CGM Funds of Boston, managed by Capital Growth Management and its two well-known senior executives and company co-founders Ken Heebner and Bob Kemp, are trying to make certain that all fund board trustees are created equal--no matter what additional board roles they accept.
Late last month, the $2.2 billion four-fund group floated a proxy statement asking fund investors for their approval on a series of proposals. Among them is amending each fund's declaration of trust to include new language clarifying that each trustee has the same duties and responsibilities to the funds and their shareholders regardless of whether some of the trustees agree to serve in additional roles on the board's committees, or are found to "have particular skills, experience or expertise," according to the proxy.
All Created Equal
The CGM proxy statement explains that it is adding such amendments so that even if a board trustee is appointed, designated or identified as a chairperson of a committee or sub-committee, or an "expert on any topic in any area" or the lead, or head independent trustee, or even the independent board chairman, that he or she bears no additional duty, obligation or liability than any other board member.
Why is CGM building in the extra level of care in assuring that certain board trustees don't face more liability that other trustees? A CGM official declined to comment in advance of the Nov. 19 shareholder vote.
But it appears that the CGM Funds board may be faced with overly concerned trustees who want assurances that their extra level of expertise or additional duties won't translate into increased exposure to regulatory scrutiny or investor lawsuits. The proxy statement goes on to note that if such assurances were not built into each fund's constitution, that trustees "might be reluctant to accept such an appointment or designation." Furthermore, the proxy notes, there might be dissension and conflict among the trustees themselves if some faced more liability than others.
The CGM Funds may, in fact, be facing one or more trustees who are reticent to step up and assume some important board roles. In January 2003, in accordance with stipulations under the Sarbanes-Oxley Act that Congress voted into law in July 2002, the SEC required that registered investment companies disclose whether they have an "audit committee financial expert" who meets certain criteria. Under this provision, the investment company must disclose the identity of the designated financial expert in its fund's annual report and indicate whether or not that expert is independent of management.
In addition, this past June, amid an outcry from many mutual fund company founders and senior executives, the Securities and Exchange Commission voted to require fund boards to have independent board chairmen with no ties to the fund's management company. Funds will be required to comply by early 2006.
The CGM proxy reveals that in January of this year, the funds' board determined that one of its independent trustees qualified as an audit committee financial expert. It also noted that this past April, the board had elected a new independent trustee, Mark Holland, the president of Wellesley Financial Services, to replace an octogenarian independent trustee who had died earlier in the year.
But a review of the CGM Funds' SEC filings reveals that no one board member, be they independent or affiliated, now serves as the chairman of the seven-person fund board. Unless the U.S. Chamber of Commerce is successful in its lawsuit challenging the regulator's imposition of the new mandate (see MME 9/13/04), the CGM fund board will have to ask one independent trustee to assume the chairman's role.
Redundancy of Protections
Industry insiders note that while the intended amendments to the CGM Funds' guiding documents may give great comfort to board members, the added protection is probably unnecessary. CGM Funds' proposed declaration of trust amendments were likely decided on a "belt and suspenders approach" just to make it very clear that investors understand the board's roles, said Tom Westle, a partner with the law firm Blank Rome in New York. They are essentially saying, "Now that the SEC is going to make us have an independent chairman, we'll make it clear that any chairman has no additional liability than any other board trustee," he added.
"There's definitely a trustee somewhere who is vexed about this liability," said Meyrick Payne, partner with Management Practice of Stamford, Conn., a firm that provides services to fund boards. But in reality, it's much ado about nothing, he added.
"Board members already have substantial protection under indemnification provisions of their funds' trust and whatever directors and officers insurance they have. So, as long as the board members are not guilty of disabling conduct, such as fraud, gross negligence or recklessness," they are not at risk, said Carl Frischling, a partner with the law firm of Kramer Levin Naftalis & Frankel in New York. Moreover, a financial expert doesn't have any incremental liabilities under federal law, and additional exposure under state law would be highly unlikely, he added.
In fact, the SEC acknowledged, but put to rest, the liability concerns of some members of the industry when it finalized its regulations regarding an audit committee financial expert. As part of its rules, the SEC built in a safe harbor protection, which assures that the designation of a person as an audit committee's financial expert does not impose any greater duties, obligations or liabilities, and does not subject them to a higher level of due diligence or individual responsibility.
Board chairmen could be on the hook, but only if they fail to carry out their duties. "There could be greater responsibilities for chairpersons of the board or committee chairs that may expose them to greater liabilities, but only if they do not perform their jobs," Frischling added.
If there is concern over additional liability, it doesn't appear to be spilling out of boardrooms. "I have heard of no theory under which the designation of an independent chairman imposes extra liability on a particular trustee who has agreed to assume this leadership role on behalf of fellow trustees and shareholders," echoed Dawn-Marie Driscoll, independent chairman of the Scudder Funds board and a member of the Investment Company Institute's Independent Directors Council that was formed this past May.