Roundtable on the role of independent investment company directors:

Issues for Independent Directors of Bank-Related Funds, Variable Insurance Product Funds and Closed-End Funds

By Diane E. Ambler *
The Business Lawyer, American Bar Association | November, 1999
55 Bus. Law. 205

* Ms. Ambler is a partner with Mayer, Brown & Platt in Washington, D.C. C. Dirk Peterson, an associate in the D.C. office of Mayer, Brown & Platt, co-authored the section on bank-related funds. Thomas E. Bisset, counsel in the D.C. office of Mayer, Brown & Plaff, co-authored the section on variable insurance funds. Beth R. Kramer, counsel in the New York office of Mayer, Brown & Platt, co-authored the section on closed-end funds. The authors wish to express their appreciation to Kristin H. Smith, Monica S. Amparo, and Michael G. Palek for their contributions to this Article.

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The independent directors who are members of a board of directors (Board) of a registered investment company (or mutual fund) n1 serve a central role, by virtue of their independence from management, in the operation of the mutual fund under the Investment Company Act of 1940 (1940 Act). n2 The Commission has expressed the view that “the disinterested representation of shareholders in the management of investment companies constitutes an important investor protection.” n3 Judicial decisions also have emphasized the investor protection aspect of independent directors’ duties, characterizing independent directors as “independent watchdogs” whose role is “looking after the interests of the fund’s shareholders.” n4 The scope of the role of independent directors has been the focus of recent public attention. n5 The discussion below relates to the role of independent directors of three specific fund types: bank-related funds, variable insurance product funds, and closed-end funds.

A bank-related fund has been defined very generally as “[a] fund that is managed by a bank or sold through bank distribution channels . . . subject to certain restrictions . . . under the banking laws.” ABA SECTION OF BUSINESS LAW, FUND DIRECTOR’S GUIDEBOOK 73 (1996) [hereinafter FUND DIRECTOR’S GUIDEBOOK].

Issue: Do the bank exclusions from the federal securities laws create any unique issues requiring special review or monitoring by the independent directors of the Board of a bank-related fund?

Conclusion: Generally speaking, a bank, or an affiliate of a bank, acting as distributor of or adviser to a mutual fund presents no materially unique issues to the independent directors of the Board. Obviously, the Board must be made aware of the limitations of the federal securities laws in connection with bank-related funds and should be apprised of specific aspects of those limitations as they may affect the mutual fund and its shareholders. Nevertheless, in the absence of contradictory evidence, the Board, and its independent directors, would be justified in relying on the representations of the mutual fund’s distributor and investment adviser as to their compliance with the existing regulatory structure that Congress, in its wisdom, has determined sufficiently protects mutual funds and their shareholders.


The Securities Exchange Act of 1934

National banks, member state-chartered banks and trust companies, and nonmember state chartered banks (but not thrifts or credit unions) rely on the bank exclusion from the definition of “broker” n7 and “dealer” n8 in the Securities Exchange Act of 1934 (Exchange Act), n9 in performing their securities brokerage functions. As excluded banks, they are not subject to registration with or regulation by the Commission or the National Association of Securities Dealers, Inc. (NASD) as a broker or a dealer. n10 An affiliate of an excluded bank that acts as a broker-dealer does not itself fall within the bank exclusion and is subject to Exchange Act and NASD regulation.

n111 Some 80% of domestic closed-end equity funds and 86% of foreign equity funds trade at discounts to their net asset values, far more than the half of all closed-end funds that historically traded below net asset value. These discounts can be wide, currently averaging about 15% and running as high as 35%. See Periodic Repurchases by Closed-End Management Investment Companies Redemptions by Open-End Management Investment Companies and Registered Separate Accounts at Periodic Intervals or with Extend Payment, Investment Company Act Release No. 18,869, [1992 Transfer Binder] Fed. Sec. L. Rep. (CCH) P85,022, at 83,160 n.10 (July 28, 1992) [hereinafter Release No. 18,869]; Alyssa A. Lappen, Why Closed-End Funds Will Survive, INSTITUTIONAL INVESTOR, Oct. 1998, at 220; see also PROTECTING INVESTORS, supra note 3, at 432-36; Eric Balchunas, CDA/Weisenberger to Provide Daily NAVs for Closed-End Funds, FUND ACTION, Aug. 4, 1997, at 1 (stating that the average closed-end fund has been trading at a 13% discount over the past two years); Paul J. Lim, Thinking Foreign? Closed-End May Be the Ticket, L.A. TIMES, Nov. 3, 1998, at C6 (stating that the typical closed-end emerging markets stock fund is trading at a 16.1% discount to net asset value).

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Alyssa A. Lappen is a U.S.-based investigative journalist. She is the former Managing Editor at the Leeb Group (2012-2017); a former Senior Fellow of the American Center for Democracy (2005-2008); and a former Senior Editor of Institutional Investor (1993-1999), Working Woman (1991-1993) and Corporate Finance (1991). She served six of her 12 years at Forbes (1978-1990) as an Associate Editor. Ms. Lappen was also a staff reporter at The New Haven Register (1975-1977). During a decade as a freelance, her work appeared in Big Peace, Pajamas Media, Front Page Magazine, American Thinker, Right Side News, Family Security Matters, the Washington Times and many other Internet and print journals. Ms. Lappen also contributed to the Terror Finance Blog, among others. She supports the right of journalists worldwide to write without fear or restriction on politics, governments, international affairs, terrorism, terror financing and religious support for terrorism, among other subjects. Ms. Lappen is also an accomplished poet. Her first full-length collection, The Minstrel's Song, was published by Cross-Cultural Communications in April 2015. Her poems have been published in the 2nd 2007 edition of Blood to Remember: American Poets on the Holocaust and both 2007 issues of Wales' award-winning Seventh Quarry: Swansea Poetry Magazine. Dozens of her poems have appeared in print and online literary journals and books. She won the 2000 annual Ruah: A Journal of Spiritual Poetry chapbook award and has received a Harvard Summer Poetry Prize and several honorable mentions.

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