The mutual fund industry is rallying to support a Maryland law that says mutual fund directors do not lose their independence because they get paid for serving on several fund boards in the same mutual fund complex.
The Investment Company Institute, Alliance Capital Management of New York, T. Rowe Price Associates and Legg Mason Wood Walker, both of Baltimore, Md. and other Maryland securities and money management firms, are asking that state's highest court to uphold the constitutionality of a Maryland law that the fund industry helped pass. The Appeals Court, in a decision Jan. 27, permitted the ICI and the fund and securities firms to jointly file a friend of the court brief supporting the law.
The ICI and the firms will argue that the directors' law is constitutional and important for protecting the independence of mutual fund directors, said one of the lawyers writing the brief, James J. Hanks, Jr. of the Baltimore office of Ballard Spahr Andrews & Ingersoll, LLP of Philadelphia. Ronald B. Rubin of Rockville, Md., the lawyer for the two mutual fund shareholders challenging the law, declined to comment. The appeals court is expected to hear oral arguments on the challenge March 2.
The Maryland law, which the legislature passed on April 13, 1998, is intended to limit the effect of a 1997 court case that held that directors of funds incorporated in Maryland could lose their independence by virtue of being paid to serve on multiple fund boards in the same fund complex. The fund industry - including the ICI, T. Rowe Price and Legg Mason - worked to pass the law in 1998. Two T. Rowe Price fund shareholders, David Migdal and Linda Rohrbaugh, are suing Maryland Gov. Paris N. Glendening (D) and the Maryland legislature, contending that the state legislature violated the state constitution on technical grounds in passing the law.
Mutual fund companies frequently incorporate in Maryland, Delaware and Massachusetts because they are viewed as having favorable laws for funds. Alliance has a majority of approximately 100 funds organized under Maryland law, according to a Jan. 27 court filing from the ICI and the firms.
The moves in Maryland court come as the ICI and others in the industry continue to comment on proposed changes to SEC rules governing independent mutual fund directors. The rules are intended to strengthen the independence of fund directors.
The ICI, while generally supporting the proposed rules, was highly critical of plans to require fund directors to disclose information about business relationships and jobs involving a director's family members and a fund adviser. The disclosure would subject directors to potential liability for failing to disclose family relationships with a fund adviser and may discourage individuals from becoming or remaining directors, said Craig Tyle, general counsel of the ICI, in a Jan. 28 letter to the SEC. At the same time, the proposed disclosure requirements would provide little help for shareholders, Tyle said.
"The scope of the Commission's proposal is so broad that it likely would result in disclosure in proxy statements and [statements of additional information, which are filed with prospectuses] that is of questionable or no relevance to fund shareholders, and that could cause confusion or be subject to misinterpretation," Tyle said.
As an alternative, the ICI recommended that the SEC establish a new record-keeping requirement so that funds can monitor the business relationships of fund directors.