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GOVERNANCE


The SEC has put mutual fund advisers on notice that it is keeping a close eye on the establishment of boards of directors for new funds.

Within the past few months, the SEC has questioned the independence of appointees to at least two new funds' boards, citing concerns that there may be overlooked conflicts of interest.

In the most recent case, a fund abandoned plans to grant independent directors equity ownership in the fund's advisory company, after the SEC questioned the plan.

The initial registration statement for Allied Owners Action Fund, a fund to be managed by Privateer Asset Management in New York, included a novel clause. Each of the new fund's four outside, independent fund trustees were to be given a one-time 500-share equity stake in the fund's advisory company, according to the statement, filed in August. This grant would be in addition to the $150 in fund share compensation the independent trustees were to receive for each board meeting they attended. (MFMN 1/24/00)

But, the SEC questioned the planned grants, according to Aaron Brown, co-founder of Privateer and portfolio manager of the Allied Owners fund.

"We had a discussion with the SEC and they raised some concerns," said Brown. "So we decided to take it [the 500-share equity stake in Privateer] out."

The concern was that by virtue of owning a stake in the mutual fund's management company, the independent directors could lose their independence. On Feb. 23, the Allied Owners Action Fund filed an amended registration statement without the equity grant to the fund's independent trustees.

This is at least the second time in recent months that the SEC has asked fund advisers to elaborate on issues relating to a new fund's initial board of directors. The SEC declined to comment for this article.

In October, the Valgro Funds of Chicago registered its first mutual fund, appointing one affiliated trustee and one independent trustee to the fund's board. But the independent trustee was the grandfather of the advisory firm's chief executive officer.

The SEC contacted the advisory firm to get a clearer picture of the relationship between the two board members who belonged to the same family but it did not raise objections based solely upon the familial relationship, said Robert Allen Rintel, president of Valgro Funds. Rather, the SEC wanted to know if any business relationship existed between the two men.

After disclosing that he owned a five percent interest in a building owned by his grandfather, Rintel scrapped his plan to appoint his grandfather to the board, according to a revised registration statement filed with the SEC in December. At that time, a new independent trustee was named in place of Rintel's grandfather.

"The SEC is looking much closer at the composition and background of mutual funds' board of directors to identify legal prohibitions of those serving as disinterested directors," said David Sturms, attorney with Vedder Price Kaufman & Kammholz in Chicago.

In October, the SEC proposed regulations regarding the role of mutual fund independent directors which included heightened disclosure about independent trustees' business relationships with fund advisers and officers. Final regulations have yet to be released.