Funds Can Relax Over Directors Issues
May 3, 1999
NEW YORK - Mutual fund companies do not need to worry much about how well their directors are paid or whether they sit on multiple fund boards, said lawyers on a panel exploring "Litigation, Enforcement & Inspections" at a conference sponsored by the Practising Law Institute of New York recently.
However, mutual funds do need to make sure these directors are well informed and are doing their jobs properly, the panelists said.
Mutual fund companies have overwhelmingly won lawsuits brought against them challenging the independence of their directors by sitting on multiple boards and receiving multiple fees, said James Benedict, a partner with Rogers & Wells of New York. As a result, Benedict is not aware of any mutual fund complex reassigning or bringing on more directors to avoid a lawsuit. (See related story p. 1.)
"It's business as usual," he said.
Barry Barbash, a partner with Shearman & Sterling of Washington, D.C. and former director of the SEC's division of investment management, agreed that the practice of directors sitting on multiple boards and being compensated accordingly has not changed significantly.
"Many take comfort from the SEC's statements since 1994 that compensation doesn't make you disinterested, and the fact the Investment Company Act does not address the issue of being on too many boards," Barbash said.
However, the Securities and Exchange Commission plans to hold directors more accountable for any wrongdoing at a fund, said Joan McKown, the SEC's chief counsel for the division of enforcement.
"We are looking more closely at two areas - how mutual funds are marketed and at directors' failure to properly supervise them," McKown said. Her statements reflected her own opinions and not necessarily those of everyone at the commission, she said.
"The reason we are looking beyond wrongdoers to directors and independent directors is because we want to find out who may have prevented a problem and whether they should have done something about it," she said.
The SEC will continue to look at a number of other areas as well, including "conflicts of interest, disclosure, personal trading, pricing and valuation, allocations of IPOs, soft dollars, Y2K, advertising and independent directors," McKown said.
Furthermore, the SEC is "litigating rather than settling more cases," she said.
"Guidelines of settlement are not always meaningful, and we feel we have a solid basis of the law behind cases we bring forward," she said.
However, settlement is usually preferable for a mutual fund, said Colleen Mahoney, a partner with Skadden, Arps, Slate, Meagher & Flom in Washington, D.C.