he Investment Company Institute
(ICI) created the Advisory Group on Best Practices for Fund Directors
this past March in order to address growing concern over the "independence" of independent fund directors.
After consulting a variety of experts, including former SEC officials, representatives of the accounting and legal communities, prominent academics and others with expertise in the areas of mutual fund and corporate governance, the group's findings and recommendations were presented at a news briefing today in Washington D.C.
"The recommendations in our report go beyond what is required by law and regulation. They also seek to enhance the independence and effectiveness of all
fund directors -- both independent and affiliated -- in fulfilling their responsibilities to shareholders," said John J. Brennan
, chairman and ceo of The Vanguard Group, Inc.
, and chairman of the Advisory Group. Brennan also is chairman of the ICI.
The Advisory Group.
The Group's members, in addition to Brennan, include: Dawn-Marie Driscoll
, independent director, the Scudder Funds
; Paul G. Haaga, Jr.
, executive vice president, Capital Research and Management Company
; Dr. Manuel H. Johnson
, independent director, the Morgan Stanley Dean Witter Family of Funds
; William M. Lyons
, president and coo, American Century Investments
; and Gerald C. McDonough
, independent director, The Fidelity Funds
. The group's report will be submitted to the Institute's Board of Governors, which will consider the recommendations at a special meeting on July 7.
Among the 15 practices cited in the report is a call for independent directors to represent a "super-majority" (or at least two-thirds on all fund boards) rather than the current 40 percent generally required by law. The group stated that although it was not uncommon for many of the larger fund complexes to already have fulfilled this requirement, it was by no means universal.
The report also recommends that former officers or directors of a fund's investment adviser, principal underwriter or certain affiliates may never serve as independent directors of the fund; that fund independent directors have access to separate counsel; and that a fund's independent directors meet separately from management.
Listed below are the practices that the Advisory Group is recommending to investment company boards of directors.
The Advisory Group recommends that:
- At least two-thirds of the directors of all investment companies be independent directors.
- Former officers or directors of a fund's investment adviser, principal underwriter or certain of their affiliates not serve as independent directors of the fund.
- Independent directors be selected and nominated by the incumbent independent directors.
- Independent directors establish the appropriate compensation for serving on fund boards.
- Fund directors invest in funds on whose boards they serve.
- Independent directors have qualified investment company counsel who is independent from the investment adviser and the funds other service providers; and that independent directors have express authority to consult with the fund's independent auditors or other experts, as appropriate, when faced with issues that they believe require special expertise.
- Independent directors complete on an annual basis a questionnaire on business, financial and family relationships, if any, with the adviser, principal underwriter, other service providers and their affiliates.
- Investment company boards establish Audit Committees composed entirely of independent directors; that the committee meet with the fund's independent auditors at least once a year outside the presence of management representatives; that the committee secure from the auditor an annual representation of its independence from management; and that the committee have a written charter spelling out its duties and powers.
- Independent directors meet separately from management in connection with their consideration of the fund's advisory and underwriting contracts and otherwise as they deem appropriate.
- Independent directors designate one or more "lead" independent directors.
- Fund boards obtain directors and officers /errors and omissions insurance coverage and/or indemnification from the fund that is adequate to ensure the independence and effectiveness of independent directors.
- Investment company boards of directors generally be organized either as a unitary board for all the funds in a complex or as cluster boards for groups of funds within a complex, rather than as separate boards for each individual fund.
- Fund boards adopt policies on retirement of directors.
- Fund directors evaluate periodically the board's effectiveness.
- New fund directors receive appropriate orientation and all fund directors keep abreast of industry and regulatory developments.
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