Once is not enough when it comes to defining what makes a fund director independent under Maryland law.
Two Maryland legislators have introduced separate, identical bills in the Maryland House of Delegates and the state Senate that provide that fund directors do not lose their independence by receiving fees for serving on multiple fund boards in the same mutual fund complex. The bills explicitly provide that courts cannot consider a director's pay in assessing whether the director is independent.
The proposal is similar to but more detailed than a law the Maryland legislature passed in April, 1998 that provided that directors do not lose their independence by serving on multiple fund boards. The constitutionality of the 1998 law is now under attack on procedural grounds in a case before the Court of Appeals, the state's highest court. The appeals court is scheduled to hear arguments in the case on March 2.
State Sen. Walter Baker and Kumar Barve, a house delegate, introduced the bills earlier this month, according to Maryland legislative records. The bills provide that "service as a director or trustee, or the receipt of fees or other compensation for service as a director or trustee, of one or more (funds)... of a fund complex... may not be considered in determining whether a director is independent or disinterested."
Baker did not return a call seeking comment on the proposal. Barve did not respond to a call and an e-mail message.
The proposals have angered the lawyers representing shareholders in cases that challenge the independence of directors based on the fees they receive. If the legislature passed the proposal, the new law will insulate fund directors from suits even in the most outrageous circumstances, according to the lawyers for shareholders in Maryland.
"This new proposed statute would require a trial judge in a state law derivative case to turn a blind eye to: (1) the number of boards on which the mutual fund director serves, even if that number is 100 or more; and (2) the amount the director is paid for his or her services, even if the amount is $1 million or more," the attorneys for David Migdal said in a brief filed with the Maryland appeals court Feb. 22.
The source of the proposed legislation is unclear. John Collins, a spokesperson for the Investment Company Institute, said the ICI was not consulted on the proposal.
The ICI backed the 1998 bill, paying a Maryland lobbyist to aid in the legislation's passage. That bill addressed the ICI's concerns about directors' independence under Maryland law, Collins said.
Whatever the source, lawyers for shareholders contend that the new bill is excessive, striking at the heart of protections central to the federal legislation that governs mutual funds. A law which says that directors can be paid an unlimited amount without the payments jeopardizing their status as independent effectively eliminates the existence of independent directors, said Karl Barth, a lawyer at the firm of Hagens Berman of Seattle, Wash.
"This law would eliminate the requirements for having independent directors, and could well allow massive frauds to be perpetrated upon unsuspecting investors that assume the funds' directors are looking out for them - not the fund company," Barth said.
