estimate is based on statistics compiled by
Commission staff from January 1, 1997 through December 31, 1998.
\283\ This estimate is based on a Commission staff assessment of
the hour burden that would be imposed by the proposed amendment in
light of the estimated hour burden currently imposed by the
requirements of the rule.
\284\ In calculating the total annual industry cost of the
proposed amendment, the Commission staff assumed that one-third of
the total annual industry hour burden (233 hours) would be incurred
by professionals with an average hourly wage rate of $125 per hour,
and two-thirds of that annual hour burden (465 hours) would be
incurred by clerical staff with an average hourly wage rate of $15
per hour ((233 x $125/hour)+(465 x $15/hour)=$36,100).
---------------------------------------------------------------------------
To assist in the evaluation of the costs and benefits that may
result from the proposed rules and rule amendments, the Commission
requests that commenters provide views and data relating to any costs
and benefits associated with these proposals.
IV. Paperwork Reduction Act
Certain provisions of Forms N-1A, N-2, and N-3, and rules 0-1, 20a-
1, 30e-1, 31a-2, and 32a-4 under the Investment Company Act, and
Schedule 14A under the Exchange Act contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 [44 U.S.C. 3501-3520].\285\ The Commission has
submitted those rules and forms to the Office of Management and Budget
(``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 CFR
1320.11. The titles for the collections of information are: (1) ``Rule
0-1 under the Investment Company Act of 1940, Definition of terms used
in this part;'' (2) ``Rule 20a-1 under the Investment Company Act of
1940, Solicitation of Proxies, Consents and Authorizations;'' (3)
``Form N-1A under the Investment Company Act of 1940 and Securities Act
of 1933, Registration Statement of Open-End Management Investment
Companies;'' (4) ``Form N-2--Registration Statement of Closed-End
Management Investment Companies;'' (5) ``Form N-3--Registration
Statement of Separate Accounts Organized as Management Investment
Companies;'' (6) ``Rule 30e-1 under the Investment Company Act of 1940,
Reports to Stockholders of Management Companies;'' (7) ``Rule 31a-2
under the Investment Company Act of 1940, Records to be preserved by
registered investment companies, certain majority-owned subsidiaries
thereof, and other persons having transactions with registered
investment companies;'' and (8) ``Rule 32a-4 under the Investment
Company Act of 1940, Exemption from ratification or rejection
requirement of section 32(a)(2) for registered investment companies
with independent audit committees.'' An agency may not sponsor,
conduct, or require response to an information collection unless a
currently valid OMB control number is displayed.
---------------------------------------------------------------------------
\285\ Because we are proposing to redesignate rule 30d-1 as rule
30e-1, were refer to the newly designated rule 30e-1 in this
section.
---------------------------------------------------------------------------
Forms N-1A (OMB Control No. 3235-0307), N-2 (OMB Control No. 3235-
0026), and N-3 (OMB Control No. 3235-0316) were adopted pursuant to
section 8(a) of the Investment Company Act [15 U.S.C. 80a-8] and
section 5 of the Securities Act [15 U.S.C. 77e]. Rule 0-1 was adopted
pursuant to section 38(a) of the Investment Company Act [15 U.S.C. 80a-
37(a)]. Rule 20a-1 (OMB Control No. 3235-0158) and rule 30e-1 (OMB
Control No. 3235-0025) were promulgated under sections 20(a) and 30(e)
[15 U.S.C. 80a-20 and 80a-29], respectively, of the Investment Company
Act. Rule 31a-2 (OMB Control No. 3235-0179) was adopted under sections
31 [15 U.S.C. 80a-30] and 38(a) of the Investment Company Act. Rule
32a-4 is proposed pursuant to sections 6(c) [15 U.S.C. 80a-6(c)] and
38(a) of the Investment Company Act.
Rule 0-1
The proposed amendments to rule 0-1 include collection of
information requirements. Rule 0-1 defines certain terms for purposes
of the rules and regulations under the Investment Company Act. The
proposed amendments would add a definition of the term ``independent
legal counsel'' to this rule. Under the proposed definition, a person
is an independent legal counsel if (i) a fund reasonably believes that
the person has not acted as legal counsel to the fund's adviser,
principal underwriter, administrator, or any of their control persons
\286\ during the last two years, or (ii) a majority of the fund's
independent directors determines that the person's representation of
the fund's adviser, principal underwriter, administrator, or a control
person is or was so limited that it would not adversely affect the
person's ability to provide impartial, objective, and unbiased legal
counsel to the independent directors. The basis of the independent
directors' determination must be recorded in the minutes of the fund.
The purpose of this recordkeeping requirement is to make it possible
for the Commission staff to review these determinations.
---------------------------------------------------------------------------
\286\ The term ``control person'' is defined 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.
---------------------------------------------------------------------------
Any fund that relies on an Exemptive Rule would be required to use
this proposed definition of independent legal counsel.\287\ We assume
that approximately 3,200 funds rely on at least one of the Exemptive
Rules annually.\288\ We further assume that the independent directors
of approximately one-third (1,065) of those funds would need to make
the required determination in order for their counsel to meet the
definition of ``independent legal counsel.'' \289\ We estimate that
each of these 1,065 funds would be required to spend, on average, 0.75
hours annually to comply with the proposed recordkeeping requirement
concerning this determination,\290\ for a total annual burden of
approximately 799 hours.
---------------------------------------------------------------------------
\287\ Among other things, the proposed amendments to the
Exemptive Rules would require that, for funds relying on those
rules, any legal counsel for the independent directors of the fund
be an independent legal counsel.
\288\ See supra note 253.
\289\ See supra note 254.
\290\ See supra note 255 for the basis of this estimate.
---------------------------------------------------------------------------
Compliance with the proposed rule 0-1 definition of independent
legal counsel would be necessary to obtain the benefit of relying on
the Exemptive Rules. Responses will not be kept confidential.
Rule 20a-1
Rule 20a-1 requires persons soliciting proxies regarding investment
companies to comply with the proxy solicitation requirements of
Regulation 14A under the Exchange Act, including Schedule 14A, which,
with the proposed amendments, contains collection of information
requirements. The likely respondents to this information
[[Page 59854]]
collection are investment companies and other persons filing proxy
statements for investment companies. We estimate that 1,000 proxy
statements are filed annually for investment companies and that the
current hour burden for proxy statements is 96.2 hours per
statement.\291\
---------------------------------------------------------------------------
\291\ The estimated number of proxy statements filed is based on
the approximate number of proxy statements filed with the commission
in calendar year 1998. The current approved Paperwork Reduction Act
(``PRA'') hour burden for rule 20a-1 is 96.2 hours.
---------------------------------------------------------------------------
We estimate that the proposed amendments would increase the hour
burden per filing of a proxy statement by 10 hours.\292\ Thus, we
estimate the hour burden per proxy statement would be 106.2 hours, for
a total industry annual hour burden of 106,200 hours.
---------------------------------------------------------------------------
\292\ This estimate is based upon a Commission staff assessment
of the proposed amendments in light of the current hour burden and
current reporting requirements.
As stated above, the additional hours are based on the
additional time funds would devote to determining what information
needs to be disclosed and preparing the disclosure documents.
---------------------------------------------------------------------------
Compliance with the disclosure requirements of rule 20a-1 and
Schedule 14A is mandatory. Responses to the disclosure requirements
will not be kept confidential.
Form N-1A
Form N-1A, including the proposed amendments, contains collection
of information requirements. The likely respondents to this information
collection are open-end funds registering with the Commission on Form
N-1A. We estimate that 160 initial registration statements are filed
annually on Form N-1A, registering 280 portfolios, and that the current
hour burden per portfolio per filing is 800 hours, for an annual hour
burden of 224,000 hours.\293\ We estimate that 4,500 post-effective
amendments to registration statements are filed annually on Form N-1A,
for 7,875 portfolios, and that the current hour burden per portfolio
per post-effective amendment filing is 100 hours, for an annual hour
burden of 787,500 hours.\294\ Thus, we estimate a current total annual
hour burden of 1,011,500 hours for the preparation and filing of Form
N-1A.
---------------------------------------------------------------------------
\293\ These estimates are based on filings received in calendar
year 1998. The current approved PRA hour burden per portfolio for an
initial Form N-1A is 800 hours.
\294\ These estimates are based on filings received in calendar
year 1998. The current approved PRA hour burden per portfolio for
post-effectmens amendmends to Form N-1A is 100 hours.
---------------------------------------------------------------------------
We estimate that the proposed amendments would increase the hour
burden per portfolio per filing of an initial registration statement by
24 hours and would increase the hour burden per portfolio per filing of
a post-effective amendment to a registration statement by 4 hours.\295\
Thus, if the proposed amendments to Form N-1A are adopted, the total
annual hour burden for all funds for preparation and filing of initial
registration statements and post-effective amendments on Form N-1A
would be 1,049,720 hours.\296\
---------------------------------------------------------------------------
\295\ See supra 269 and 270 and accompanying text. As stated
above, the additional hours are based on the additional time funds
would devote to determining what information needs to be dislosed
and preparing the disclosure documents.
For post-effective amendments, although funds would only have to
update the information about current directors and add information
about new directors, we anticipate that funds would incur some
burden hours in regularly collecting information from directors,
determining what information needs to be disclosed, and preparing
the updated disclosure.
The hour burden for the first post-effective amendment to a
registration statement filed by an existing fund after the rules
take effect generally would be higher than for subsequent post-
effective amendments because the fund would need to compile and
disclose the required information for the first time.
\296\ This total annual hour burden is calculated by adding the
hour burden for initial registration statements and the hour burden
for post-effective amendments, based on the proposed amendments. The
annual hour burden per portfolio for an initial filing would be 824
hours (800 plus 24), for 280 portfolios, for a total of 230,720
hours. The annual hour burden per portfolio for a post-effective
amendment would be 104 hours (100 plus 4), for 7,875 portfolios, for
a total of 819,000 hours. The total annual hour burden for all funds
for preparing and filing of initial registration statements and
post-effective amendments on Form N-1A would be 1,049,720 hours
(230,720 plus 819,000).
---------------------------------------------------------------------------
Compliance with the disclosure requirements of Form N-1A is
mandatory. Responses to the disclosure requirements will not be kept
confidential.
Form N-2
Form N-2, including the proposed amendments, contains collection of
information requirements. The likely respondents to this information
collection are closed-end funds registering with the Commission on Form
N-2. We estimate that 110 initial registration statements are filed
annually on Form N-2, at a current hour burden per filing of 500 hours,
for an annual hour burden of 55,000 hours.\297\ We estimate that 20
post-effective amendments to registration statements are filed annually
on Form N-2, at a current hour burden of 100 hours, for an annual hour
burden of 2,000.\298\ Thus, we estimate a current total annual hour
burden of 57,000 hours for the preparation and filing of Form N-2.
---------------------------------------------------------------------------
\297\ These estimates are based on filings received in calendar
year 1998. The current approved PRA hour burden per initial Form N-2
is 500 hours.
\298\ These estimates are based on filings received in calendar
year 1998. The current approved PRA hour burden per initial Form N-2
is 100 hours.
---------------------------------------------------------------------------
We estimate that the proposed amendments would increase the hour
burden per filing of an initial registration statement by 42 hours and
would increase the hour burden per filing of a post-effective amendment
to a registration statement by 7 hours.\299\ Thus, if the proposed
amendments to Form N-2 are adopted, the total annual hour burden for
all funds for preparation and filing of initial registration statements
and post-effective amendments on Form N-2 would be 61,760 hours.\300\
---------------------------------------------------------------------------
\299\ See supra Section III.F. As states above, the additional
hours are based on the additional time funds would devote to
determining what information needs to be disclosed and preparing the
disclosure documents.
For post-effective amendments, although funds would only have to
update the information about current directors and add information
about new directors, we anticipate that funds would incur some
burden hours in regularly collecting information from directors,
determining what information needs to be disclosed, and preparing
the updated disclosure.
The hour burden for the first post-effective amendment to a
registration statement filed by an existing fund after the rules
take effect generally would be higher than for subsequent post-
effective amendments because the fund would need to compile and
disclose the required information for the first time.
\300\ This total annual hour burden is calculated by adding the
hour burden for initial registration statements and the hour burden
for post-effective amendments, based on the proposed amendments. The
annual hour burden per initial registration statement would be 542
hours (500 plus 42), for 110 filings, for a total of 59,620 hours.
The annual hour burden per post-effective amendment would be 107
hours (100 plus 7), for 20 post-effective amendments, for a total of
2,140 hours. The total annual hour burden for all funds for
preparing and filing of initial registration statements and post-
effective amendments on Form N-2 would be 61.760 hours (59,620 plus
2,140).
---------------------------------------------------------------------------
Compliance with the disclosure requirements of Form N-2 is
mandatory. Responses to the disclosure requirements will not be kept
confidential.
Form N-3
Form N-3, including the proposed amendments, contains collection of
information requirements. The likely respondents to this information
collection are separate accounts organized as management investment
companies registering with the Commission on Form N-3. We estimate that
5 initial registration statements are filed annually on Form N-3,
including approximately 20 portfolios, and that the current hour burden
per portfolio in a filing is 900 hours, for an annual hour burden of
18,000 hours.\301\ We estimate
[[Page 59855]]
that 10 post-effective amendments to registration statements are filed
annually on Form N-3, including approximately 40 portfolios, at a
current hour burden of 150 hours per portfolio in a filing, for an
annual hour burden of 6,000.\302\ Thus, we estimate a current total
annual hour burden of 24,000 hours for the preparation and filing of
Form N-3.
---------------------------------------------------------------------------
\301\ These estimates are based on filings received in calendar
year 1998. The previous Paperwork Reduction Act submission for Form
N-3 did not differentiate the hour burden between initial filings
and post-effective amendments. the approved hour burden at that time
was 518.8 hours per filing based on 53 filings. Based upon
experience with Form N-3, we have reevaluated the hour burden for
Form N-3 and estimated that exclusive of the proposed amendments,
the hour burden for initial filings is 900 hours.
\302\ These estimates are based on filings received in calendar
year 1998. The previous Paperwork Reduction Act submission for Form
N-3 did not differentiate the hour burden between initial filings
and post-effective amendments. The approved hour burden at that time
was 518.8 hours per filing based on 53 filings. Based upon
experience with Form N-3, we have reevaluated the hour burden for
Form N-3 and estimated that exclusive of the proposed amendments,
the hour burden for post-effective amendments is 150 hours.
---------------------------------------------------------------------------
We estimate that the proposed amendments would increase the hour
burden per portfolio per filing of an initial registration statement by
10.5 hours and would increase the hour burden per portfolio per filing
of a post-effective amendment to a registration statement by 1.75
hours.\303\ Thus, if the proposed amendments to Form N-3 are adopted,
the total annual hour burden for all funds for preparation and filing
of initial registration statements and post-effective amendments on
Form N-3 would be 24,280 hours.\304\
---------------------------------------------------------------------------
\303\ See supra Section III.F. As stated above, the additional
hours are based on the additional time funds would devote the
determining what information needs to be disclosed and preparing the
disclosure documents.
For post-effective amendments, although funds would only have to
update the information about current directors and add information
about new directors, we anticipate that funds would incur some
burden hours in regularly collecting information from directors,
determining what information needs to be disclosed, and preparing
the updated disclosure.
The hour burden for the first post-effective amendment to a
registration statement filed by an existing fund after the rules
take effect generally would be higher than for subsequent post-
effective amendments because the fund would need to compile and
disclose the required information for the first time.
\304\ This total annual hour burden is calculated by adding the
hour burden for initial registration statements and the hour burden
for post-effective amendments, based on the proposed amendments. the
annual hour burden per portfolio for an initial filing would be
910.5 hours (900 plus 10.5), for 20 portfolios, for a total of
18,210 hours. The annual hour burden per portfolio for a post-
effective amendment would be 151.75 hours (150 plus 1.75), for 40
portfolios, for a total of 6,070 hours. The total annual hour burden
for all funds for preparing and filing of initial registration
statements and post-effective amendments on Form N-3 would be 24,280
hours (18,210 plus 6,070).
---------------------------------------------------------------------------
Compliance with the disclosure requirements of Form N-3 is
mandatory. Responses to the disclosure requirements will not be kept
confidential.
Rule 30e-1 Shareholder Reports \305\
Rule 30e-1, including the proposed amendments to Forms N-1A, N-2,
and N-3, contains collection of information requirements.\306\ There
are approximately 3,490 management investment companies subject to rule
30e-1.\307\ We estimate that the current hour burden for preparing and
filing semi-annual and annual shareholder reports in compliance with
rule 30e-1 is 202 hours.\308\ With the proposed amendments, we estimate
the hour burden to be 202.5 hours, for a total annual hour burden to
the industry of 706,725 hours.\309\
---------------------------------------------------------------------------
\305\ Because we are proposing to redesignate rule 30d-1 as rule
30e-1, we refer to the newly designated rule 30e-1 in this section.
\306\ The proposed amendments are to Forms N-1A, N-2, and N-3.
Rule 30e-1 requires funds to include in the shareholder reports the
information that is required by the fund's registration statement
form.
\307\ This estimate is based on statistics compiled by
Commission staff from January 1, 1997 through December 31, 1998.
\308\ The current approved PRA hour burden for rule 30e-1 is 202
hours per investment company.
\309\ See Supra section III.F.
---------------------------------------------------------------------------
Compliance with the disclosure requirements of rule 30e-1 is
mandatory. Responses to the disclosure requirements will not be kept
confidential.
Rule 31a-2
Rule 31a-2, including the proposed amendments, contains collection
of information requirements. The rule requires funds and certain
principal underwriters, broker-dealers, investment advisers and
depositors of funds to preserve certain records for at least six years
and other records permanently. Its purpose is to ensure that the
Commission and the public have access to material business information
about funds. The proposed amendments to rule 31a-2 would require funds
to preserve for a period of at least six years any record of (i) The
initial determination that a director qualifies as an independent
director, and (ii) each subsequent determination of whether the
director continues to qualify as an independent director. The purpose
of this proposal is to enable the Commission to monitor funds'
assessments of the independence of their directors.
We estimate that approximately 3,490 management investment
companies are likely respondents to rule 31a-2,\310\ and that each
investment company currently spends about 27.8 hours per year complying
with the rule, for a total industry burden of approximately 97,022
hours.\311\
---------------------------------------------------------------------------
\310\ The burdens associated with the rule's requirements that
investment advisers, underwriters, brokers, dealers, and depositors
preserve certain records have been addressed separately in
connection with rules adopted under section 204 of the Investment
Advisers Act [15 U.S.C. 80b-4] and section 17 of the exchange Act
[15 U.S.C. 78q].
\311\ The Commission staff surveyed representatives of several
funds to determine the current burden hour estimate for rule 31a-2.
---------------------------------------------------------------------------
Each of those 3,490 investment companies would be affected by the
proposal to amend rule 31a-2 to require funds to preserve records
regarding the independence of their directors. We estimate that each of
these investment companies would be required to spend an additional 0.2
hours annually to comply with the proposed amendment,\312\ for a total
additional annual burden for all funds of approximately 698 hours.
Thus, we estimate that the total annual burden for all funds of
complying with rule 31a-2, as proposed to be amended, would be
approximately 97,720 hours.
---------------------------------------------------------------------------
\312\ See suprs note 283 for the basis of this estimate.
---------------------------------------------------------------------------
Compliance with rule 31a-2 is mandatory for every registered fund.
The Commission may not keep confidential any records preserved in
reliance on the rule.
Rule 32a-4
Proposed rule 32a-4 contains collection of information
requirements. The rule provides an exemption from the requirement in
section 32(a)(2) of the Act that the selection of a fund's independent
public accountant be submitted to shareholders for ratification or
rejection, if the fund establishes an audit committee consisting
entirely of independent directors to oversee the fund's auditor. To
rely on this exemption, among other things, the fund's board of
directors must adopt an audit committee charter that sets forth the
committee's structure, duties, powers and methods of operation. The
fund also must preserve that charter, and any modifications to the
charter, permanently in an easily accessible place. The purpose of
these conditions is to ensure that the Commission staff will be able to
monitor the duties and responsibilities of an independent audit
committee formed by a fund relying on this exemption.
We estimate that there are approximately 3,490 investment companies
that could rely on the proposed rule. We assume that approximately 15
percent (524) of those funds are likely to rely on the
[[Page 59856]]
exemption. For each of those funds, we estimate that the adoption of
the audit committee charter would require, on average, 2 hours of
director time and 2 hours of professional time,\313\ for a total one-
time burden of 2,096 hours. We also estimate that each of the funds
relying on the rule would be required to spend approximately 0.2 hours
annually to comply with the proposed requirement that they preserve
permanently their audit committee charters,\314\ for an additional
annual hour burden of 105 hours.
---------------------------------------------------------------------------
\313\ See supra note 260 for the basis of this estimate.
\314\ See supra note 262 for the basis of this estimate.
---------------------------------------------------------------------------
Compliance with rule 32a-4 is voluntary. The Commission may not
keep confidential the records preserved pursuant to the rule.
Request for Comments
We request your comments on the accuracy of our estimates. Pursuant
to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments to: (i)
evaluate whether the proposed collection of information is necessary
for the proper performance of the functions of the agency, including
whether the information will have practical utility; (ii) evaluate the
accuracy of the Commission's estimate of the burden of the proposed
collection of information; (iii) determine whether there are ways to
enhance the quality, utility, and clarity of the information to be
collected; and (iv) evaluate whether there are ways to minimize the
burden of the collection of information on those who are to respond,
including through the use of automated collection techniques or other
forms of information technology.
Persons submitting comments on the collection of information
requirements should direct the comments to the Office of Management and
Budget, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington,
D.C. 20503, and should send a copy to Jonathan G. Katz, Secretary,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, with reference to File No. S7-23-99. The Office of
Management and Budget is required to make a decision concerning the
collection of information between 30 and 60 days after publication of
this release. Consequently, a comment to OMB is best assured of having
its full effect if OMB receives it within 30 days after publication of
this Release.
V. Summary of Initial Regulatory Flexibility Analysis
The Commission has prepared an Initial Regulatory Flexibility
Analysis (``IRFA'' or ``analysis'') in accordance with 5 U.S.C. 603.
The IRFA relates to proposed rules 2a19-3, 10e-1, and 32a-4, and the
proposed amendments to rules 0-1, 2a19-1, 10f-3, 12b-1, 15a-4, 17a-7,
17a-8, 17d-1, 17e-1, 17g-1, 18f-3, 23c-3, and 31a-2 (the ``substantive
rule proposals''). The IRFA also relates to the proposed amendments to
Schedule 14A, Forms N-1A, N-2, and N-3, and rules 30e-1 and 30e-2 (the
``disclosure proposals'').\315\ The following summarizes the IRFA.
---------------------------------------------------------------------------
\315\ Because we are proposing to redesignate rule 30d-1 as rule
30e-1, and rule 30d-2 as 30e-2, we refer to the newly designated
rules 30e-1 and 30e-2 in this section.
---------------------------------------------------------------------------
The analysis explains that the substantive rule proposals contained
in this Release include proposed amendments to the Exemptive Rules that
are designed to enhance the independence and effectiveness of fund
independent directors.\316\ The proposals also include new rules and
rule amendments that would prevent qualified individuals from being
unnecessarily disqualified from serving as independent directors,
protect independent directors from the costs of legal disputes with
fund management, permit the Commission to monitor the independence of
directors by requiring funds to preserve records of their assessments
of director independence, and temporarily suspend the independent
director minimum percentage requirements if a fund falls below the
required percentage due to an independent director's death or
resignation. In addition, the Commission is proposing to exempt funds
from the requirement that shareholders ratify or reject the directors'
selection of an independent public accountant, if the fund establishes
an audit committee composed entirely of independent directors.
---------------------------------------------------------------------------
\316\ These proposals would require that, for funds relying on
those exemptive rules, (i) independent directors constitute either a
majority or a super-majority (two-thirds) of the fund's board of
directors; (ii) independent directors select and nominate other
independent directors; and (iii) any legal counsel for the
independent directors be an independent legal counsel. In connection
with these proposals, we also are proposing to amend rule 0-1 under
the Act to add definitions of the terms ``independent legal
counsel'' and ``administrator.''
---------------------------------------------------------------------------
The analysis also explains that the proposals contained in this
Release would require enhanced disclosure about directors that should
allow a fund shareholder to evaluate whether his designated
representatives can, in fact, act as independent, vigorous, and
effective representatives. The analysis explains that the proposed
amendments would impose enhanced disclosure requirements on all funds
by requiring disclosure of basic information about directors to
shareholders in the SAI, proxy solicitations for the election of
directors, and annual reports to shareholders. The proposed amendments
also would require improved disclosure in the SAI and proxy
solicitations for the election of directors about fund shares owned by
directors, information about directors that may raise conflict of
interest concerns, and information on the board's role in governing the
fund.
The analysis discusses the impact of the proposed amendments on
small entities. For purposes of the Regulatory Flexibility Act, a fund
is a small entity if the fund, together with other funds in the same
group of related funds, has net assets of $50 million or less as of the
end of its most recent fiscal year.\317\
---------------------------------------------------------------------------
\317\ 17 CFR 270.0-10.
---------------------------------------------------------------------------
The analysis notes that as of December 1998, there were
approximately 3,560 investment companies that may be affected by one or
more of the substantive and disclosure rule proposals, including 320
investment companies that are small entities. The proposed amendments
to the Exemptive Rules would affect any of these funds, including those
that are small entities, that rely on an Exemptive Rule and do not
already meet the proposed new conditions to those rules. The analysis
explains that although it appears that funds may incur certain costs in
complying with those proposed conditions, the Commission does not have
a reasonable basis for estimating those costs. The analysis also
explains that the Commission believes that the other substantive rule
proposals are not expected to have a significant economic impact on
funds, including those that are small entities. The analysis states
that the Commission believes that the disclosure changes may have a
significant impact on small entities.
The analysis also discusses the reporting, recordkeeping and other
compliance requirements associated with the proposals contained in this
Release. It notes that the proposed amendments to the Exemptive Rules
would require that, for funds relying on those rules: (i) independent
directors constitute either a majority or a super-majority (two-thirds)
of the fund's board of directors; (ii) independent directors select and
nominate other independent directors; and (iii) any legal counsel for
[[Page 59857]]
the independent directors be an independent legal counsel.
The analysis explains that the proposed amendments to rule 0-1
would add a definition of ``independent legal counsel.'' Under this
proposed definition, a person is an independent legal counsel if (i) a
fund reasonably believes that the person has not acted as legal counsel
to the fund's adviser, principal underwriter, administrator, or any of
their control persons during the last two years, or (ii) a majority of
the fund's independent directors determines that the person's
representation of the fund's adviser, principal underwriter,
administrator, or a control person is or was so limited that it would
not adversely affect the person's ability to provide impartial,
objective, and unbiased legal counsel to the independent directors. The
basis of the independent directors' determination must be recorded in
the minutes of the fund. The analysis explains that each fund whose
independent directors make a determination under the proposed
definition would be required to spend approximately 0.75 hours annually
to comply with the requirement that the determination be recorded in
the minutes of the fund.\318\
---------------------------------------------------------------------------
\318\ See supra note 255 for the basis of this estimate.
---------------------------------------------------------------------------
Proposed rule 32a-4 would require any fund relying on the exemption
provided by the rule to (i) establish an audit committee comprised
solely of independent directors, (ii) adopt an audit committee charter,
and (iii) preserve that charter, and any modifications to that charter,
permanently in an easily accessible place. The analysis explains that
the staff estimates that each fund relying on the proposed rule would
be required to spend approximately 4 hours to comply with the
requirement that it adopt an audit committee charter, and approximately
0.2 hours annually to comply with the requirement that it preserve that
charter in an easily accessible place.319
---------------------------------------------------------------------------
\319\ See supra notes 260 and 262 for the basis of these
estimates.
---------------------------------------------------------------------------
In addition, the analysis notes that the proposed amendments to
rule 31a-2 would require funds to preserve for a period of at least six
years any record of (i) the initial determination that a director
qualifies as an independent director, and (ii) each subsequent
determination of whether the director continues to qualify as an
independent director. The analysis explains the Commission staff
estimates that each investment company that must comply with the rule
would be required to spend 0.2 hours annually to comply with this new
recordkeeping requirement.320
---------------------------------------------------------------------------
\320\ See supra note 283 for the basis of this estimate.
---------------------------------------------------------------------------
The disclosure proposals would require all funds subject to the
amendments to provide enhanced disclosure about directors. As explained
in the analysis, based upon staff assessment of the proposed amendments
in light of the current hour burden and current reporting requirements,
the Commission estimates it will take approximately 10 additional hours
per proxy statement to include the proposed disclosure about directors;
24 additional hours per portfolio to prepare an initial registration
statement on Form N-1A and 4 additional hours per portfolio to prepare
post-effective amendments to the registration statement on Form N-1A
that include the proposed disclosure about directors; 42 additional
hours per registrant to prepare an initial registration statement on
Form N-2 and 7 additional hours per registrant to prepare post-
effective amendments to the registration statement on Form N-2 that
include the proposed disclosure about directors; 10.5 additional hours
per portfolio to prepare an initial registration statement on Form N-3
and 1.75 additional hours per portfolio to prepare post-effective
amendments to the registration statement on Form N-3 that include the
proposed disclosure about directors; and 0.5 additional hours per
investment company to include the proposed basic information about
directors in the annual report to shareholders.321
---------------------------------------------------------------------------
\321\ The hour burden for the first post-effective amendment to
a registration statement filed by an existing fund after the rules
take effect generally would be higher than for subsequent post-
effective amendments because the fund would need to compile and
disclose the required information for the first time.
---------------------------------------------------------------------------
As stated in the analysis, the Commission considered several
alternatives to both the substantive rule proposals and the disclosure
proposals, including establishing different compliance or reporting
requirements for small entities or exempting them from all or part of
the proposed amendments. The Commission believes that establishing
different substantive or disclosure requirements applicable
specifically to small entities is inconsistent with the protection of
investors. The Commission also believes that adjusting the proposals to
establish different compliance requirements for small entities could
undercut the purpose of the proposals: to enhance the effectiveness of
independent directors, and thus better enable those directors to
fulfill their role of protecting shareholder interests.
The Commission encourages the submission of comments on matters
discussed in the IRFA. Comment specifically is requested on the number
of small entities that would be affected by the proposals and the
impact of the proposals on small entities. Commenters are asked to
describe the nature of any impact and provide empirical data supporting
the extent of the impact. These comments will be placed in the same
public comment file as comments on the proposals. A copy of the IRFA
may be obtained by contacting Jennifer B. McHugh or Heather A. Seidel,
Securities and Exchange Commission, 450 5th Street, N.W., Washington,
D.C. 20549-0506.
VI. Statutory Authority
The Commission is proposing rules 2a19-3, 10e-1, and 32a-4, and
amendments to rules 0-1, 2a19-1, 10f-3, 12b-1, 15a-4, 17a-7, 17a-8,
17d-1, 17e-1, 17g-1, 18f-3, 23c-3, 30d-1, 30d-2, and 31a-2 pursuant to
authority set forth in sections 6(c), 10(e), 30(e), 31, and 38(a) of
the Investment Company Act [15 U.S.C. 80a-6(c), 80a-10(e), 80a-29(e),
80a-30, 80a-37(a)]. The Commission is proposing amendments to Schedule
14A pursuant to authority set forth in sections 14 and 23(a)(1) of the
Exchange Act [15 U.S.C. 78n, 78w(a)(1)] and sections 20(a) and 38 of
the Investment Company Act [15 U.S.C. 80a-20(a), 80a-37]. The
Commission is proposing amendments to Forms N-1A, N-2, and N-3 pursuant
to authority set forth in sections 5, 6, 7, 10, and 19(a) of the
Securities Act of 1933 [15 U.S.C. 77e, 77f, 77g, 77j, 77s(a)] and
sections 8, 24(a), 30, and 38 of the Investment Company Act [15 U.S.C.
80a-8, 80a-24(a), 80a-29, 80a-37].
List of Subjects
17 CFR Parts 239 and 240
Reporting and recordkeeping requirements, Securities.
17 CFR Parts 270 and 274
Investment companies, Reporting and recordkeeping requirements,
Securities.
Text of Proposed Rules and Forms
1. For the reasons set out in the preamble, Title 17, Chapter II of
the Code of Federal Regulations is proposed to be amended as follows:
[[Page 59858]]
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The authority citation for part 240 continues to read, in part,
as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee,
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k,
78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d),
78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and
80b-11, unless otherwise noted.
* * * * *
2. Section 240.14a-101 is amended by revising paragraphs (d) and
(e) of Item 7 to read as follows:
Sec. 240.14a-101 Schedule 14A. Information required in proxy
statement.
* * * * *
Item 7. Directors and executive officers.
* * * * *
(d)(1) State whether or not the registrant has standing audit,
nominating and compensation committees of the Board of Directors, or
committees performing similar functions. If the registrant has such
committees, however designated, identify each committee member,
state the number of committee meetings held by each such committee
during the last fiscal year and describe briefly the functions
performed by such committees.
(2) If the registrant has a nominating or similar committee,
state whether the committee will consider nominees recommended by
security holders and, if so, describe the procedures to be followed
by security holders in submitting such recommendations.
(e) In lieu of paragraphs (a) through (d) of this Item,
investment companies registered under the Investment Company Act of
1940 must furnish the information required by Item 22(b) of this
Schedule 14A.
* * * * *
3. In Sec. 240.14a-101 amend Item 8(d), before the Instruction, by
revising ``Item 22(b)(6)'' to read ``Item 22(b)(12)''.
4. In Sec. 240.14a-101 amend the Instruction following Item
10(a)(2)(ii)(A) by revising ``Item 22(b)(6)'' to read ``Item
22(b)(12)''.
5. In Sec. 240.14a-101 amend the Instruction following Item
10(b)(1)(ii) by revising ``Item 22(b)(6)(ii)'' to read ``Item
22(b)(12)(ii)''.
6. Item 22 of Sec. 240.14a-101 is amended by:
A. Revising paragraph (a)(1)(i);
B. Redesignating paragraphs (a)(1)(vi), (vii), and (viii) as
paragraphs (a)(1)(viii), (ix), and (xi);
C. Adding new paragraphs (a)(1)(vi), (vii), and (x); and
D. Revising newly designated paragraph (a)(1) (ix).
The revisions and additions read as follows:
Sec. 240.14a-101 Schedule 14A. Information required in proxy
statement.
* * * * *
Item 22. Information required in investment company proxy
statement.
(a) * * *
(1) * * *
(i) Administrator. The term ``Administrator'' shall mean any
person who provides significant administrative or business affairs
management services to a Fund.
* * * * *
(vi) Immediate family member. The term ``Immediate Family
Member'' shall mean a person's spouse, parent, child, sibling,
mother- or father-in-law, son- or daughter-in-law, or brother- or
sister-in-law, and includes step and adoptive relationships.
(vii) Officer. The term ``Officer'' shall mean the president,
vice-president, secretary, treasurer, controller, or any other
officer who performs policy-making functions.
* * * * *
(ix) Registrant. The term ``Registrant'' shall mean an
investment company registered under the Investment Company Act of
1940 or a business development company as defined by section
2(a)(48) of the Investment Company Act of 1940.
(x) Sponsoring Insurance Company. The term ``Sponsoring
Insurance Company'' of a Fund that is a separate account shall mean
the insurance company that establishes and maintains the separate
account and that owns the assets of the separate account.
* * * * *
7. Section 240.14a-101 is amended by revising paragraph (b) of Item
22 to read as follows:
Sec. 240.14a-101 Schedule 14A. Information required in proxy
statement.
* * * * *
Item 22. Information required in investment company proxy
statement.
* * * * *
(b) Election of directors. If action is to be taken with respect
to the election of directors of a Fund, furnish the following
information in the proxy statement in addition to the information
(and in the format) required by paragraphs (f) and (g) of Item 7 of
Schedule 14A.
Instructions to introductory text of paragraph (b). 1. Furnish
information with respect to a prospective investment adviser to the
extent applicable.
2. If the solicitation is made by or on behalf of a person other
than the Fund or an investment adviser of the Fund, provide
information only as to nominees of the person making the
solicitation.
3. When providing information about directors and nominees for
election as directors in response to this Item 22(b), furnish
information for directors or nominees who are or would be
``interested persons'' within the meaning of section 2(a)(19) of the
Investment Company Act of 1940 separately from the information for
directors or nominees who are not or would not be ``interested
persons.'' For example, when furnishing information in a table, you
should provide separate tables (or separate sections of a single
table) for directors and nominees who are or would be interested
persons and for directors or nominees who are not or would not be
interested persons. When furnishing information in narrative form,
indicate by heading or otherwise the directors or nominees who are
or would be interested persons and the ones who are not or would not
be interested persons.
4. No information need be given about any director whose term of
office as a director will not continue after the meeting to which
the proxy statement relates.
(1) Provide the information required by the following table for
each director, nominee for election as director, Officer of the
Fund, person chosen to become an Officer of the Fund, and, if the
Fund has an advisory board, member of the board. Explain in a
footnote to the table any family relationship between the persons
listed.
----------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5) (6)
----------------------------------------------------------------------------------------------------------------
Name, Address, Position(s) Held Term of Office Principal Number of Other
and Age with Fund and Length of Occupation(s) Portfolios in Directorships
Time Served During Past 5 Fund Complex Held by Director
Years Overseen by or Nominee for
Director or Director
Nominee for
Director
----------------------------------------------------------------------------------------------------------------
Instructions to paragraph (b)(1). 1. For purposes of this
paragraph, the term ``family relationship'' means any relationship
by blood, marriage, or adoption, not more remote than first cousin.
2. No nominee or person chosen to become a director or Officer
who has not consented to act as such may be named in response to
this Item. In this regard, see Rule 14a-4(d) under the Exchange Act
(Sec. 240.14a-4(d) of this chapter).
3. If fewer nominees are named than the number fixed by or
pursuant to the governing instruments, state the reasons for this
procedure and that the proxies cannot be voted for a greater number
of persons than the number of nominees named.
[[Page 59859]]
4. For each director or nominee for election as director who is
or would be an ``interested person'' within the meaning of section
2(a)(19) of the Investment Company Act of 1940, describe, in a
footnote or otherwise, the relationship, events, or transactions by
reason of which the director or nominee is or would be an interested
person.
5. State the principal business of any company listed under
column (4) unless the principal business is implicit in its name.
6. Include in column (5) the total number of separate portfolios
that a nominee for election as director would oversee if he were
elected.
7. Indicate in column (6) directorships not included in column
(5) that are held by a director or nominee for election as director
in any company with a class of securities registered pursuant to
section 12 of the Exchange Act or subject to the requirements of
section 15(d) of the Exchange Act or any company registered as an
investment company under the Investment Company Act of 1940, 15
U.S.C. 80a, as amended, and name the companies in which the
directorships are held. Where the other directorships include
directorships overseeing two or more portfolios in the same Fund
Complex, identify the Fund Complex and provide the number of
portfolios overseen as a director in the Fund Complex rather than
listing each portfolio separately.
(2) Describe briefly any arrangement or understanding between
any director, nominee for election as director, Officer, or person
chosen to become an Officer, and any other person(s) (naming the
person(s)) pursuant to which he was or is to be selected as a
director, nominee, or Officer.
Instruction to paragraph (b)(2). Do not include arrangements or
understandings with directors or Officers acting solely in their
capacities as such.
(3) Unless disclosed in the table required by paragraph (b)(1)
of this Item, describe any positions, including as an officer,
employee, director, or general partner, held by a director, nominee
for election as director, or Immediate Family Member of the director
or nominee, during the past five years, with:
(i) The Fund;
(ii) An investment company, or a person that would be an
investment company but for the exclusions provided by sections
3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 (15 U.S.C.
80a-3(c)(1) and (c)(7)), having the same investment adviser,
principal underwriter, Administrator, or Sponsoring Insurance
Company as the Fund or having an investment adviser, principal
underwriter, Administrator, or Sponsoring Insurance Company that
directly or indirectly controls, is controlled by, or is under
common control with an investment adviser, principal underwriter,
Administrator, or Sponsoring Insurance Company of the Fund;
(iii) An investment adviser, principal underwriter,
Administrator, Sponsoring Insurance Company, or affiliated person of
the Fund; or
(iv) Any person directly or indirectly controlling, controlled
by, or under common control with an investment adviser, principal
underwriter, Administrator, or Sponsoring Insurance Company of the
Fund.
Instruction to paragraph (b)(3). When an individual holds the
same position(s) with two or more portfolios that are part of the
same Fund Complex, identify the Fund Complex and provide the number
of portfolios for which the position(s) are held rather than listing
each portfolio separately.
(4) For each director or nominee for election as director, state
the aggregate dollar amount of equity securities of Funds in the
same Fund Complex as the Fund owned beneficially or of record by the
director or nominee as required by the following table:
------------------------------------------------------------------------
(1) (2) (3)
------------------------------------------------------------------------
Name of Director or Identity of Fund Aggregate Dollar
Nominee Complex Amount of Equity
Securities in Fund
Complex
------------------------------------------------------------------------
Instructions to paragraph (b)(4). 1. Information should be
provided as of the most recent practicable date. Specify the
valuation date by footnote or otherwise.
2. Determine ``beneficial ownership'' in accordance with rule
13d-3 under the Exchange (Sec. 240.13d-3 of this chapter).
(5) For each director or nominee for election as director and
his Immediate Family Members, furnish the information required by
the following table as to each class of securities owned
beneficially or of record in:
(i) An investment adviser, principal underwriter, Administrator,
or Sponsoring Insurance Company of the Fund; or
(ii) a person (other than a registered investment company)
directly or indirectly controlling, controlled by, or under common
control with an investment adviser, principal underwriter,
Administrator, or Sponsoring Insurance Company of the Fund:
----------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5) (6)
----------------------------------------------------------------------------------------------------------------
Name of Director Name of Owners Company Title of Class Value of Percent of Class
or Nominee and Securities
Relationships to
Director or
Nominee
----------------------------------------------------------------------------------------------------------------
Instructions to paragraph (b)(5).
1. Information should be provided as of the most recent
practicable date. Specify the valuation date by footnote or
otherwise.
2. Determine ``beneficial ownership'' in accordance with rule
13d-3 under the Exchange Act (Sec. 240.13d-3 of this chapter).
3. Identify the company in which the director, nominee, or
Immediate Family Member of the director or nominee owns securities
in column (3). When the company is a person directly or indirectly
controlling, controlled by, or under common control with an
investment adviser, principal underwriter, Administrator, or
Sponsoring Insurance Company, describe the company's relationship
with the investment adviser, principal underwriter, Administrator,
or Sponsoring Insurance Company.
4. Provide the information required by columns (5) and (6) on an
aggregate basis for each director (or nominee) and his Immediate
Family Members.
(6) Unless disclosed in response to paragraph (b)(5) of this
Item, describe any material interest, direct or indirect, of each
director, nominee for election as director, or Immediate Family
Member of a director or nominee, during the past five years, in:
(i) An investment adviser, principal underwriter, Administrator,
or Sponsoring Insurance Company of the Fund; or
(ii) A person (other than a registered investment company)
directly or indirectly controlling, controlled by, or under common
control with an investment adviser, principal underwriter,
Administrator, or Sponsoring Insurance Company of the Fund.
Instruction to paragraph (b)(6). A director, nominee, or
Immediate Family Member has an interest in a company if he is a
party to a contract, arrangement, or understanding with respect to
any securities of, or interest in, the company.
(7) Describe briefly any material interest, direct or indirect,
of any director, nominee for election as director, or Immediate
Family Member of a director or nominee in any material transaction,
or material series of similar transactions, since the beginning of
the last two completed fiscal years of the Fund, or in any currently
proposed material transaction, or material series of similar
transactions, to which any of the following persons was or is to be
a party:
(i) The Fund;
(ii) An Officer of the Fund;
(iii) An investment company, or a person that would be an
investment company but for the exclusions provided by sections
3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 (15 U.S.C.
80a-3(c)(1) and (c)(7)), having the same investment adviser,
principal underwriter, Administrator, or Sponsoring Insurance
Company as the Fund or having an investment adviser, principal
underwriter, Administrator, or Sponsoring Insurance Company that
directly or indirectly controls, is controlled by, or is under
common control with an investment adviser, principal underwriter,
Administrator, or Sponsoring Insurance Company of the Fund;
(iv) An Officer of an investment company, or a person that would
be an investment company but for the exclusions provided by sections
3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 (15 U.S.C.
80a-3(c)(1)
[[Page 59860]]
and (c)(7)), having the same investment adviser, principal
underwriter, Administrator, or Sponsoring Insurance Company as the
Fund or having an investment adviser, principal underwriter,
Administrator, or Sponsoring Insurance Company that directly or
indirectly controls, is controlled by, or is under common control
with an investment adviser, principal underwriter, Administrator, or
Sponsoring Insurance Company of the Fund;
(v) An investment adviser, principal underwriter, Administrator,
or Sponsoring Insurance Company of the Fund;
(vi) An Officer of an investment adviser, principal underwriter,
Administrator, or Sponsoring Insurance Company of the Fund;
(vii) A person directly or indirectly controlling, controlled
by, or under common control with an investment adviser, principal
underwriter, Administrator, or Sponsoring Insurance Company of the
Fund; or
(viii) An Officer of a person directly or indirectly
controlling, controlled by, or under common control with an
investment adviser, principal underwriter, Administrator, or
Sponsoring Insurance Company of the Fund.
Instructions to paragraph (b)(7).
1. Include the name of each director, nominee, or Immediate
Family Member whose interest in any transaction or series of similar
transactions is described and the nature of the circumstances by
reason of which the interest is required to be described.
2. State the nature of the interest, the approximate dollar
amount involved in the transaction, and, where practicable, the
approximate dollar amount of the interest.
3. In computing the amount involved in the transaction or series of
similar transactions, include all periodic payments in the case of any
lease or other agreement providing for periodic payments.
4. Compute the amount of the interest of any director, nominee, or
Immediate Family Member of the director or nominee without regard to
the amount of profit or loss involved in the transaction(s).
5. As to any transaction involving the purchase or sale of assets,
state the cost of the assets to the purchaser and, if acquired by the
seller within two years prior to the transaction, the cost to the
seller. Describe the method used in determining the purchase or sale
price and the name of the person making the determination.
6. If the proxy statement relates to multiple portfolios of a
series Fund with different fiscal years, then, in determining the date
that is the beginning of the last two completed fiscal years of the
Fund, use the earliest date of any series covered by the proxy
statement.
7. Disclose indirect, as well as direct, material interests in
transactions. A person who has a position or relationship with, or
interest in, a company that engages in a transaction with one of the
persons listed in paragraphs (b)(7)(i) through (b)(7)(viii) of this
Item may have an indirect interest in the transaction by reason of the
position, relationship, or interest. The interest in the transaction,
however, will not be deemed ``material'' within the meaning of
paragraph (b)(7) of this Item where the interest of the director,
nominee, or Immediate Family Member arises solely from the holding of
an equity interest (including a limited partnership interest, but
excluding a general partnership interest) or a creditor interest in a
company that is a party to the transaction with one of the persons
specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item,
and the transaction is not material to the company.
8. No information need be given as to any transaction where the
interest of the director, nominee, or Immediate Family Member arises
solely from the ownership of securities of a person specified in
paragraphs (b)(7)(i) through (b)(7)(viii) of this Item and the
director, nominee, or Immediate Family Member receives no extra or
special benefit not shared on a pro rata basis by all holders of the
class of securities.
9. Transactions include loans, lines of credit, and other
indebtedness. For indebtedness, indicate the largest aggregate amount
of indebtedness outstanding at any time during the period, the nature
of the indebtedness and the transaction in which it was incurred, the
amount outstanding as of the latest practicable date, and the rate of
interest paid or charged.
10. No information need be given as to any routine, retail
transaction. For example, the Fund need not disclose that a director
holds a credit card or bank or brokerage account with a person
specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item
unless the director is accorded special treatment.
(8) Describe briefly any material relationship, direct or indirect,
of any director, nominee for election as director, or Immediate Family
Member of a director or nominee that exists, or has existed at any time
since the beginning of the last two completed fiscal years of the Fund,
or is currently proposed, with any of the persons specified in
paragraphs (b)(7)(i) through (b)(7)(viii) of this Item. Relationships
include:
(i) Payments for property or services to or from any person
specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item;
(ii) Provision of legal services to any person specified in
paragraphs (b)(7)(i) through (b)(7)(viii) of this Item;
(iii) Provision of investment banking services to any person
specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item,
other than as a participating underwriter in a syndicate; and
(iv) Any consulting or other relationship that is substantially
similar in nature and scope to the relationships listed in paragraphs
(b)(8)(i) through (b)(8)(iii) of this Item.
Instructions to paragraph (b)(8). 1. Include the name of each
director, nominee, or Immediate Family Member whose relationship is
described and the nature of the circumstances by reason of which the
relationship is required to be described.
2. State the nature of the relationship and the amount of business
conducted between the director, nominee, or Immediate Family Member and
the person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of
this Item as a result of the relationship since the beginning of the
last two completed fiscal years of the Fund or proposed to be done
during the Fund's current fiscal year.
3. In computing the amount involved in a relationship, include all
periodic payments in the case of any agreement providing for periodic
payments.
4. If the proxy statement relates to multiple portfolios of a
series Fund with different fiscal years, then, in determining the date
that is the beginning of the last two completed fiscal years of the
Fund, use the earliest date of any series covered by the proxy
statement.
5. Disclose indirect, as well as direct, material relationships. A
person who has a position or relationship with, or interest in, a
company that has a relationship with one of the persons listed in
paragraphs (b)(7)(i) through (b)(7)(viii) of this Item may have an
indirect relationship by reason of the position, relationship, or
interest. The relationship, however, will not be deemed ``material''
within the meaning of paragraph (b)(8) of this Item where the
relationship of the director, nominee, or Immediate Family Member
arises solely from the holding of an equity interest (including a
limited partnership interest, but excluding a general partnership
interest) or a creditor interest in a company that has a relationship
with one of the persons specified in paragraphs (b)(7)(i) through
(b)(7)(viii) of this Item, and the relationship is not material to the
company.
6. In the case of an indirect interest, identify the company with
which a person specified in paragraphs (b)(7)(i) through (b)(7)(viii)
of this Item has a relationship; the name of the director,
[[Page 59861]]
nominee, or Immediate Family Member affiliated with the company and the
nature of the affiliation; and the amount of business done between the
company and the person specified in paragraphs (b)(7)(i) through
(b)(7)(viii) of this Item since the beginning of the last two completed
fiscal years of the Fund or proposed to be done during the Fund's
current fiscal year.
7. In calculating payments for property and services for purposes
of paragraph (b)(8)(i) of this Item, the following may be excluded:
A. Payments where the transaction involves the rendering of
services as a common contract carrier, or public utility, at rates
or charges fixed in conformity with law or governmental authority;
or
B. Payments that arise solely from the ownership of securities
of a person specified in paragraphs (b)(7)(i) through (b)(7)(viii)
of this Item and no extra or special benefit not shared on a pro
rata basis by all holders of the class of securities is received.
8. No information need be given as to any routine, retail
relationship. For example, the Fund need not disclose that a
director holds a credit card or bank or brokerage account with a
person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of
this Item unless the director is accorded special treatment.
(9) If an Officer of an investment adviser, principal
underwriter, Administrator, or Sponsoring Insurance Company of the
Fund, or an Officer of a person directly or indirectly controlling,
controlled by, or under common control with an investment adviser,
principal underwriter, Administrator, or Sponsoring Insurance
Company of the Fund, serves, or has served since the beginning of
the last two completed fiscal years of the Fund, on the board of
directors of a company where a director of the Fund, nominee for
election as director, or Immediate Family Member of a director or
nominee is, or was since the beginning of the last two completed
fiscal years of the Fund, an Officer, identify:
(i) The company;
(ii) The individual who serves or has served as a director of
the company and the period of service as director;
(iii) The investment adviser, principal underwriter,
Administrator, or Sponsoring Insurance Company or person
controlling, controlled by, or under common control with the
investment adviser, principal underwriter, Administrator, or
Sponsoring Insurance Company where the individual named in paragraph
(b)(9)(ii) of this Item holds or held office and the office held;
and
(iv) The director of the Fund, nominee for election as director,
or Immediate Family Member who is or was an Officer of the company;
the office held; and the period of holding the office.
Instruction to paragraph (b)(9). If the proxy statement relates
to multiple portfolios of a series Fund with different fiscal years,
then, in determining the date that is the beginning of the last two
completed fiscal years of the Fund, use the earliest date of any
series covered by the proxy statement.
(10) Provide in tabular form, to the extent practicable, the
information required by Items 401(f) and (g), 404(a) and (c), and
405 of Regulation S-K (Secs. 229.401(f) and (g), 229.404(a) and (c),
and 229.405 of this chapter).
Instruction to paragraph (b)(10). Information provided under
paragraph (b)(7) of this Item 22 is deemed to satisfy the
requirements of Items 404(a) and (c) of Regulation S-K for
information about directors, nominees for election as directors, and
Immediate Family Members of directors and nominees, and need not be
provided under this paragraph (b)(10).
(11) Describe briefly any material pending legal proceedings,
other than ordinary routine litigation incidental to the Fund's
business, to which any director or nominee for director or
affiliated person of such director or nominee is a party adverse to
the Fund or any of its affiliated persons or has a material interest
adverse to the Fund or any of its affiliated persons. Include the
name of the court where the case is pending, the date instituted,
the principal parties, a description of the factual basis alleged to
underlie the proceeding, and the relief sought.
(12) For all directors, and for each of the three highest-paid
Officers that have aggregate compensation from the Fund for the most
recently completed fiscal year in excess of $60,000 (``Compensated
Persons''):
(i) Furnish the information required by the following table for
the last fiscal year:
Compensation Table
----------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5)
----------------------------------------------------------------------------------------------------------------
Name of Person, Aggregate Pension or Retirement Estimated Annual Total Compensation
Position Compensation From Benefits Accrued as Benefits Upon From Fund and Fund
Fund Part of Fund Retirement Complex Paid to
Expenses Directors
----------------------------------------------------------------------------------------------------------------
Instructions to paragraph (b)(12)(i). 1. For column (1),
indicate, if necessary, the capacity in which the remuneration is
received. For Compensated Persons that are directors of the Fund,
compensation is amounts received for service as a director.
2. If the Fund has not completed its first full year since its
organization, furnish the information for the current fiscal year,
estimating future payments that would be made pursuant to an
existing agreement or understanding. Disclose in a footnote to the
Compensation Table the period for which the information is
furnished.
3. Include in column (2) amounts deferred at the election of the
Compensated Person, whether pursuant to a plan established under
Section 401(k) of the Internal Revenue Code (26 U.S.C. 401(k)) or
otherwise, for the fiscal year in which earned. Disclose in a
footnote to the Compensation Table the total amount of deferred
compensation (including interest) payable to or accrued for any
Compensated Person.
4. Include in columns (3) and (4) all pension or retirement
benefits proposed to be paid under any existing plan in the event of
retirement at normal retirement date, directly or indirectly, by the
Fund or any of its Subsidiaries, or by other companies in the Fund
Complex. Omit column (4) where retirement benefits are not
determinable.
5. For any defined benefit or actuarial plan under which
benefits are determined primarily by final compensation (or average
final compensation) and years of service, provide the information
required in column (4) in a separate table showing estimated annual
benefits payable upon retirement (including amounts attributable to
any defined benefit supplementary or excess pension award plans) in
specified compensation and years of service classifications. Also
provide the estimated credited years of service for each Compensated
Person.
6. Include in column (5) only aggregate compensation paid to a
director for service on the board and other boards of investment
companies in a Fund Complex specifying the number of such other
investment companies.
(ii) Describe briefly the material provisions of any pension,
retirement, or other plan or any arrangement other than fee
arrangements disclosed in paragraph (b)(12)(i) of this Item pursuant
to which Compensated Persons are or may be compensated for any
services provided, including amounts paid, if any, to the
Compensated Person under any such arrangements during the most
recently completed fiscal year. Specifically include the criteria
used to determine amounts payable under any plan, the length of
service or vesting period required by the plan, the retirement age
or other event that gives rise to payments under the plan, and
whether the payment of benefits is secured or funded by the Fund.
(iii) With respect to each Compensated Person, business
development companies must include the information required by Items
402(b)(2)(iv) and 402(c) of Regulation S-K (Secs. 229.402(b)(2)(iv)
and 229.402(c) of this chapter).
(13) Identify the standing committees of the Fund's board of
directors, and provide the following information about each
committee:
(i) A concise statement of the functions of the committee;
(ii) The members of the committee;
(iii) The number of committee meetings held during the last
fiscal year; and
[[Page 59862]]
(iv) If the committee is a nominating or similar committee,
state whether the committee will consider nominees recommended by
security holders and, if so, describe the procedures to be followed
by security holders in submitting recommendations.
* * * * *
PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
8. The authority citation for part 270 is amended by adding the
following citation to read as follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39
unless otherwise noted:
* * * * *
Section 270.10e-1 is also issued under 15 U.S.C. 80a-10(e).
* * * * *
9. Section 270.0-1 is amended by adding paragraphs (a)(5) and
(a)(6) to read as follows:
Sec. 270.0-1 Definition of terms used in this part.
* * * * *
(a) * * *
(5) The term administrator means any person who provides
significant administrative or business affairs management services to
an investment company.
(6)(i) A person is an independent legal counsel with respect to the
directors who are not interested persons of an investment company
(``disinterested directors'') if:
(A) The investment company reasonably believes that the person has
not acted as legal counsel for the company's investment adviser,
principal underwriter, administrator (collectively, ``management
organizations''), or any of their control persons at any time since the
beginning of the company's last two completed fiscal years; or
(B) A majority of the disinterested directors determine (and record
the basis for that determination in the minutes of their meeting) that
the person's representation of any of the company's management
organizations or any of their control persons is or was so limited that
it would not adversely affect the person's ability to provide
impartial, objective, and unbiased legal counsel to the disinterested
directors.
(ii) For purposes of paragraph (a)(6)(i) of this section:
(A) The term person has the same meaning as in section 2(a)(28) of
the Act (15 U.S.C. 80a-2(a)(28)) and, in addition, includes a partner,
co-member, or employee of any person; and
(B) The term control person means any person (other than an
investment company) directly or indirectly controlling, controlled by,
or under common control with any of the investment company's management
organizations.
* * * * *
10. The section heading for Sec. 270.2a19-1 is revised to read as
follows:
Sec. 270.2a19-1 Certain investment company directors not considered
interested persons because of broker-dealer affiliation.
* * * * *
11. Section 270.2a19-1 is amended by removing the phrase ``a
minority of the directors f'' in paragraph (a)(3) and adding in its
place the phrase ``one-half of the directors of''.
12. Section 270.2a19-3 is added to read as follows:
Sec. 270.2a19-3 Certain investment company directors not considered
interested persons because of ownership of index fund securities.
If a director of a registered investment company (``Fund'') owns
shares of a registered investment company (including the Fund) with an
investment objective to replicate the performance of one or more
securities indices (``Index Fund''), ownership of the Index Fund shares
will not cause the director to be considered an ``interested person''
of the Fund or of the Fund's investment adviser or principal
underwriter (as defined by section 2(a)(19)(A)(iii) and (B)(iii) of the
Act (15 U.S.C. 80a-2(a)(19)(A)(iii) and (B)(iii))), if the value of the
securities of the Fund's investment adviser or principal underwriter
(or a controlling person of the investment adviser or principal
underwriter) in any of the securities indices constitutes no more than
five percent of the value of that index.
13. Section 270.10e-1 is added to read as follows:
Sec. 270.10e-1 Death, disqualification, or bona fide resignation of
directors.
If a registered investment company, by reason of the death,
disqualification, or bona fide resignation of any director, does not
meet any requirement of the Act or any rule or regulation regarding the
composition of the company's board of directors, the operation of the
relevant subsection of the Act, rule, or regulation will be suspended
as to the company:
(a) For 60 days if the vacancy may be filled by action of the board
of directors; or
(b) For 150 days if a vote of stockholders is required to fill the
vacancy.
14. Section 270.10f-3 is amended by redesignating paragraph (b)(11)
as paragraph (b)(12) and adding new paragraph (b)(11) to read as
follows:
Sec. 270.10f-3 Exemption for the acquisition of securities during the
existence of an underwriting or selling syndicate.
* * * * *
(b) * * *
(11) Board Composition, Selection, and Representation. (i) [A
majority/At least two-thirds] of the directors of the investment
company are not interested persons of the company, and those directors
select and nominate any other disinterested directors of the company;
and
(ii) Any person who acts as legal counsel for the disinterested
directors of the company is an independent legal counsel.
* * * * *
Section 270.12b-1 is amended by revising paragraph (c) to read as
follows:
Sec. 270.12b-1 Distribution of shares by registered open-end
management investment company.
* * * * *
(c) A registered open-end management investment company may rely on
the provisions of paragraph (b) of this section only if:
(1) [A majority/At least two-thirds] of the directors of the
company are not interested persons of the company, and those directors
select and nominate any other disinterested directors of the company;
and
(2) Any person who acts as legal counsel for the disinterested
directors of the company is an independent legal counsel;
* * * * *
16. Section 270.15a-4 is amended by removing the word ``and'' at
the end of paragraph (a), removing the period at the end of paragraph
(b) and adding in its place ``; and'' and adding paragraph (c) to read
as follows:
Sec. 270.15a-4 Temporary exemption for certain investment advisers.
* * * * *
(c)(1) [A majority/At least two-thirds] of the directors of the
investment company are not interested persons of the company, and those
directors select and nominate any other disinterested directors of the
company; and
(2) Any person who acts as legal counsel for the disinterested
directors of the company is an independent legal counsel.
17. Section 270.17
a-7 is amended by:
A. Removing the ``and'' at the end of paragraph (e)(3), IPB.
Redesignating paragraph (f) as paragraph (g), and
[[Page 59863]]
C. Adding new paragraph (f) to read as follows:
Sec. 270.17a-7 Exemption of certain purchase or sale transactions
between an investment company and certain affiliated persons thereof.
* * * * *
(f)(1) [A majority/At least two-thirds] of the directors of the
investment company are not interested persons of the company, and those
directors select and nominate any other disinterested directors of the
company; and
(2) Any person who acts as legal counsel for the disinterested
directors of the company is an independent legal counsel; and
* * * * *
18. Section 270.17a-8 is amended by:
A. Removing the ``, and'' at the end of paragraph (a)(2) and in its
place adding a semi-colon,
B. Removing the period at the end of paragraph (b) and adding in
its place ``; and'', and
C. Adding paragraph (c) to read as follows:
Sec. 270.17a-8 Mergers of certain affiliated investment companies.
* * * * *
(c)(1) [A majority/At least two-thirds] of the directors of the
investment company are not interested persons of the company, and those
directors select and nominate any other disinterested directors of the
company; and
(2) Any person who acts as legal counsel for the disinterested
directors of the company is an independent legal counsel.
19. Section 270.17d-1 is amended by:
A. Removing the word ``and'' at the end of paragraph (d)(7)(ii),
B. Redesignating paragraph (d)(7)(iii) as paragraph (d)(7)(iv),
C. Removing the period at the end of newly designated paragraph
(d)(7)(iv) and adding in is place ``; and'', and
D. Adding new paragraphs (d)(7)(iii) and (d)(7)(v) to read as
follows:
Sec. 270.17d-1 Applications regarding joint enterprises or
arrangements and certain profit-sharing plans.
* * * * *
(d) * * *
(7) * * *
(iii) The joint liability insurance policy does not exclude
coverage for bona fide claims made against any director who is not an
interested person of the investment company, or against the investment
company if it is a co-defendant in the claim with the disinterested
director, by another person insured under the joint liability insurance
policy;
* * * * *
(v)(A) [A majority/At least two-thirds] of the directors of the
investment company are not interested persons of the company, and those
directors select and nominate any other disinterested directors of the
company; and
(B) Any person who acts as legal counsel for the disinterested
directors of the company is an independent legal counsel.
* * * * *
20. Section 270.17e-1 is amended by:
Removing the word ``and'' at the end of paragraph (b)(3),
redesignating paragraph (c) as paragraph (d), and adding new paragraph
(c) to read as follows:
Sec. 270.17e-1 Brokerage transactions on a securities exchange.
* * * * *
(c)(1) [A majority / At least two-thirds] of the directors of the
investment company are not interested persons of the company, and those
directors select and nominate any other disinterested directors of the
company; and
(2) Any person who acts as legal counsel for the disinterested
directors of the company is an independent legal counsel; and
* * * * *
21. Section 270.17g-1 is amended by revising paragraph (j) to read
as follows:
Sec. 270.17g-1 Bonding of officers and employees of registered
management investment companies.
* * * * *
(j) Any joint insured bond provided and maintained by a registered
management investment company and one or more other parties shall be a
transaction exempt from the provisions of section 17(d) of the Act (15
U.S.C. 80a-17(d)) and the rules thereunder, if:
(1) The terms and provisions of the bond comply with the provisions
of this section;
(2) The terms and provisions of any agreement required by paragraph
(f) of this section comply with the provisions of that paragraph; and
(3)(i) [A majority / At least two-thirds] of the directors of the
investment company are not interested persons of the company, and those
directors select and nominate any other disinterested directors of the
company; and
(ii) Any person who acts as legal counsel for the disinterested
directors of the company is an independent legal counsel.
* * * * *
22. Section 270.18f-3 is amended by redesigning paragraph (e) as
paragraph (f), and adding new paragraph (e) to read as follows:
Sec. 270.18f-3 Multiple class companies.
* * * * *
(e)(1) [A majority / At least two-thirds] of the directors of the
investment company are not interested persons of the company, and those
directors select and nominate any other disinterested directors of the
company; and
(2) Any person who acts as legal counsel for the disinterested
directors of the company is an independent legal counsel.
* * * * *
23. Section 270.23c-3 is amended by revising paragraph (b)(8) to
read as follows:
Sec. 270.23c-3 Repurchase offers by closed-end companies.
* * * * *
(b) * * *
(8)(i) [A majority / At least two-thirds] of the directors of the
investment company are not interested persons of the company, and those
directors select and nominate any other disinterested directors of the
company; and
(ii) Any person who acts as legal counsel for the disinterested
directors of the company is an independent legal counsel.
* * * * *
24. Redesignate Sec. 270.30d-1 as Sec. 270.30e-1; in newly
designated Sec. 270.30e-1, in paragraph (a), revise ``financial
statements'' to read ``information''; and revise paragraph (d) to read
as follows:
Sec. 270.30e-1 Reports to stockholders of management companies.
* * * * *
(d) An open-end company may transmit a copy of its current
effective prospectus or Statement of Additional Information, or both,
under the Securities Act, inplace of any report required to be
transmitted to shareholders by this section, provided that the
prospectus or Statement of Additional Information, or both, include all
the information that would otherwise be required to be contained in the
report by this section. Such prospectus or Statement of Additional
Information, or both, shall be transmitted within 60 days after the
close of the period for which the report is being made.
* * * * *
Sec. 270.30d-2 [Redesignated as Sec. 270.30e-2]
25. Redesignate Sec. 270.30d-2 as Sec. 270.30e-2 and in newly
designated Sec. 270.30e-2 revise ``Rule N-30D-1'' to read
``Sec. 270.30e-1 of this chapter'' in the first and second sentence.
26. Section 270.31a-2 is amended by removing the period at end of
paragraph (a)(3) and in its place adding a semi-
[[Page 59864]]
colon, and adding paragraphs (a)(4) and (a)(5) to read as follows:
Sec. 270.31a-2 Records to be preserved by registered investment
companies, certain majority-owned subsidiaries thereof, and other
persons having transactions with registered investment companies.
(a) * * *
(4) Preserve for a period not less than six years, the first two
years in an easily accessible place, any record of the initial
determination that a director is not an interested person of the
investment company, and each subsequent determination that the director
is not an interested person of the investment company. These records
must include any questionnaire and any other document used to determine
that a director is not an interested person of the company; and
(5) Preserve for a period not less than six years, the first two
years in an easily accessible place, any document used by an investment
company to establish a reasonable belief that any person who acts as
legal counsel to the directors who are not interested persons of the
company is an independent legal counsel and any document used by the
disinterested directors to determine that any current or prior
representation is or was so limited that it will not adversely affect
the counsel's ability to provide impartial, objective, and unbiased
legal advice.
* * * * *
27. Section 270.32a-4 is added to read as follows:
Sec. 270.32a-4 Exemption from ratification or rejection requirement of
section 32(a)(2) for certain registered investment companies with
independent audit committees.
A registered management investment company or a registered face-
amount certificate company is exempt from the requirement of section
32(a)(2) of the Act (15 U.S.C. 80a-31(a)(2)) that the selection of the
company's independent public accountant be submitted for ratification
or rejection at the next succeeding annual meeting of shareholders, if:
(a) The company's board of directors has established a committee
that has responsibility for overseeing the fund's accounting and
auditing processes (``audit committee'');
(b) The audit committee is composed solely of directors who are not
interested persons of the fund;
(c) The company's board of directors has adopted a charter for the
audit committee setting forth the committee's structure, duties,
powers, and methods of operation; and
(d) The company maintains and preserves permanently in an easily
accessible place a copy of the audit committee's charter and any
modification to the charter.
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
28. The authority citation for part 239 continues to read, in part,
as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77sss, 78c,
78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 79e, 79f, 79g, 79j,
79l, 79m, 79n, 79q, 79t, 80a-8, 80a-24, 80a-29, 80a-30 and 80a-37,
unless otherwise noted.
* * * * *
PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940
29. The authority citation for part 274 continues to read as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m,
78n, 78o(d), 80a-8, 80a-24, and 80a-29, unless otherwise noted.
Note: The text of Form N-1A does not and these amendments will
not appear in the Code of Federal Regulations.
30. Item 13 of Form N-1A (referenced in Secs. 239.15A and 274.11A)
is amended by adding Instructions 1 and 2 before paragraph (a);
removing paragraphs (a), (b), and (c) and adding paragraphs (a) and (b)
in their place; redesignating paragraphs (d) and (e) as paragraphs (c)
and (d); and removing ``executive'' from the first sentence of newly
redesignated paragraph (c) to read as follows:
Form N-1A
* * * * *
Item 13. Management of the Fund
Instructions
1. For purposes of this Item 13, the terms below have the following
meanings:
(a) The term ``fund complex'' means two or more registered
investment companies that:
(1) Hold themselves out to investors as related companies for
purposes of investment and investor services; or (2) Have a common
investment adviser or have an investment adviser that is an affiliated
person of the investment adviser of any of the other registered
investment companies.
(b) The term ``immediate family member'' means a person's spouse,
parent, child, sibling, mother- or father-in-law, son- or daughter-in-
law, or brother- or sister-in-law, and includes step and adoptive
relationships.
(c) The term ``officer'' means the president, vice-president,
secretary, treasurer, controller, or any other officer who performs
policy-making functions.
2. When providing information about directors, furnish information
for directors who are interested persons separately from the
information for directors who are not interested persons. For example,
when furnishing information in a table, you should provide separate
tables (or separate sections of a single table) for directors who are
interested persons and for directors who are not interested persons.
When furnishing information in narrative form, indicate by heading or
otherwise the directors who are interested persons and the ones who are
not interested persons.
(a) Management Information. (1) Provide the information required by
the following table for each director and officer of the Fund, and, if
the Fund has an advisory board, member of the board. Explain in a
footnote to the table any family relationship between the persons
listed.
----------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5) (6)
----------------------------------------------------------------------------------------------------------------
Name, Address, Position(s) Held Term of Office Principal Number of Other
and Age with Fund and Length of Occupation(s) Portfolios in Directorships
Time Served During Past 5 Fund Complex Held by Director
Years Overseen by
Director
----------------------------------------------------------------------------------------------------------------
Instructions
1. For purposes of this paragraph, the term ``family relationship''
means any relationship by blood, marriage, or adoption, not more remote
than first cousin.
2. For each director who is an interested person, describe, in a
footnote or otherwise, the relationship, events, or transactions by
reason of which the director is an interested person.
3. State the principal business of any company listed under column
(4) unless
[[Page 59865]]
the principal business is implicit in its name.
4. Indicate in column (6) directorships not included in column (5)
that are held by a director in any company with a class of securities
registered pursuant to section 12 of the Securities Exchange Act (15
U.S.C. 78l) or subject to the requirements of section 15(d) of the
Securities Exchange Act (15 U.S.C. 78o(d)) or any company registered as
an investment company under the Investment Company Act, and name the
companies in which the directorships are held. Where the other
directorships include directorships overseeing two or more portfolios
in the same fund complex, identify the fund complex and provide the
number of portfolios overseen as a director in the fund complex rather
than listing each portfolio separately.
(2) For each individual listed in column (1) of the table required
by paragraph (a)(1) of this Item 13 who is not a director, describe any
positions, including as an officer, employee, director, or general
partner, held with affiliated persons or principal underwriters of the
Fund.
Instruction. When an individual holds the same position(s) with two
or more registered investment companies that are part of the same fund
complex, identify the fund complex and provide the number of registered
investment companies for which the position(s) are held rather than
listing each registered investment company separately.
(3) Describe briefly any arrangement or understanding between any
director or officer and any other person(s) (naming the person(s))
pursuant to which he was selected as a director or officer.
Instruction. Do not include arrangements or understandings with
directors or officers acting solely in their capacities as such.
(b) Board of Directors.
(1) Briefly describe the responsibilities of the board of directors
with respect to the Fund's management.
Instruction. A Fund may respond to this paragraph by providing a
general statement as to the responsibilities of the board of directors
with respect to the Fund's management under the applicable laws of the
state or other jurisdiction in which the Fund is organized.
(2) Identify the standing committees of the Fund's board of
directors, and provide the following information about each committee:
(i) A concise statement of the functions of the committee;
(ii) The members of the committee;
(iii) The number of committee meetings held during the last fiscal
year; and
(iv) If the committee is a nominating or similar committee, state
whether the committee will consider nominees recommended by security
holders and, if so, describe the procedures to be followed by security
holders in submitting recommendations.
(3) Unless disclosed in the table required by paragraph (a)(1) of
this Item 13, describe any positions, including as an officer,
employee, director, or general partner, held by a director or immediate
family member of the director during the past five years with:
(i) The Fund;
(ii) An investment company, or a person that would be an investment
company but for the exclusions provided by sections 3(c)(1) and 3(c)(7)
(15 U.S.C. 80a-3(c)(1) and (c)(7)), having the same investment adviser,
principal underwriter, or administrator as the Fund or having an
investment adviser, principal underwriter, or administrator that
directly or indirectly controls, is controlled by, or is under common
control with an investment adviser, principal underwriter, or
administrator of the Fund;
(iii) An investment adviser, principal underwriter, administrator,
or affiliated person of the Fund; or
(iv) Any person directly or indirectly controlling, controlled by,
or under common control with an investment adviser, principal
underwriter, or administrator of the Fund.
Instruction. When an individual holds the same position(s) with two
or more portfolios that are part of the same fund complex, identify the
fund complex and provide the number of portfolios for which the
position(s) are held rather than listing each portfolio separately.
(4) For each director, state the aggregate dollar amount of equity
securities of registered investment companies in the same fund complex
as the Fund owned beneficially or of record by the director as required
by the following table:
------------------------------------------------------------------------
(1) (2) (3)
------------------------------------------------------------------------
Name of Director Identity of Fund Aggregate Dollar
Complex Amount of Equity
Securities in Fund
Complex
------------------------------------------------------------------------
Instructions
1. Information should be provided as of the most recent practicable
date. Specify the valuation date by footnote or otherwise.
2. Determine ``beneficial ownership'' in accordance with rule 13d-3
under the Exchange Act (Sec. 240.13d-3 of this chapter).
(5) For each director and his immediate family members, furnish the
information required by the following table as to each class of
securities owned beneficially or of record in:
(i) An investment adviser, principal underwriter, or administrator
of the Fund; or
(ii) A person (other than a registered investment company) directly
or indirectly controlling, controlled by, or under common control with
an investment adviser, principal underwriter, or administrator of the
Fund:
----------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5) (6)
----------------------------------------------------------------------------------------------------------------
Name of Director Name of Owners Company Title of Class Value of Percent of Class
and Securities
Relationships to
Director
----------------------------------------------------------------------------------------------------------------
Instructions
1. Information should be provided as of the most recent practicable
date. Specify the valuation date by footnote or otherwise.
2. Determine ``beneficial ownership'' in accordance with rule 13d-3
under the Exchange Act (Sec. 240.13d-3 of this chapter).
3. Identify the company in which the director or immediate family
member of the director owns securities in column (3). When the company
is a person directly or indirectly controlling, controlled by, or under
common control with an investment adviser, principal underwriter, or
administrator, describe the company's relationship with the investment
adviser, principal underwriter, or administrator.
4. Provide the information required by columns (5) and (6) on an
aggregate
[[Page 59866]]
basis for each director and his immediate family members.
(6) Unless disclosed in response to paragraph (b)(5) of this Item
13, describe any material interest, direct or indirect, of each
director or immediate family member of a director, during the past five
years, in:
(i) An investment adviser, principal underwriter, or administrator
of the Fund; or
(ii) A person (other than a registered investment company) directly
or indirectly controlling, controlled by, or under common control with
an investment adviser, principal underwriter, or administrator of the
Fund.
Instruction. A director or immediate family member has an interest
in a company if he is a party to a contract, arrangement, or
understanding with respect to any securities of, or interest in, the
company.
(7) Describe briefly any material interest, direct or indirect, of
any director or immediate family member of a director in any material
transaction, or material series of similar transactions, since the
beginning of the last two completed fiscal years of the Fund, or in any
currently proposed material transaction, or material series of similar
transactions, to which any of the following persons was or is to be a
party:
(i) The Fund;
(ii) An officer of the Fund;
(iii) An investment company, or a person that would be an
investment company but for the exclusions provided by sections 3(c)(1)
and 3(c)(7) (15 U.S.C. 80a-3(c)(1) and (c)(7)), having the same
investment adviser, principal underwriter, or administrator as the Fund
or having an investment adviser, principal underwriter, or
administrator that directly or indirectly controls, is controlled by,
or is under common control with an investment adviser, principal
underwriter, or administrator of the Fund;
(iv) An officer of an investment company, or a person that would be
an investment company but for the exclusions provided by sections
3(c)(1) and 3(c)(7) (15 U.S.C. 80a-3(c)(1) and (7)), having the same
investment adviser, principal underwriter, or administrator as the Fund
or having an investment adviser, principal underwriter, or
administrator that directly or indirectly controls, is controlled by,
or is under common control with an investment adviser, principal
underwriter, or administrator of the Fund;
(v) An investment adviser, principal underwriter, or administrator
of the Fund;
(vi) An officer of an investment adviser, principal underwriter, or
administrator of the Fund;
(vii) A person directly or indirectly controlling, controlled by,
or under common control with an investment adviser, principal
underwriter, or administrator of the Fund; or
(viii) 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.
Instructions
1. Include the name of each director or immediate family member
whose interest in any transaction or series of similar transactions is
described and the nature of the circumstances by reason of which the
interest is required to be described.
2. State the nature of the interest, the approximate dollar amount
involved in the transaction, and, where practicable, the approximate
dollar amount of the interest.
3. In computing the amount involved in the transaction or series of
similar transactions, include all periodic payments in the case of any
lease or other agreement providing for periodic payments.
4. Compute the amount of the interest of any director or immediate
family member of the director without regard to the amount of profit or
loss involved in the transaction(s).
5. As to any transaction involving the purchase or sale of assets,
state the cost of the assets to the purchaser and, if acquired by the
seller within two years prior to the transaction, the cost to the
seller. Describe the method used in determining the purchase or sale
price and the name of the person making the determination.
6. If the Registrant is a Series company whose Series have
different fiscal years, then, in determining the date that is the
beginning of the last two completed fiscal years of the Registrant, use
the earliest date of any Series.
7. Disclose indirect, as well as direct, material interests in
transactions. A person who has a position or relationship with, or
interest in, a company that engages in a transaction with one of the
persons listed in paragraphs (b)(7)(i) through (b)(7)(viii) of this
Item 13 may have an indirect interest in the transaction by reason of
the position, relationship, or interest. The interest in the
transaction, however, will not be deemed ``material'' within the
meaning of paragraph (b)(7) of this Item 13 where the interest of the
director or immediate family member arises solely from the holding of
an equity interest (including a limited partnership interest, but
excluding a general partnership interest) or a creditor interest in a
company that is a party to the transaction with one of the persons
specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13,
and the transaction is not material to the company.
8. No information need be given as to any transaction where the
interest of the director or immediate family member arises solely from
the ownership of securities of a person specified in paragraphs
(b)(7)(i) through (b)(7)(viii) of this Item 13 and the director or
immediate family member receives no extra or special benefit not shared
on a pro rata basis by all holders of the class of securities.
9. Transactions include loans, lines of credit, and other
indebtedness. For indebtedness, indicate the largest aggregate amount
of indebtedness outstanding at any time during the period, the nature
of the indebtedness and the transaction in which it was incurred, the
amount outstanding as of the latest practicable date, and the rate of
interest paid or charged.
10. No information need be given as to any routine, retail
transaction. For example, the Fund need not disclose that a director
holds a credit card or bank or brokerage account with a person
specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13
unless the director is accorded special treatment.
(8) Describe briefly any material relationship, direct or indirect,
of any director or immediate family member of a director that exists,
or has existed at any time since the beginning of the last two
completed fiscal years of the Fund, or is currently proposed, with any
of the persons specified in paragraphs (b)(7)(i) through (b)(7)(viii)
of this Item 13. Relationships include:
(i) Payments for property or services to or from any person
specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13;
(ii) Provision of legal services to any person specified in
paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13;
(iii) Provision of investment banking services to any person
specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13,
other than as a participating underwriter in a syndicate; and
(iv) Any consulting or other relationship that is substantially
similar in nature and scope to the relationships
[[Page 59867]]
listed in paragraphs (b)(8)(i) through (b)(8)(iii) of this Item 13.
Instructions
1. Include the name of each director or immediate family member
whose relationship is described and the nature of the circumstances by
reason of which the relationship is required to be described.
2. State the nature of the relationship and the amount of business
conducted between the director or immediate family member and the
person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this
Item 13 as a result of the relationship since the beginning of the last
two completed fiscal years of the Fund or proposed to be done during
the Fund's current fiscal year.
3. In computing the amount involved in a relationship, include all
periodic payments in the case of any agreement providing for periodic
payments.
4. If the Registrant is a Series company whose Series have
different fiscal years, then, in determining the date that is the
beginning of the last two completed fiscal years of the Registrant, use
the earliest date of any Series.
5. Disclose indirect, as well as direct, material relationships. A
person who has a position or relationship with, or interest in, a
company that has a relationship with one of the persons listed in
paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13 may have an
indirect relationship by reason of the position, relationship, or
interest. The relationship, however, will not be deemed ``material''
within the meaning of paragraph (b)(8) of this Item 13 where the
relationship of the director or immediate family member arises solely
from the holding of an equity interest (including a limited partnership
interest, but excluding a general partnership interest) or a creditor
interest in a company that has a relationship with one of the persons
specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13,
and the relationship is not material to the company.
6. In the case of an indirect interest, identify the company with
which a person specified in paragraphs (b)(7)(i) through (b)(7)(viii)
of this Item 13 has a relationship; the name of the director or
immediate family member affiliated with the company and the nature of
the affiliation; and the amount of business done between the company
and the person specified in paragraphs (b)(7)(i) through (b)(7)(viii)
of this Item 13 since the beginning of the last two completed fiscal
years of the Fund or proposed to be done during the Fund's current
fiscal year.
7. In calculating payments for property and services for purposes
of paragraph (b)(8)(i) of this Item 13, the following may be excluded:
A. Payments where the transaction involves the rendering of
services as a common contract carrier, or public utility, at rates or
charges fixed in conformity with law or governmental authority; or
B. Payments that arise solely from the ownership of securities of a
person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this
Item 13 and no extra or special benefit not shared on a pro rata basis
by all holders of the class of securities is received.
8. No information need be given as to any routine, retail
relationship. For example, the Fund need not disclose that a director
holds a credit card or bank or brokerage account with a person
specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13
unless the director is accorded special treatment.
(9) If an officer of an investment adviser, principal underwriter,
or administrator of the 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, on the board of directors of a
company where a director of the Fund or immediate family member of a
director is, or was since the beginning of the last two completed
fiscal years of the Fund, an officer, identify:
(i) The company;
(ii) The individual who serves or has served as a director of the
company and the period of service as director;
(iii) The investment adviser, principal underwriter, or
administrator or person controlling, controlled by, or under common
control with the investment adviser, principal underwriter, or
administrator where the individual named in paragraph (b)(9)(ii) of
this Item 13 holds or held office and the office held; and
(iv) The director of the Fund or immediate family member who is or
was an officer of the company; the office held; and the period of
holding the office.
Instruction. If the Registrant is a Series company whose Series
have different fiscal years, then, in determining the date that is the
beginning of the last two completed fiscal years of the Registrant, use
the earliest date of any Series.
(10) Discuss in reasonable detail the material factors and the
conclusions with respect thereto that formed the basis for the board of
directors approving the existing investment advisory contract. If
applicable, include a discussion of any benefits derived or to be
derived by the investment adviser from the relationship with the Fund
such as soft dollar arrangements by which brokers provide research to
the Fund or its investment adviser in return for allocating fund
brokerage.
Instruction. Conclusory statements or a list of factors will not be
considered sufficient disclosure. The discussion should relate the
factors to the specific circumstances of the Fund and the investment
advisory contract.
* * * * *
31. Item 22 of Form N-1A (referenced in Secs. 239.15A and 274.11A)
is amended by adding paragraphs (b)(5) and (b)(6) to read as follows:
Form N-1A
* * * * *
Item 22. Financial Statements
* * * * *
(b) * * *
(5) The management information required by Item 13(a)(1).
(6) A statement that the SAI includes additional information about
Fund directors and is available, without charge, upon request, and a
toll-free (or collect) telephone number for shareholders to call to
request the SAI.
* * * * *
Note: The text of Form N-2 does not and these amendments will
not appear in the Code of Federal Regulations
32. Item 18 of Form N-2 (referenced in Secs. 239.14 and 274.11a-1)
is amended by adding Instructions 1 and 2 before paragraph 1; revising
paragraphs 1 and 2; redesignating paragraphs 3 and 4 as paragraphs 4
and 14; adding new paragraphs 3 and 5 through 13; and removing
``executive'' from the first sentence of newly designated paragraph 14
to read as follows:
Form N-2
* * * * *
Item 18. Management
Instructions
1. For purposes of this Item 18, the terms below have the following
meanings:
a. The term ``fund complex'' means two or more registered
investment companies that:
(i) Hold themselves out to investors as related companies for
purposes of investment and investor services; or
(ii) Have a common investment adviser or have an investment adviser
[[Page 59868]]
that is an affiliated person of the investment adviser of any of the
other registered investment companies.
b. The term ``immediate family member'' means a person's spouse,
parent, child, sibling, mother- or father-in-law, son- or daughter-in-
law, or brother- or sister-in-law, and includes step and adoptive
relationships.
c. The term ``officer'' means the president, vice-president,
secretary, treasurer, controller, or any other officer who performs
policy-making functions.
2. When providing information about directors, furnish information
for directors who are interested persons as defined in Section 2(a)(19)
of the 1940 Act (15 U.S.C. 80a-2(a)(19)) and the rules thereunder
separately from the information for directors who are not interested
persons. For example, when furnishing information in a table, you
should provide separate tables (or separate sections of a single table)
for directors who are interested persons and for directors who are not
interested persons. When furnishing information in narrative form,
indicate by heading or otherwise the directors who are interested
persons and the ones who are not interested persons.
1. Provide the information required by the following table for each
director and officer of the Registrant, and, if the Registrant has an
advisory board, member of the board. Explain in a footnote to the table
any family relationship between the persons listed.
----------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5) (6)
----------------------------------------------------------------------------------------------------------------
Name, Address, Position(s) Held Term of Office Principal Number of Other
and Age with Registrant and Length of Occupation(s) Portfolios in Directorships
Time Served During Past 5 Fund Complex Held by Director
Years Overseen by
Director
----------------------------------------------------------------------------------------------------------------
Instructions
1. For purposes of this paragraph, the term ``family relationship''
means any relationship by blood, marriage, or adoption, not more remote
than first cousin.
2. For each director who is an interested person as defined in
Section 2(a)(19) of the 1940 Act (15 U.S.C. 80a-2(a)(19)) and the rules
thereunder, describe, in a footnote or otherwise, the relationship,
events, or transactions by reason of which the director is an
interested person.
3. State the principal business of any company listed under column
(4) unless the principal business is implicit in its name.
4. Indicate in column (6) directorships not included in column (5)
that are held by a director in any company with a class of securities
registered pursuant to section 12 of the Exchange Act (15 U.S.C. 78l)
or subject to the requirements of section 15(d) of the Exchange Act (15
U.S.C. 78o(d)) or any company registered as an investment company under
the 1940 Act, and name the companies in which the directorships are
held. Where the other directorships include directorships overseeing
two or more portfolios in the same fund complex, identify the fund
complex and provide the number of portfolios overseen as a director in
the fund complex rather than listing each portfolio separately.
2. For each individual listed in column (1) of the table required
by paragraph 1 who is not a director, describe any positions, including
as an officer, employee, director, or general partner, held with
affiliated persons or principal underwriters of the Registrant.
Instruction: When an individual holds the same position(s) with two
or more registered investment companies that are part of the same fund
complex, identify the fund complex and provide the number of registered
investment companies for which the position(s) are held rather than
listing each registered investment company separately.
3. Describe briefly any arrangement or understanding between any
director or officer and any other person(s) (naming the person(s))
pursuant to which he was selected as a director or officer.
Instruction: Do not include arrangements or understandings with
directors or officers acting solely in their capacities as such.
4. For each non-resident director or officer of the Registrant
listed in column (1) of the table required by paragraph 1, disclose
whether he has authorized an agent in the United States to receive
notice and, if so, disclose the name and address of the agent.
5. Identify the standing committees of the Registrant's board of
directors, and provide the following information about each committee:
(a) A concise statement of the functions of the committee;
(b) The members of the committee;
(c) The number of committee meetings held during the last fiscal
year; and
(d) If the committee is a nominating or similar committee, state
whether the committee will consider nominees recommended by security
holders and, if so, describe the procedures to be followed by security
holders in submitting recommendations.
6. Unless disclosed in the table required by paragraph 1 of this
Item 18, describe any positions, including as an officer, employee,
director, or general partner, held by a director or immediate family
member of the director during the past five years with:
(a) The Registrant;
(b) An investment company, or a person that would be an investment
company but for the exclusions provided by sections 3(c)(1) and 3(c)(7)
of the 1940 Act (15 U.S.C. 80a-3(c)(1) and (c)(7)), having the same
investment adviser, principal underwriter, or administrator as the
Registrant or having an investment adviser, principal underwriter, or
administrator that directly or indirectly controls, is controlled by,
or is under common control with an investment adviser, principal
underwriter, or administrator of the Registrant;
(c) An investment adviser, principal underwriter, administrator, or
affiliated person of the Registrant; or
(d) Any person directly or indirectly controlling, controlled by,
or under common control with an investment adviser, principal
underwriter, or administrator of the Registrant.
Instruction: When an individual holds the same position(s) with two
or more portfolios that are part of the same fund complex, identify the
fund complex and provide the number of portfolios for which the
position(s) are held rather than listing each portfolio separately.
7. For each director, state the aggregate dollar amount of equity
securities of registered investment companies in the same fund complex
as the Registrant owned beneficially or of record by the director as
required by the following table:
------------------------------------------------------------------------
(1) (2) (3)
------------------------------------------------------------------------
Name of Director Identity of Fund Aggregate Dollar
Complex Amount of Equity
Securities in Fund
Complex
------------------------------------------------------------------------
[[Page 59869]]
Instructions
1. Information should be provided as of the most recent practicable
date. Specify the valuation date by footnote or otherwise.
2. Determine ``beneficial ownership'' in accordance with rule 13d-3
under the Exchange Act (Sec. 240.13d-3 of this chapter).
8. For each director and his immediate family members, furnish the
information required by the following table as to each class of
securities owned beneficially or of record in:
(a) An investment adviser, principal underwriter, or administrator
of the Registrant; or
(b) A person (other than a registered investment company) directly
or indirectly controlling, controlled by, or under common control with
an investment adviser, principal underwriter, or administrator of the
Registrant:
----------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5) (6)
----------------------------------------------------------------------------------------------------------------
Name of Director Name of Owners Company Title of Class Value of Percent of Class
and Securities
Relationships to
Director
----------------------------------------------------------------------------------------------------------------
Instructions
1. Information should be provided as of the most recent practicable
date. Specify the valuation date by footnote or otherwise.
2. Determine ``beneficial ownership'' in accordance with rule 13d-3
under the Exchange Act (Sec. 240.13d-3 of this chapter).
3. Identify the company in which the director or immediate family
member of the director owns securities in column (3). When the company
is a person directly or indirectly controlling, controlled by, or under
common control with an investment adviser, principal underwriter, or
administrator, describe the company's relationship with the investment
adviser, principal underwriter, or administrator.
4. Provide the information required by columns (5) and (6) on an
aggregate basis for each director and his immediate family members.
9. Unless disclosed in response to paragraph 8 of this Item 18,
describe any material interest, direct or indirect, of each director or
immediate family member of a director, during the past five years, in:
(a) An investment adviser, principal underwriter, or administrator
of the Registrant; or
(b) A person (other than a registered investment company) directly
or indirectly controlling, controlled by, or under common control with
an investment adviser, principal underwriter, or administrator of the
Registrant.
Instruction: A director or immediate family member has an interest
in a company if he is a party to a contract, arrangement, or
understanding with respect to any securities of, or interest in, the
company.
10. Describe briefly any material interest, direct or indirect, of
any director or immediate family member of a director in any material
transaction, or material series of similar transactions, since the
beginning of the last two completed fiscal years of the Registrant, or
in any currently proposed material transaction, or material series of
similar transactions, to which any of the following persons was or is
to be a party:
(a) The Registrant;
(b) An officer of the Registrant;
(c) An investment company, or a person that would be an investment
company but for the exclusions provided by sections 3(c)(1) and 3(c)(7)
of the 1940 Act (15 U.S.C. 80a-3(c)(1) and (c)(7)), having the same
investment adviser, principal underwriter, or administrator as the
Registrant or having an investment adviser, principal underwriter, or
administrator that directly or indirectly controls, is controlled by,
or is under common control with an investment adviser, principal
underwriter, or administrator of the Registrant;
(d) An officer of an investment company, or a person that would be
an investment company but for the exclusions provided by sections
3(c)(1) and 3(c)(7) of the 1940 Act (15 U.S.C. 80a-3(c)(1) and (c)(7)),
having the same investment adviser, principal underwriter, or
administrator as the Registrant or having an investment adviser,
principal underwriter, or administrator that directly or indirectly
controls, is controlled by, or is under common control with an
investment adviser, principal underwriter, or administrator of the
Registrant;
(e) An investment adviser, principal underwriter, or administrator
of the Registrant;
(f) An officer of an investment adviser, principal underwriter, or
administrator of the Registrant;
(g) A person directly or indirectly controlling, controlled by, or
under common control with an investment adviser, principal underwriter,
or administrator of the Registrant; or
(h) 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 Registrant.
Instructions
1. Include the name of each director or immediate family member
whose interest in any transaction or series of similar transactions is
described and the nature of the circumstances by reason of which the
interest is required to be described.
2. State the nature of the interest, the approximate dollar amount
involved in the transaction, and, where practicable, the approximate
dollar amount of the interest.
3. In computing the amount involved in the transaction or series of
similar transactions, include all periodic payments in the case of any
lease or other agreement providing for periodic payments.
4. Compute the amount of the interest of any director or immediate
family member of the director without regard to the amount of profit or
loss involved in the transaction(s).
5. As to any transaction involving the purchase or sale of assets,
state the cost of the assets to the purchaser and, if acquired by the
seller within two years prior to the transaction, the cost to the
seller. Describe the method used in determining the purchase or sale
price and the name of the person making the determination.
6. Disclose indirect, as well as direct, material interests in
transactions. A person who has a position or relationship with, or
interest in, a company that engages in a transaction with one of the
persons listed in paragraphs 10(a) through (h) of this Item 18 may have
an indirect interest in the transaction by reason of the position,
relationship, or interest. The interest in the transaction, however,
will not be deemed ``material'' within the meaning of paragraph 10 of
this Item 18 where the interest of the director or immediate
[[Page 59870]]
family member arises solely from the holding of an equity interest
(including a limited partnership interest, but excluding a general
partnership interest) or a creditor interest in a company that is a
party to the transaction with one of the persons specified in
paragraphs 10(a) through (h) of this Item 18, and the transaction is
not material to the company.
7. No information need be given as to any transaction where the
interest of the director or immediate family member arises solely from
the ownership of securities of a person specified in paragraphs 10(a)
through (h) of this Item 18 and the director or immediate family member
receives no extra or special benefit not shared on a pro rata basis by
all holders of the class of securities.
8. Transactions include loans, lines of credit, and other
indebtedness. For indebtedness, indicate the largest aggregate amount
of indebtedness outstanding at any time during the period, the nature
of the indebtedness and the transaction in which it was incurred, the
amount outstanding as of the latest practicable date, and the rate of
interest paid or charged.
9. No information need be given as to any routine, retail
transaction. For example, the Registrant need not disclose that a
director holds a credit card or bank or brokerage account with a person
specified in paragraphs 10(a) through (h) of this Item 18 unless the
director is accorded special treatment.
11. Describe briefly any material relationship, direct or indirect,
of any director or immediate family member of a director that exists,
or has existed at any time since the beginning of the last two
completed fiscal years of the Registrant, or is currently proposed,
with any of the persons specified in paragraphs 10(a) through (h) of
this Item 18. Relationships include:
(a) Payments for property or services to or from any person
specified in paragraphs 10(a) through (h) of this Item 18;
(b) Provision of legal services to any person specified in
paragraphs 10(a) through (h) of this Item 18;
(c) Provision of investment banking services to any person
specified in paragraphs 10(a) through (h) of this Item 18, other than
as a participating underwriter in a syndicate; and
(d) Any consulting or other relationship that is substantially
similar in nature and scope to the relationships listed in paragraphs
11(a) through (c) of this Item 18.
Instructions
1. Include the name of each director or immediate family member
whose relationship is described and the nature of the circumstances by
reason of which the relationship is required to be described.
2. State the nature of the relationship and the amount of business
conducted between the director or immediate family member and the
person specified in paragraphs 10(a) through (h) of this Item 18 as a
result of the relationship since the beginning of the last two
completed fiscal years of the Registrant or proposed to be done during
the Registrant's current fiscal year.
3. In computing the amount involved in a relationship, include all
periodic payments in the case of any agreement providing for periodic
payments.
4. Disclose indirect, as well as direct, material relationships. A
person who has a position or relationship with, or interest in, a
company that has a relationship with one of the persons listed in
paragraphs 10(a) through (h) of this Item 18 may have an indirect
relationship by reason of the position, relationship, or interest. The
relationship, however, will not be deemed ``material'' within the
meaning of paragraph 11 of this Item 18 where the relationship of the
director or immediate family member arises solely from the holding of
an equity interest (including a limited partnership interest, but
excluding a general partnership interest) or a creditor interest in a
company that has a relationship with one of the persons specified in
paragraphs 10(a) through (h) of this Item 18, and the relationship is
not material to the company.
5. In the case of an indirect interest, identify the company with
which a person specified in paragraphs 10(a) through (h) of this Item
18 has a relationship; the name of the director or immediate family
member affiliated with the company and the nature of the affiliation;
and the amount of business done between the company and the person
specified in paragraphs 10(a) through (h) of this Item 18 since the
beginning of the last two completed fiscal years of the Registrant or
proposed to be done during the Registrant's current fiscal year.
6. In calculating payments for property and services for purposes
of paragraph 11(a) of this Item 18, the following may be excluded:
a. Payments where the transaction involves the rendering of
services as a common contract carrier, or public utility, at rates or
charges fixed in conformity with law or governmental authority; or
b. Payments that arise solely from the ownership of securities of a
person specified in paragraphs 10(a) through (h) of this Item 18 and no
extra or special benefit not shared on a pro rata basis by all holders
of the class of securities is received.
7. No information need be given as to any routine, retail
relationship. For example, the Registrant need not disclose that a
director holds a credit card or bank or brokerage account with a person
specified in paragraphs 10(a) through (h) of this Item 18 unless the
director is accorded special treatment.
* * * * *
12. If an officer of an investment adviser, principal underwriter,
or administrator of the Registrant, 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
Registrant, serves, or has served since the beginning of the last two
completed fiscal years of the Registrant, on the board of directors of
a company where a director of the Registrant or immediate family member
of a director is, or was since the beginning of the last two completed
fiscal years of the Registrant, an officer, identify:
(a) The company;
(b) The individual who serves or has served as a director of the
company and the period of service as director;
(c) The investment adviser, principal underwriter, or administrator
or person controlling, controlled by, or under common control with the
investment adviser, principal underwriter, or administrator where the
individual named in paragraph 12(b) of this Item 18 holds or held
office and the office held; and
(d) The director of the Registrant or immediate family member who
is or was an officer of the company; the office held; and the period of
holding the office.
13. Discuss in reasonable detail the material factors and the
conclusions with respect thereto that formed the basis for the board of
directors approving the existing investment advisory contract. If
applicable, include a discussion of any benefits derived or to be
derived by the investment adviser from the relationship with the
Registrant such as soft dollar arrangements by which brokers provide
research to the Registrant or its investment adviser in return for
allocating fund brokerage.
Instruction: Conclusory statements or a list of factors will not be
considered sufficient disclosure. The discussion should relate the
factors to the specific circumstances of the Registrant and the
investment advisory contract.
* * * * *
[[Page 59871]]
33. Instruction 4 to Item 23 of Form N-2 (referenced in
Secs. 239.14 and 274.11a-1) is amended by removing ``and'' from the end
of paragraph c., removing the period at the end of paragraph d. and in
its place adding a semi-colon, and adding paragraphs e. and f. to read
as follows:
Form N-2
* * * * *
Item 23. Financial Statements
* * * * *
Instructions
* * * * *
4. * * *
e. the management information required by paragraph 1 of Item 18;
and
f. a statement that the SAI includes additional information about
directors of the Registrant and is available, without charge, upon
request, and a toll-free (or collect) telephone number for shareholders
to call to request the SAI.
* * * * *
Note: The text of Form N-3 does not and these amendments will
not appear in the Code of Federal Regulations.
34. Item 20 of Form N-3 (referenced in Secs. 239.17a and 274.11b)
is amended by adding instructions 1 and 2 before paragraph (a);
revising paragraphs (a) and (b); redesignating paragraph (c) as
paragraph (m); adding paragraphs (c) through (l); and removing
``executive'' from the first sentence of newly designated paragraph (m)
to read as follows:
Form N-3
* * * * *
Item 20. Management
Instructions
1. For purposes of this Item 20, the terms below have the following
meanings:
a. The term ``fund complex'' means two or more registered
investment companies that:
(i) Hold themselves out to investors as related companies for
purposes of investment and investor services; or
(ii) Have a common investment adviser or have an investment adviser
that is an affiliated person of the investment adviser of any of the
other registered investment companies.
b. The term ``immediate family member'' means a person's spouse,
parent, child, sibling, mother- or father-in-law, son- or daughter-in-
law, or brother or sister-in-law, and includes step and adoptive
relationships.
c. The term ``officer'' means the president, vice-president,
secretary, treasurer, controller, or any other officer who performs
policy-making functions.
2. When providing information about directors, furnish information
for directors who are interested persons as defined in Section 2(a)(19)
of the 1940 Act (15 U.S.C. 80a-2(a)(19)) and the rules thereunder
separately from the information for directors who are not interested
persons. For example, when furnishing information in a table, you
should provide separate tables (or separate sections of a single table)
for directors who are interested persons and for directors who are not
interested persons. When furnishing information in narrative form,
indicate by heading or otherwise the directors who are interested
persons and the ones who are not interested persons.
(a) Provide the information required by the following table for
each member of the board of managers (``director'') and officer of the
Registrant, and, if the Registrant has an advisory board, member of the
board. Explain in a footnote to the table any family relationship
between the persons listed.
----------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5) (6)
----------------------------------------------------------------------------------------------------------------
Name, Address, Position(s) Held Term of Office Principal Number of Other
and Age with Registrant and Length of Occupation(s) Portfolios in Directorships
Time Served During Past 5 Fund Complex Held by Director
Years Overseen by
Director
----------------------------------------------------------------------------------------------------------------
Instructions
1. For purposes of this paragraph, the term ``family relationship''
means any relationship by blood, marriage, or adoption, not more remote
than first cousin.
2. For each director who is an interested person as defined in
Section 2(a)(19) of the 1940 Act (15 U.S.C. 80a-2(a)(19)) and the rules
thereunder, describe, in a footnote or otherwise, the relationship,
events, or transactions by reason of which the director is an
interested person.
3. State the principal business of any company listed under column
(4) unless the principal business is implicit in its name.
4. Indicate in column (6) directorships not included in column (5)
that are held by a director in any company with a class of securities
registered pursuant to section 12 of the Exchange Act (15 U.S.C. 78l)
or subject to the requirements of section 15(d) of the Exchange Act (15
U.S.C. 78o(d)) or any company registered as an investment company under
the 1940 Act, and name the companies in which the directorships are
held. Where the other directorships include directorships overseeing
two or more portfolios in the same fund complex, identify the fund
complex and provide the number of portfolios overseen as a director in
the fund complex rather than listing each portfolio separately.
(b) For each individual listed in column (1) of the table required
by paragraph (a) of this Item 20 who is not a director, describe any
positions, including as an officer, employee, director, or general
partner, held with affiliated persons or principal underwriters of the
Registrant.
Instruction: When an individual holds the same position(s) with two
or more registered investment companies that are part of the same fund
complex, identify the fund complex and provide the number of registered
investment companies for which the position(s) are held rather than
listing each registered investment company separately.
(c) Describe briefly any arrangement or understanding between any
director or officer and any other person(s) (naming the person(s))
pursuant to which he was selected as a director or officer.
Instruction: Do not include arrangements or understandings with
directors or officers acting solely in their capacities as such.
(d) Identify the standing committees of the Registrant's board of
managers, and provide the following information about each committee:
(i) A concise statement of the functions of the committee;
(ii) The members of the committee;
(iii) The number of committee meetings held during the last fiscal
year; and
(iv) If the committee is a nominating or similar committee, state
whether the committee will consider nominees recommended by security
holders and, if so, describe the procedures to be followed by security
holders in submitting recommendations.
[[Page 59872]]
(e) Unless disclosed in the table required by paragraph (a) of this
Item 20, describe any positions, including as an officer, employee,
director, or general partner, held by a director or immediate family
member of the director during the past five years with:
(i) The Registrant;
(ii) An investment company, or a person that would be an investment
company but for the exclusions provided by sections 3(c)(1) and 3(c)(7)
of the 1940 Act (15 U.S.C. 80a-3(c)(1) and (c)(7)), having the same
Insurance Company, investment adviser, principal underwriter, or
administrator as the Registrant or having an Insurance Company,
investment adviser, principal underwriter, or administrator that
directly or indirectly controls, is controlled by, or is under common
control with the Insurance Company or an investment adviser, principal
underwriter, or administrator of the Registrant;
(iii) The Insurance Company or an investment adviser, principal
underwriter, administrator, or affiliated person of the Registrant; or
(iv) Any person directly or indirectly controlling, controlled by,
or under common control with the Insurance Company or an investment
adviser, principal underwriter, or administrator of the Registrant.
Instruction:
When an individual holds the same position(s) with two or more
portfolios that are part of the same fund complex, identify the fund
complex and provide the number of portfolios for which the position(s)
are held rather than listing each portfolio separately.
(f) For each director, state the aggregate dollar amount of equity
securities of registered investment companies in the same fund complex
as the Registrant owned beneficially or of record by the director as
required by the following table:
------------------------------------------------------------------------
(1) (2) (3)
------------------------------------------------------------------------
Name of Director Identity of fund Complex Aggregate Dollar Amount
of Equity Securities in
Fund Complex
------------------------------------------------------------------------
Instructions:
1. Information should be provided as of the most recent practicable
date. Specify the valuation date by footnote or otherwise.
2. Determine ``beneficial ownership'' in accordance with rule 13d-3
under the Exchange Act (Sec. 240.13d-3 of this chapter).
(g) For each director and his immediate family members, furnish the
information required by the following table as to each class of
securities owned beneficially or of record in:
(i) The Insurance Company or an investment adviser, principal
underwriter, or administrator of the Registrant; or
(ii) A person (other than a registered investment company) directly
or indirectly controlling, controlled by, or under common control with
the Insurance Company or an investment adviser, principal underwriter,
or administrator of the Registrant:
----------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5) (6)
----------------------------------------------------------------------------------------------------------------
Name of Director Name of Owners Company Title of Class Value of Percent of Class
and Securities
Relationships to
Director
----------------------------------------------------------------------------------------------------------------
Instructions
1. Information should be provided as of the most recent practicable
date. Specify the valuation date by footnote or otherwise.
2. Determine ``beneficial ownership'' in accordance with rule 13d-3
under the Exchange Act (Sec. 240.13d-3 of this chapter).
3. Identify the company in which the director or immediate family
member of the director owns securities in column (3). When the company
is a person directly or indirectly controlling, controlled by, or under
common control with the Insurance Company or an investment adviser,
principal underwriter, or administrator, describe the company's
relationship with the Insurance Company, investment adviser, principal
underwriter, or administrator.
4. Provide the information required by columns (5) and (6) on an
aggregate basis for each director and his immediate family members.
(h) Unless disclosed in response to paragraph (g) of this Item 20,
describe any material interest, direct or indirect, of each director or
immediate family member of a director, during the past five years, in:
(i) The Insurance Company or an investment adviser, principal
underwriter, or administrator of the Registrant; or
(ii) A person (other than a registered investment company) directly
or indirectly controlling, controlled by, or under common control with
the Insurance Company or an investment adviser, principal underwriter,
or administrator of the Registrant.
Instruction
A director or immediate family member has an interest in a company
if he is a party to a contract, arrangement, or understanding with
respect to any securities of, or interest in, the company.
(i) Describe briefly any material interest, direct or indirect, of
any director or immediate family member of a director in any material
transaction, or material series of similar transactions, since the
beginning of the last two completed fiscal years of the Registrant, or
in any currently proposed material transaction, or material series of
similar transactions, to which any of the following persons was or is
to be a party:
(i) The Registrant;
(ii) An officer of the Registrant;
(iii) An investment company, or a person that would be an
investment company but for the exclusions provided by sections 3(c)(1)
and 3(c)(7) of the 1940 Act (15 U.S.C. 80a-3(c)(1) and (c)(7)), having
the same Insurance Company, investment adviser, principal underwriter,
or administrator as the Registrant or having an Insurance Company,
investment adviser, principal underwriter, or administrator that
directly or indirectly controls, is controlled by, or is under common
control with the Insurance Company or an investment adviser, principal
underwriter, or administrator of the Registrant;
[[Page 59873]]
(iv) An officer of an investment company, or a person that would be
an investment company but for the exclusions provided by sections
3(c)(1) and 3(c)(7) of the 1940 Act (15 U.S.C. 80a-3(c)(1) and (c)(7)),
having the same Insurance Company, investment adviser, principal
underwriter, or administrator as the Registrant or having an Insurance
Company, investment adviser, principal underwriter, or administrator
that directly or indirectly controls, is controlled by, or is under
common control with the Insurance Company or an investment adviser,
principal underwriter, or administrator of the Registrant;
(v) The Insurance Company or an investment adviser, principal
underwriter, or administrator of the Registrant;
(vi) An officer of the Insurance Company or an investment adviser,
principal underwriter, or administrator of the Registrant;
(vii) A person directly or indirectly controlling, controlled by,
or under common control with the Insurance Company or an investment
adviser, principal underwriter, or administrator of the Registrant; or
(viii) An officer of a person directly or indirectly controlling,
controlled by, or under common control with the Insurance Company or an
investment adviser, principal underwriter, or administrator of the
Registrant.
Instructions
1. Include the name of each director or immediate family member
whose interest in any transaction or series of similar transactions is
described and the nature of the circumstances by reason of which the
interest is required to be described.
2. State the nature of the interest, the approximate dollar amount
involved in the transaction, and, where practicable, the approximate
dollar amount of the interest.
3. In computing the amount involved in the transaction or series of
similar transactions, include all periodic payments in the case of any
lease or other agreement providing for periodic payments.
4. Compute the amount of the interest of any director or immediate
family member of the director without regard to the amount of profit or
loss involved in the transaction(s).
5. As to any transaction involving the purchase or sale of assets,
state the cost of the assets to the purchaser and, if acquired by the
seller within two years prior to the transaction, the cost to the
seller. Describe the method used in determining the purchase or sale
price and the name of the person making the determination.
6. Disclose indirect, as well as direct, material interests in
transactions. A person who has a position or relationship with, or
interest in, a company that engages in a transaction with one of the
persons listed in paragraphs (i) through (viii) of paragraph (i) of
this Item 20 may have an indirect interest in the transaction by reason
of the position, relationship, or interest. The interest in the
transaction, however, will not be deemed ``material'' within the
meaning of paragraph (i) of this Item 20 where the interest of the
director or immediate family member arises solely from the holding of
an equity interest (including a limited partnership interest, but
excluding a general partnership interest) or a creditor interest in a
company that is a party to the transaction with one of the persons
specified in paragraphs (i) through (viii) of paragraph (i) of this
Item 20, and the transaction is not material to the company.
7. No information need be given as to any transaction where the
interest of the director or immediate family member arises solely from
the ownership of securities of a person specified in paragraphs (i)
through (viii) of paragraph (i) of this Item 20 and the director or
immediate family member receives no extra or special benefit not shared
on a pro rata basis by all holders of the class of securities.
8. Transactions include loans, lines of credit, and other
indebtedness. For indebtedness, indicate the largest aggregate amount
of indebtedness outstanding at any time during the period, the nature
of the indebtedness and the transaction in which it was incurred, the
amount outstanding as of the latest practicable date, and the rate of
interest paid or charged.
9. No information need be given as to any routine, retail
transaction. For example, the Registrant need not disclose that a
director holds a credit card or bank or brokerage account with a person
specified in paragraphs (i) through (viii) of paragraph (i) of this
Item 20 unless the director is accorded special treatment.
(j) Describe briefly any material relationship, direct or indirect,
of any director or immediate family member of a director that exists,
or has existed at any time since the beginning of the last two
completed fiscal years of the Registrant, or is currently proposed,
with any of the persons specified in paragraphs (i) through (viii) of
paragraph (i) of this Item 20. Relationships include:
(i) Payments for property or services to or from any person
specified in paragraphs (i) through (viii) of paragraph (i) of this
Item 20;
(ii) Provision of legal services to any person specified in
paragraphs (i) through (viii) of paragraph (i) of this Item 20;
(iii) Provision of investment banking services to any person
specified in paragraphs (i) through (viii) of paragraph (i) of this
Item 20, other than as a participating underwriter in a syndicate; and
(iv) Any consulting or other relationship that is substantially
similar in nature and scope to the relationships listed in paragraphs
(j)(i) through (j)(iii) of this Item 20.
Instructions
1. Include the name of each director or immediate family member
whose relationship is described and the nature of the circumstances by
reason of which the relationship is required to be described.
2. State the nature of the relationship and the amount of business
conducted between the director or immediate family member and the
person specified in paragraphs (i) through (viii) of paragraph (i) of
this Item 20 as a result of the relationship since the beginning of the
last two completed fiscal years of the Registrant or proposed to be
done during the Registrant's current fiscal year.
3. In computing the amount involved in a relationship, include all
periodic payments in the case of any agreement providing for periodic
payments.
4. Disclose indirect, as well as direct, material relationships. A
person who has a position or relationship with, or interest in, a
company that has a relationship with one of the persons listed in
paragraphs (i) through (viii) of paragraph (i) of this Item 20 may have
an indirect relationship by reason of the position, relationship, or
interest. The relationship, however, will not be deemed ``material''
within the meaning of paragraph (j) of this Item 20 where the
relationship of the director or immediate family member arises solely
from the holding of an equity interest (including a limited partnership
interest, but excluding a general partnership interest) or a creditor
interest in a company that has a relationship with one of the persons
specified in paragraphs (i) through (viii) of paragraph (i) of this
Item 20, and the relationship is not material to the company.
5. In the case of an indirect interest, identify the company with
which a person specified in paragraphs (i)
[[Page 59874]]
through (viii) of paragraph (i) of this Item 20 has a relationship; the
name of the director or immediate family member affiliated with the
company and the nature of the affiliation; and the amount of business
done between the company and the person specified in paragraphs (i)
through (viii) of paragraph (i) of this Item 20 since the beginning of
the last two completed fiscal years of the Registrant or proposed to be
done during the Registrant's current fiscal year.
6. In calculating payments for property and services for purposes
of paragraph (j)(i) of this Item 20, the following may be excluded:
a. Payments where the transaction involves the rendering of
services as a common contract carrier, or public utility, at rates or
charges fixed in conformity with law or governmental authority; or
b. Payments that arise solely from the ownership of securities of a
person specified in paragraphs (i) through (viii) of paragraph (i) of
this Item 20 and no extra or special benefit not shared on a pro rata
basis by all holders of the class of securities is received.
7. No information need be given as to any routine, retail
relationship. For example, the Registrant need not disclose that a
director holds a credit card or bank or brokerage account with a person
specified in paragraphs (i) through (viii) of paragraph (i) of this
Item 20 unless the director is accorded special treatment.
(k) If an officer of the Insurance Company or an investment
adviser, principal underwriter, or administrator of the Registrant, or
an officer of a person directly or indirectly controlling, controlled
by, or under common control with the Insurance Company or an investment
adviser, principal underwriter, or administrator of the Registrant,
serves, or has served since the beginning of the last two completed
fiscal years of the Registrant, on the board of directors of a company
where a director of the Registrant or immediate family member of a
director is, or was since the beginning of the last two completed
fiscal years of the Registrant, an officer, identify:
(i) The company;
(ii) The individual who serves or has served as a director of the
company and the period of service as director;
(iii) The Insurance Company, investment adviser, principal
underwriter, or administrator or person controlling, controlled by, or
under common control with the Insurance Company, investment adviser,
principal underwriter, or administrator where the individual named in
paragraph (k)(ii) of this Item 20 holds or held office and the office
held; and
(iv) The director of the Registrant or immediate family member who
is or was an officer of the company; the office held; and the period of
holding the office.
(l) Discuss in reasonable detail the material factors and the
conclusions with respect thereto that formed the basis for the board of
managers approving the existing investment advisory contract. If
applicable, include a discussion of any benefits derived or to be
derived by the investment adviser from the relationship with the
Registrant such as soft dollar arrangements by which brokers provide
research to the Registrant or its investment adviser in return for
allocating fund brokerage.
Instruction: Conclusory statements or a list of factors will not be
considered sufficient disclosure. The discussion should relate the
factors to the specific circumstances of the Registrant and the
investment advisory contract.
* * * * *
35. Instruction 4 to Item 27 of Form N-3 (referenced in
Secs. 239.17a and 274.11b) is amended by removing ``and'' from the end
of paragraph (iii), removing the period at the end of paragraph (iv)
and in its place adding a semi-colon, and adding paragraphs (v) and
(vi) to read as follows:
Item 27. Financial Statements
* * * * *
Instructions
* * * * *
4. * * *
(v) The management information required by paragraph (a) of Item
20; and
(vi) A statement that the SAI includes additional information about
members of the board of managers of the Registrant and is available,
without charge, upon request, and a toll-free (or collect) telephone
number for contract owners to call to request the SAI.
* * * * *
Dated: October 14, 1999.
By the Commission.
Jonathan G. Katz,
Secretary.
Note: Appendix A to the preamble will not appear in the Code of
Federal Regulations.
Appendix A.--Analysis of Proposed Amendments to Schedule 14A under the
Exchange Act and Form N-1A under the Investment Company Act
------------------------------------------------------------------------
Source of proposed
Proposed item 22 of Schedule Proposed items 13 items in current
14A and 22 of Form N-1A rules and forms
------------------------------------------------------------------------
Item 22. Information Item 13. Management
Required in Investment Information.
Company Proxy Statement
Instr. 1.a. to Item Item 22(a)(v) of
13 (Defn. of fund Schedule 14A.
complex).
22(a)(1)(i) (Defn. of .................... Item 15(h)(1) of
Administrator) Form N-1A.
22(a)(1)(vi) (Defn. of Instr. 1.b. to Item Instruction 2 to
Immediate Family Member) 13. 404(a) of Reg. S-K.
22(a)(1)(vii) (Defn. of Instr. 1.c. to Item Instruction 1 to
Officer) 13. Item 13(b) of Form
N-1A.
22(a)(1)(ix) (Defn. of .................... Item 22(a)(1)(vii)
Registrant). of Schedule 14A.
22(a)(1)(x) (Defn. of .................... Instruction D. of
Sponsoring Insurance General
Company. Instructions to
Form N-3.
22(b) (Applies when there is
an election of directors):
Instr. 1................ .................... Instruction 1 to
Item 22(b) of
Schedule 14A.
Instr. 2................ .................... Instruction 2 to
Item 22(b) of
Schedule 14A.
Instr. 3................ Instr. 2 to Item 13. New.
Instr. 4................ .................... Instruction 3 to
Item 401(a) of Reg.
S-K.
[[Page 59875]]
22(b)(1) (Table of core Item 13(a)(1)....... Items 401(a), (b),
information about each (d), and (e) of
director, nominee, officer, Reg. S-K and Item
and advisory board member) 13 of Form N-1A.
Instr. 1................ Instr. 1 to Item Instruction to
13(a)(1). 401(d) of Reg. S-K
and Instruction 1
to Item 13(b) of
Form N-1A.
Instr. 2................ .................... Instruction 2 to
Item 401(a) and
Instruction 2 to
Item 401(b) to Reg.
S-K.
Instr. 3................ .................... Instruction 4 to
Item 401(a) of Reg.
S-K.
Instr. 4................ Instr. 2 to Item Instruction 1 to
13(a)(1). Item 22(b)(4) of
Schedule 14A.
Instr. 5................ Instr. 3 to Item Instruction 2 to
13(a)(1). Item 13(b) of Form
N-1A.
Instr. 6................ .................... New.
Instr. 7................ Instr. 4 to Item Item 401(e)(2) and
13(a)(1). Instruction to Item
401(e)(2) of Reg. S-
K.
Item 13(a)(2) Item 13(c) of Form N-
(Positions held by 1A.
officers):.
Instr. to Item Instruction to Item
13(a)(2). 13(c) of Form N-1A.
22(b)(2) (Any agreement Item 13(a)(3)....... Items 401(a) and
regarding selection as 401(b) of Reg. S-K.
director, nominee, or
officer).
Instr....................... Instr. to Item Instruction 1 to
13(a)(3). Item 401(a) and
Instruction 1 to
Item 401(b) of Reg.
S-K.
Item 13(b)(1) Item 13(a) of Form N-
(Description of 1A.
board
responsibilities).
Instr. to Item Instruction to Item
13(b)(1). 13(a) of Form N-1A.
------------------------------------------------------------------------
Appendix A--Analysis of Proposed Amendments to Schedule 14A Under the
Exchange Act and Form N-1A Under the Investment Company Act
------------------------------------------------------------------------
Source of proposed
Proposed item 22 of Schedule Proposed items 13 items in current
14A and 22 of Form N-1A rules and forms
------------------------------------------------------------------------
22(b)(3) (Positions held by Item 13(b)(3)....... Item 22(b)(1) of
director, nominee, or Schedule 14A and
immediate family members at Item 13(c) of Form
fund and related persons N-1A.
(i.e., other funds in fund
complex, investment
adviser, principal
underwriter, administrator,
or control-affiliates of
adviser, underwriter, or
administrator).
Instr................... Instr. to Item Instruction to Item
13(b)(3). 13(c) of Form N-1A.
22(b)(4) (Ownership of funds Item 13(b)(4)....... New.
in fund complex).
Instr. 1................ Instr. 1 to Item Item 403(b) of Reg.
13(b)(4). S-K.
Instr. 2................ Instr. 2 to Item Instruction 2 to
13(b)(4). Item 403 of Reg. S-
K.
22(b)(5) (Ownership of Item 13(b)(5)....... Item 22(b)(1) of
securities of investment Schedule 14A.
adviser, principal
underwriter, administrator,
and control-affiliates of
adviser, underwriter, and
administrator).
Instr. 1................ Instr. 1 to Item Item 403(b) of Reg.
13(b)(5). S-K.
Instr. 2................ Instr. 2 to Item Instruction 2 to
13(b)(5). Item 403 of Reg. S-
K.
Instr. 3................ Instr. 3 to Item New.
13(b)(5).
Instr. 4................ Instr. 4 to Item New.
13(b)(5).
22(b)(6) (Material interests Item 13(b)(6)....... Items 22(b)(1) and
in fund and related (2) of Schedule
persons). 14A.
Instr................... Instr. to Item Item 5(b)(1)(viii)
13(b)(6). of Schedule 14A.
------------------------------------------------------------------------
Appendix A--Analysis of Proposed Amendments to Schedule 14A Under the
Exchange Act and Form N-1A Under the Investment Company Act
------------------------------------------------------------------------
Source of proposed
Proposed item 22 of Schedule Proposed items 13 items in current
14A and 22 of Form N-1A rules and forms
------------------------------------------------------------------------
22(b)(7) (Material interests Item 13(b)(7)....... Item 22(b)(3) of
in material transactions Schedule 14A and
involving fund and related Item 404(a) of Reg.
persons). S-K.
Instr. 1................ Instr. 1 to Item Instruction 1 to
13(b)(7). Item 22(b)(3) of
Schedule 14A.
Instr. 2................ Instr. 2 to Item Item 404(a) of Reg.
13(b)(7). S-K.
Instr. 3................ Instr. 3 to Item Instruction 3 of
13(b)(7). Item 404(a) of Reg.
S-K.
[[Page 59876]]
Instr. 4................ Instr. 4 to Item Instruction 4 to
13(b)(7). Item 404(a) of Reg.
S-K.
Instr. 5................ Instr. 5 to Item Instruction 2 to
13(b)(7). Item 22(b)(3) of
Schedule 14A and
Instruction 5 to
Item 404(a) of Reg.
S-K.
Instr. 6................ Instr. 6 to Item New.
13(b)(7).
Instr. 7................ Instr. 7 to Item Instruction 8 to
13(b)(7). Item 404(a) of Reg.
S-K.
Instr. 8................ Instr. 8 to Item Instruction 7.C to
13(b)(7). Item 404(a) of Reg.
S-K.
Instr. 9................ Instr. 9 to Item New.
13(b)(7).
22(b)(8) (Material Item 13(b)(8)....... New. Derived from
relationships with fund and Item 404(b) of Reg.
related persons). S-K.
Instr. 1................ Instr. 1 to Item New. Derived from
13(b)(8). Instruction 1 to
Item 22(b)(3) of
Schedule 14A.
Instr. 2................ Instr. 2 to Item New. Derived from
13(b)(8). Item 404(b) of Reg.
S-K.
Instr. 3................ Instr. 3 to Item New. Derived from
13(b)(8). Instruction 3 of
Item 404(a) of Reg.
S-K.
Instr. 4................ Instr. 4 to Item New.
13(b)(8).
Instr. 5................ Instr. 5 to Item New. Derived from
13(b)(8). Instruction 8 of
Item 404(a) of Reg.
S-K.
Instr. 6................ Instr. 6 to Item New. Derived from
13(b)(8). Item 404(b) of Reg.
S-K.
Instr. 7................ Instr. 7 to Item New. Derived from
13(b)(8). Instructions 2.A
and B to 404(b) of
Reg. S-K.
22(b)(9) (Cross- Item 13(b)(9)....... New.
directorships).
Instr................... Instr. to Item New.
13(b)(9).
22(b)(10) (Incorporates .................... Item 22(b)(4) of
parts of Reg. S-K into Item Schedule 14A.
22).
Instr................... .................... New.
22(b)(11) (Material pending .................... Item 22(b)(5) of
legal proceedings). Schedule 14A.
22(b)(12) (Compensation Item 13(c).......... Item 22(b)(6) of
table). Schedule 14A and
Item 13(d) of Form
N-1A.
22(b)(13) (Board committees) Item 13(b)(2)....... Item 7(e) (1) and
(2) of Schedule 14A
and Instruction 3
of Item 13(b) of
Form N-1A.
Item 13(b)(10) Item 22(c)(11) of
(Basis for Schedule 14A.
approving advisory
contract).
Item 22. Financial
Statements.
Item 22(b)(5) New.
(Management
information
required by Item
13(a)(1).
Item 22(b)(6) New.
(Reference to SAI).
------------------------------------------------------------------------
[FR Doc. 99-27442 Filed 11-2-99; 8:45 am]
BILLING CODE 8010-01-P
