The Investment Company Institute has announced its support for an SEC proposal that would allow joint liability insurance coverage to be purchased on behalf of a fund adviser, its officers and its fund directors.

The ICI disclosed its position on the proposal - one of a number the SEC made in October pertaining to mutual fund board independence - in a comment letter to the SEC last week. The comment period on the proposals ended Jan. 31.

Directors' and officers' errors and omissions insurance previously available had contained a standard "insured vs. insured" exemption from insurance. That exemption stipulated that the insurance company was not liable to pay the legal costs of both parties where one party sued the other and both were covered under the same policy. Consequently, if a fund's independent trustees were sued by the fund adviser, the trustees could be unprotected and face significant legal expenses, said the SEC, in making its proposals in October.

In its letter, the ICI said trustees should be able to act in good conscience without fear of potential legal liability.

"We agree that independent directors should be able to take whatever actions they deem necessary in the interests of shareholders without undue concern over personal liability from litigation, particularly litigation with fund management," the ICI letter said.

"The proposed amendment will help eliminate situations where independent directors might be discouraged from acting aggressively in the interests of shareholders, or where qualified independent directors might be discouraged from serving as independent directors based on concern about potential personal liability in connection with litigation."

In the past few years, at least two landmark cases of fund advisers vying with independent fund trustees, caused the industry to pay closer attention to insurance concerns.

In 1997, after purposefully allowing a fund's advisory agreement with Navellier Investment Management of Reno, Nev. to lapse, three independent trustees of the fund were sued for breach of contract and causing economic hardship to investors. Although the trustees eventually won the case, they found themselves with seven-figure legal bills. The trustees charged that Navellier had allowed the trustees' directors' and officers' insurance to expire. Navellier charged that it was the responsibility of the attorney for the independent directors to renew the trustees' insurance.

Despite winning the lawsuit, the two uninsured former Navellier trustees are facing combined legal costs of $5.6 million and each has separately filed a lawsuit demanding reimbursement from the successor mutual fund for which they served as trustees. The lawsuits are pending.

In 1998, conflicts at the Yacktman Funds between the adviser and the independent directors to the funds over the Yacktman Fund's investment strategy and fund performance led to another boardroom dispute. Yacktman eventually sued the trustees.

In October, 1998, a U.S. District Court for The District of Maryland overturned a state court's decision, agreeing with the SEC's opinion that directors should not have to themselves pay the legal costs associated with lawsuits filed by the fund's adviser or for proxy battles with the advisory firm.

In response to SEC Chairman Arthur Levitt's concern about the potential liability independent trustees face, in April, 1998, the ICI Mutual Insurance Company of Washington, D.C., an independent insurance company that underwrites errors and omission insurance for approximately 70 percent of the mutual fund industry, dropped its "insured vs. insured" exclusion. ICI Mutual revised its liability insurance policy to provide mutual fund independent directors with greater protection in lawsuits brought by a fund's investment adviser. That meant directors could, from then on, recover defense costs, settlements and judgements that resulted from being named as defendants in suits.

The original "insured vs. insured" exclusion existed to avoid collusive conduct, said Dan Steiner, vice president and general counsel at ICI Mutual. But when the need arose, ICI Mutual realized changing times meant changing insurance provisions.

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