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Morgan Trustees Give Selves Fat Raises

The seven independent trustees who serve as watchdogs over 129 retail and institutional funds sponsored by Morgan Stanley Investment Management of New York have approved a restructuring of their board compensation plan that will result in a significant double-digit increase in their pay.

Some trustees will see their board pay soar by at least 13% this year over 2002 and 18% or more from 2001 levels - while retainer fees will rise 123%. In some cases, such as for trustees who also serve as chairmen of board committees, compensation will rise even more handsomely.

These pay raises coincide with Morgan Stanley's recent decision to consolidate the board of directors presiding over the firm's institutional mutual funds into the board of directors presiding over its retail mutual funds. The result is the formation of one, 10-member board of directors of which seven trustees are considered independent of management. Five of the six independent trustees who had served on institutional funds resigned on July 31.

The consolidation and pay changes were disclosed in an Aug. 21 filing with the Securities and Exchange Commission. A Morgan Stanley spokesman was unavailable for comment.

The consolidation of boards has been a growing trend among fund firms, although some complexes prefer to retain "cluster boards" overseeing various groups of a firm's total funds. According to Carl Frischling, a partner with Kramer Levin Naftalis & Frankel in New York, 23 of the top 37 complexes with more than $35 billion under management now have unitary boards in place.

Just last month, for example, AIM Investments announced it would meld the Invesco Funds board into its own, resulting in a reconfigured 16-member board with 14 independent trustees, Both firms are divisions of Amvescap (see MME 6/23/03).

To compensate themselves for the added responsibilities of overseeing a total of 123 Morgan institutional and retail funds, the trustees have voted themselves big pay raises. Beginning Aug. 1, each of the seven independent trustees of Morgan Stanley's funds will earn an annual retainer fee of $168,000. Previously, the trustees of the retail funds had been paid a flat $800 annual retainer per fund for service to each of about 94 mutual funds. That amounted to about $75,200 a year. Trustees of the 29 institutional funds were paid a flat $75,000 annual retainer. However, three of Morgan Stanley's retail fund trustees earned between $158,000 and $160,000 last year.

In addition, under the new arrangement, each trustee will receive $2,000 extra for each quarterly board meeting and for the two performance meetings held each year. That could boost a trustee's minimum wage to $180,000 this year.

Under the new schedule, the chairman of the board's audit committee will also rake in an extra $60,000, while both the chairman and the deputy chairman of the board's two other committees, the derivatives and insurance committees, will each pocket an extra $30,000 per year for their services.

Unchanged will be the even heftier $360,000 annual payment that Charles Fiumefreddo, the current chairman of the board, receives for serving in this top role. Fiumefreddo is the former chief executive officer of Morgan Stanley's mutual funds.

The pay raises, part of the change to compensation that all independent fund trustees by law must set for themselves, are being instituted at a time when sales of Morgan Stanley funds by Morgan Stanley brokers is under intense scrutiny by the SEC, the National Association of Securities Dealers and state securities regulators. Massachusetts state regulators have charged that Morgan Stanley routinely ran sales contests and awarded incentives of as much as $100,000 to winners for meeting certain proprietary fund sales goals without disclosing these incentives to clients (see MME 8/18/03).

In addition, a potential class action lawsuit was filed early this summer, alleging that Morgan Stanley brokers routinely recommended its clients invest in unsuitable and costlier B shares of the firm's proprietary funds (see MME 8/11/03).

Of course, board trustees don't bear direct responsibility for how their funds are sold and distributed, beyond having general oversight duties that include annually approving each fund's 12b-1 distribution plan, industry lawyers said.

Sarbanes-Oxley the Culprit

Although Morgan Stanley's SEC filing does not provide an explanation for the steep increase in compensation to its board, beefier fees paid to all independent mutual fund trustees across the industry is a growing trend, due in part to the increasing number of funds trustees must oversee when boards fuse.

Industry insiders also point to the enactment last year of Sarbanes-Oxley as the real culprit for swelling directors' fees.

The SEC has raised the bar and required trustees to take a more active role, said Barry Barbash, a partner with the law firm of Shearman & Sterling in Washington. "In light of that, you are seeing increases in retainers, and in other cases new committees," he said. "The trend is definitely toward greater compensation," he added.

"The power and influence of this job is increasing," said Meyrick Payne, a partner with Man-

agement Practice of Stamford, Conn., which consults with fund boards. Payne estimates that increased corporate governance now means that the average trustee of a large fund complex spends between 300 and 400 hours a year attending to board service - far more than the number of hours corporate directors routinely spend.

Management Practice found in a recent report that for fund complexes with more than $60 billion in assets, the median pay to independent trustees was $113,000. Moreover, pay grew more than 8% in 2002. In the report, Management Practice forecasted higher fees, especially for those serving on boards' audit committees where the number of committee meetings is expected to double.

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