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Morgan Board Tweaks Committees, Pay

Morgan Stanley Funds' board of directors is tweaking both its board committee structure as well as the compensation that independent trustees receive for serving as chairpersons of committees. As of next week, independent trustees who serve as committee chairpersons and/or chairpersons of newly formed sub-committees are in for raises.

Effective Oct. 1, the Morgan Stanley board will have four separate board committees, one more than the previous three committees that trustees served on. Morgan also had a derivatives committee as recently as 2003, but that has since been eliminated.

The board will retain its audit committee, whose function, among other things, is to recommend the engagement of the fund's public auditing firm to the full board, review fund audits and approve audit fees. In addition, the governance committee will remain intact and will serve to both recommend and oversee the funds' corporate governance practices as well as identify independent trustee candidates and advise the board on its composition. Since the fund group does not have a formal nominating committee as some fund boards do, that task is handled by the governance committee.

But the third committee, formerly the insurance committee, whose members' job it was to review and monitor the insurance coverage maintained by the funds and the board, will have added responsibilities. This committee will become the valuation, insurance and compliance committee. The revised committee will still monitor insurance matters, but going forward, its members will also review the portfolio securities valuation process as well as oversee the compliance function of all proprietary funds.

Scrutinizing Contracts

New to the boardroom of the Morgan Stanley Funds will be the investment committee, which will be charged with reviewing performance of the funds and the portfolio investment process, as well as recommending that the full board renew the investment management contract between Morgan Stanley Investment Management and each of the funds.

In addition, this fledgling investment committee will break off into three sub-committees, dividing the 175 funds generally overseen by all trustees into three specific asset classes: equity funds, fixed-income funds and a third class to include money market funds, alternative investments and closed-end funds.

Morgan Stanley Funds' board governance committee made the recommendation that the three investment sub-committees be formed in order to allow trustees to focus on one group of similar funds, and drill down deeper to review and assess certain issues, said Carl Frischling, a partner with the New York law firm Kramer Levin Naftalis & Frankel. Frischling serves as the independent counsel to the Morgan Stanley Funds' independent trustees.

"It's good governance given the amount of work involved," he added.

The annual retainer fees paid to Morgan Stanley Funds' independent board trustees will not change from the $180,000 level the board members instituted back in 2003. Nor will the 100% premium payment that the overall board chairperson receives in addition to his usual retainer change. But individual committee chairpersons, and those assuming the chair of investment sub-committees, will see a fee increase as of Oct. 1. Fund boards set their own compensation levels.

Specifically, the chairperson of the board's audit committee who had received an additional $60,000 per year to serve in that role, will soon receive a higher $75,000. The new investment committee chairperson will also receive extra compensation of $60,000 per annum, while newly reigning sub-committee chairpersons will be granted an extra $15,000 yearly for their service. The other committee chairpersons will receive $30,000.

"Due to increased responsibilities, the board has reviewed its overall committee structure and revised the compensation for a number of committee and sub-committee chairs," a Morgan Stanley spokesperson confirmed.

Sub-Committees Gaining Favor

Increasing trustees' responsibilities is driving the formation of board committees, and in particular, sub-committees, which can often individually handle bite-sized pieces of an otherwise daunting task and then report back to the committee or full board.

Last year, JPMorgan Funds reconfigured its board committees in a similar fashion. Among the changes, the responsibility for determining valuations of portfolio securities was taken off the list of responsibilities of the valuation and compliance committee and assigned to the audit committee. As part of this move, the valuation and compliance committee was simply renamed the compliance committee.

In turn, the audit committee created a brand new valuation sub-committee and staffed it with two trustees. When thorny valuation issues crop up, the two-member sub-committee is empowered to make decisions in lieu of the whole board.

Fidelity Investments' fund board, whose independent trustees oversee a total of 326 mutual funds, relies on 12 separate committees to handle the collective fund oversight function. And each of its committees can break its duties into even smaller tasks by forming "working groups" that act like the more formal sub-committees.

But while trustees often find it more effective to delegate tasks to committees or sub-committees, they also want to be paid for their committee service, especially if they agree to serve as chair.

According to the 2006 survey of mutual fund directors' compensation compiled by Management Practice of Stamford, Conn., 74% of fund boards now pay additional fees for committee service, including committee chairperson fees, versus 63% in 2004 as the importance and frequency of committee meetings has increased. While Management Practice found that such committee fees only account for about 11% of an independent trustee's board pay, the average compensation paid for committee service is $7,100 per year for sitting on one committee.

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