October 21, 1994
TO: BOARD OF GOVERNORS NO. 108-94
SEC RULES COMMITTEE NO. 113-94
INVESTMENT COMPANY DIRECTORS CONFERENCE ATTENDEES
RE: CHAIRMAN LEVITT'S REMARKS AT ICI INVESTMENT COMPANY
DIRECTORS CONFERENCE
__________________________________________________________
As part of a major new initiative to assist fund directors
in fulfilling their increasingly challenging and complex
responsibilities to shareholders, the Institute recently held its
first Investment Company Directors Conference. At the
conference, SEC Chairman Arthur Levitt gave a speech entitled
"Mutual Fund Directors as Investor Advocates." Although Chairman
Levitt's speech apparently was not released publicly by the
Commission, the text of his prepared remarks was made available
to the Institute this week. A copy is attached for your
information.
In his remarks, Chairman Levitt addressed four areas of
"board activism and involvement," which included compliance
activities, derivatives, soft dollars, and conflicts of interest.
With respect to compliance activities, Chairman Levitt indicated
that directors should not be involved in day-to-day matters but
rather should ask hard questions -- such as questions about the
resources that are devoted to compliance activities, and the
degree of support and responsiveness of management to compliance
issues.
Concerning derivatives, Chairman Levitt stressed that
directors should understand how derivatives work, how the fund is
using them, how clearly their effects are described in the
prospectus, and what the exposure of investors is. He noted that
better disclosure and more reporting would help solve some of the
recent problems funds have experienced with investments in
derivatives, but he urged directors not to wait for the SEC to
act before considering and approving their own proposals to deal
with derivatives.
Chairman Levitt also recommended that directors "stay on top
of" issues relating to soft dollar arrangements. In addition, he
suggested that directors monitor brokerage arrangements through
which fund expenses are paid because although these arrangements
2can be beneficial to funds, they can raise numerous questions.
Two other issues that Chairman Levitt highlighted as deserving
directors' special attention (because of the potential for
conflicts of interest) were performance-based portfolio manager
compensation arrangements and personal trading by portfolio
managers.
Paul Schott Stevens
General Counsel
Attachment