The staff believes that the rebuttable presumption also should apply in situations when the independent, non-party directors of the investment company, rather than independent legal counsel, make the reasonable belief determination. The staff believes that a fund's former portfolio manager must be viewed as having had a material business or professional relationship with the fund and its adviser because he or she would have had significant responsibilities with the fund and the adviser, and likely would have received substantial compensation and other benefits from the adviser and/or the fund.37 Indeed, the staff would view the former portfolio manager's position as material due to the manager's responsibility in the position even if the manager had not received substantial compensation from adviser or the fund. -- In the Companion Release, the Commission has proposed rules that would require additional disclosure about fund directors to, among other things, assist the Commission and its staff in evaluating directors' independence. While it might seem that independent investors do not seek other people’s advice, they actually do because they exert influence over a group of people. 2337, 89th Cong., 2d Sess. This can be problematic when they implement a high-risk idea and they lose. Independent investors are prone to the illusion of control, primarily because they are overconfident risk takers. -- Section 22(g) [15 U.S.C. Section 2(a)(19)(B)(vi) of the Act defines "interested person," when used with respect to an investment adviser of or principal underwriter for, any investment company, in part, as: any natural person whom the Commission by order shall have determined to be an interested person by reason of having had at any time since the beginning of the last two completed fiscal years of such investment company a material business or professional relationship with such investment adviser or principal underwriter or with the principal executive officer or any controlling person of such investment adviser or principal underwriter. [by whom? Such a determination should include the consideration of any new information that is readily available. 15 (1970); S. Rep. No. 10065 Before the House Subcomm. The press has questioned the effectiveness of independent directors21 and, in a number of instances, independent directors have come under fire by fund management and been replaced with directors who were nominated by management.22 Private litigants have challenged independent directors' independence,23 and the Commission has instituted enforcement actions against independent directors for failing to fulfill their legal obligations.24 The prominence of these developments has been magnified by the extraordinary growth of the fund industry.25, In recognition of the increasingly important role that funds play in Americans' finances, and that independent directors play in protecting fund investors, the Commission launched an initiative to explore the state of fund governance and to determine what improvements could be made. By favoring the director's account over other accounts that it manages, the adviser may create an incentive for the director to act in a manner that will preserve or increase the favorable treatment.43 In this instance, significant economic benefits from the relationship between the director and the adviser would flow to the director, or the director may have the expectation that significant economic benefits would flow in the future to the director.44, The staff believes that a fund director who serves as a chief executive officer of any company for which the chief executive officer of the fund's adviser serves as a director also may be treated as "interested." Indeed, as discussed below, no one should presume that the Commission has not carefully considered such allegations or that the Commission has failed to take appropriate action merely because the Commission has not instituted an enforcement action or taken other public actions. The strategy includes an appropriate price of the stocks or assets in the right time he enters. The Roundtable Transcripts are available to the public in the Commission's public reference room, the Commission's Louis Loss Library, and on the Commission's Web site at www.sec.gov/offices/invmgmt/roundtab.htm. This is countered by the opinion that after-tax returns should be considered, especially during retirement, on the basis that allocation to equities is in general, lower, than any returns and should be maximized, to the most lucrative extent. Another related issue is the degree of due diligence that would be necessary for independent, non-party directors or independent legal counsel to make a reasonable belief determination. The staff believes that not every position that a director holds or held with a Specified Entity would be deemed to impair his or her independence. Personal investing on the other hand, has no requirements and is open to all by means of the stock market or by word of mouth requests for money. § 80b-9(b)]. These uncertainties could make it unnecessarily difficult for some independent directors to receive advances of legal fees, particularly during disputes with the fund's investment adviser. Under a formal order, the Commission authorizes the staff to conduct an investigation, pursuant to which the staff may subpoena witnesses and compel the production of documents.80This information gathering is critical to the Commission's determination of the appropriate course of action, for it often uncovers exculpatory or inculpatory nonpublic information that bears upon the validity of the allegations. If the value of the fund's shares appreciated by the time that the shares were payable by the fund, the compensation paid to the insiders exceeded the value of the services provided. In particular, this section of the release describes how the staff will analyze whether a person should be treated as "interested" by virtue of (1) holding or having held certain positions with a Specified Entity, and (2) engaging or having engaged in certain material transactions with a Specified Entity.36. 1979) and Investment Trusts and Investment Companies: Hearings on H.R. § 80a-41(b)]; Section 209(b) of the Advisers Act [15 U.S.C. Amendment of the Code of Federal Regulations. An investor is a person that allocates capital with the expectation of a future financial return or to gain an advantage. Sections 36(a) and 37 [15 U.S.C. Its officers are usually employed and compensated by the fund's investment adviser, which is a separately owned and operated entity. If a director is found liable, even for mere negligence, the potential financial burdens may far exceed the director's ability to pay, and be greatly disproportionate to the financial and other benefits of serving as a director. -- SEC v. Tally Industries, Inc., 399 F.2d 396, 403 (2d Cir. -- The opinion must set forth the facts and legal analysis that formed the basis for counsel's conclusion. Independent investors are above average risk takers, mainly because of their overconfidence. Independent investors have their own ideas, and as they conduct research, they gather supporting data and information. Second, the Commission and its staff may decide that enforcement action is not warranted based on all available information, including information to which commentators and others are not privy, even though publicly available information may suggest that a federal securities law violation has occurred. Section 22(g) generally provides that no open-end fund shall issue any of its securities (1) for services or (2) for property other than cash or securities.71 Both the Commission and the representatives of investment companies agreed in 1940 that "[n]o security issued by an investment company shall be sold to insiders or to anyone other than an underwriter or dealer, except on the same terms as are offered to other investors. Some have questioned whether these actions may run afoul of certain provisions of the Act that prohibit affiliated transactions. Consequently, Congress enacted section 22(g) to prohibit open-end funds from issuing shares to any person or entity that performs services for the fund. The Commission and the staff also are dedicated to enhancing the fairness and integrity of the fund governance process, and will consider instituting enforcement proceedings or taking other public positions if they will further this goal. § 80a-9] and Section 203 of the Advisers Act [15 U.S.C. If, in fact, the directors were motivated solely by self-interest, they may have breached their duties of care or loyalty under state law or breached their fiduciary duties under section 36(a) of the Act.54But whether rule 17d-1 applies turns on the nature of the transaction, not on its propriety or the affiliate's motives, provided that the directors are acting within the scope of their duties. An investor who owns a stock is a shareholder. 12585 (Aug. 17, 1990). Endowment funds used by universities, churches, etc. § 80a-35(b)]). "16 The Commission followed the Wharton study with its own study, which agreed that the then-current standard for director independence was inadequate.17 Subsequently, Congress enacted an amendment to the Act in 1970 which required that independent directors not be "interested persons" of a fund under new section 2(a)(19) of the Act.18The amendment substantially limited the categories of persons who could serve as independent directors for funds.19. This definition makes no distinction between the investors in the primary and secondary markets. Some have argued that, if fund directors take an action on behalf of the fund that benefits themselves, the action may constitute a "joint transaction" under section 17(d) of the Act and rule 17d-1 thereunder, thereby requiring prior Commission approval. The staff has sought to address these concerns by interpreting the Act to permit funds to advance legal fees to their directors under certain circumstances.
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