The 59 Wall Street Funds, the small fund group of Brown Brothers Harriman & Co. of New York, appears to be the first in the industry to make changes in its requirements for directors as a result of a special industry report issued in June.
The 59 Wall Street Funds are asking shareholders to approve a change in the funds' articles of incorporation that would set a retirement age of 70 for board members, according to a proxy statement the funds filed with the SEC Aug. 27. The funds now have no retirement policy, said Michael Martins, an assistant manager for Brown Brothers Harriman. The fund group has about $1.8 billion in assets under management in 11 funds, Martins said. Brown Brothers Harriman manages approximately $33 billion in assets, he said.
The proxy statement cites the report of the Investment Company Institute's Advisory Group on the Best Practices for Fund Directors as a basis for making the proposal. The board viewed setting the retirement age as a way to strengthen fund governance, Martins said. The board of directors proposed the change to shareholders after weighing the need to have new members join the funds' board against the benefit of having the experience of long-tenured directors, according to the proxy statement.
The ICI Fund Directors Committee, in June, made 15 recommendations that the group said would strengthen the independence of independent fund directors - those who do not work for a fund's investment adviser. The report included a proposal that fund boards set mandatory retirement ages or term limits for directors. (MFMN 6/28/99) The committee did not recommend a specific retirement age. The ICI's board of governors adopted the committee's report in July.
Fund executives, lawyers and regulators last week said they knew of no group other than 59 Wall Street Funds that had moved publicly to make changes based on the ICI committee's recommendations. Not all changes, however, require a shareholder vote, fund executives said. As a result, some changes may be taking place without the public noticing it, executives and lawyers said.
It is too early to tell how widely the fund industry will adopt the recommendations on directors, said Meyer Eisenberg, deputy general counsel for the SEC. For its part, the SEC staff expects next month to propose rules designed to further strengthen the independence of fund directors who do not work for fund investment advisers, Eisenberg said.
The SEC's rule proposal may identify factors that help determine whether fund directors' lawyers are independent from the fund adviser, Eisenberg said. SEC Chairman Arthur Levitt in March said he wanted to make sure that independent directors had their own independent attorney rather than relying on a lawyer who represented both the directors and the fund adviser. The ICI committee made a similar recommendation in June, but included caveats that would permit the independent directors' lawyer also to work for the fund's investment adviser when the lawyer discloses details about the relationship and receives the consent of the independent directors to continue it.
The independent directors of 59 Wall Street Funds already have independent counsel so the funds have made no change in policy on that point, Martins said. Until the current proxy proposal, however, the funds had no policy on retirement, Martins said.
The 59 Wall Street Funds' proposal for shareholders sets a retirement age of 70, but phases in that requirement for the current board. Directors who are elected at a meeting scheduled for Oct. 8 can remain on the board until they are 72, according to the proxy statement. Since none of the current members or candidates are more than 70 years old, no one will be obliged to step down from the board for at least two years under the new rule.
The retirement age issue gained attention last month when John Bogle, 70, founder of the Vanguard Group of Malvern, Pa., said he hoped the Vanguard funds' board would waive a mandatory retirement age of 70 for board members so that he could remain on the board. In response, the fund group said the mandatory retirement policy was longstanding and would not be changed. Neither a Vanguard spokesperson nor Bogle, who was on vacation last week, returned calls seeking comment.
Mandatory retirement ages are not uncommon for fund directors.
In a 1998 survey of 446 mutual funds in 32 mutual fund complexes, Management Practice of New York, a consulting firm that advises independent directors, found that 69 percent of the fund boards had mandatory retirement ages, said C. Meyrick Payne, senior partner at Management Practice. Increasingly, boards are adopting mandatory retirement ages, he said.
The Aquila Group of Funds of New York, for example, adopted a mandatory retirement age of 75 for directors in 1995. The mandatory retirement will force three of Aquila's approximately 30 directors off of fund boards next year, said Diana Herrmann, president and chief operating officer of Aquila. The retirement requirement costs a fund board qualified candidates but also insures that a board regularly has new members and ideas, Herrmann said.
Fund directors have been retiring at about age 72 and the average age of fund directors is 62, according to Management Practice.