The fight between Donald Yacktman and the independent directors of his funds is likely to continue this month, propelled in part by intervention from the Securities and Exchange Commission.
Top SEC officials informally intervened in the escalating litigation between Yacktman and the directors, suggesting that federal securities laws permit independent directors to use fund assets to pay expenses in proxy fights.
The SEC outlined its views in a letter dated Oct. 16 to attorneys in the Yacktman case, a rare move for the agency, which is not a party in the action. A court ruling suggesting that independent directors who used fund assets on proxy expenses violated provisions of the Investment Company Act "could undermine the important role of independent directors" of mutual funds, Jacob H. Stillman and Douglas J. Scheidt, senior SEC lawyers, wrote in the letter. Stillman and Scheidt said the SEC staff was considering recommending to SEC commissioners that the agency file a friend-of-the-court brief in the case.
However, the SEC may not need to intervene. A U.S. District Court judge has ruled that the Yacktman directors can use fund assets to pay expenses, reversing an Oct. 16 state court decision. Yacktman and the directors, however, are continuing to battle over whether a shareholder meeting which Yacktman called for Nov. 24 can proceed as scheduled.
Yacktman started the proxy campaign to oust the four independent directors who supervise the Yacktman fund and the Yacktman Focused fund. Yacktman contends that the directors have exceeded their authority by straying too far into the investment process. The directors have challenged the business practices of Yacktman's firm, Yacktman Asset Management, challenges which Yacktman rejects.
The SEC staffs' move should lend support to independent directors who work part time at their director jobs and are not automatically given a staff and budget to support their oversight of funds. Directors, particularly at smaller fund complexes, rely on aid from the company which advises the funds.