Mutual Fund Boards and Shareholder Action - Submitted to Professor Howell Jackson in Satisfaction of the Written Work Requirement of the Harvard ...
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Mutual Fund Boards and Shareholder Action
Submitted to Professor Howell Jackson in Satisfaction of
the Written Work Requirement of the Harvard Law School
David J. Carter
April 21, 2000Page
Part One: The Regulation of Mutual Funds 3
Federal Law 3
State Law 6
Part Two: Regulation of Mutual Funds Under the 40 Act 7
Corporate Governance Structure 8
Independent Directors 10
Independent Directors as “Watchdogs” 13
Part Three: Industry Structure and Debate 15
Criticisms of the Corporate Governance Structure 17
Part Four: The Shareholders 22
The “Typical” Mutual Fund Investor 24
Part Five: Redemptions 27
A Theory of Redemptions 27
The Reality of Redemptions 28
The Initial Investment Decision 31
The Redemption Decision 35
Limits on the Ability to Redeem 35
Taxes 36
Employer-Sponsored Retirement Plans 39
The Nature of the Mutual Fund Investment 46
Informed Shareholders 49Page
Part Six: Shareholder Voting – The Ritualistic Anachronism 55
Why Voting is Viewed as Ineffective 58
Proxy Battles 60
Navellier 60
Yacktman 63
Shareholder-Initiated Proxy Fights 64
Part Seven: Shareholder Suits 65
Strougo v. Scudder, Stevens & Clark, Inc. 66
Other Suits 73
Conclusion 76The Investment Company Act of 19401 (the “40 Act”) imposes on mutual funds2
a structure of governance similar to that of traditional corporations. A board of directors
sits atop each fund and is responsible for overseeing the fund’s operations. Due to the
potential for abuse inherent in mutual funds, the 40 Act assigns certain additional
responsibilities to the independent directors. Those within the mutual fund industry often
claim that, because of these additional tasks, the independent directors are to serve as the
“watchdogs” in protecting the shareholders of mutual funds.3 Recently, this structure of
independent directors has come under increased criticism with commentators claiming
that the interests of the independent directors are more closely aligned with the
investment adviser than with the shareholders. In this paper, I set forth the debate
between the mutual fund industry and the financial press over the role that independent
directors can play in protecting shareholders. Before doing so, I briefly describe the body
of regulations applicable to mutual funds and provide two competing images of the
structure of a typical fund.
1
Investment Company Act of 1940, 15 U.S.C. §§ 80a-1 et seq. (1998). Professors Loss and Seligman refer
to the 40 Act as “the most complex of the entire SEC series.” 1 LOUIS LOSS & JOEL SELIGMAN, SECURITIES
REGULATION ch. 1, at 264 (1998).
2
“Mutual funds” refer to open-end management companies as defined in § 5(a)(1) of the 40 Act. 15 U.S.C.
§ 80a-5(a)(1) (1998). Investment companies are defined in § 3(a)(1) of the 40 Act as any issuer which,
among others, engages in “the business of investing, reinvesting, or trading in securities.” 15 U.S.C. § 80a-
3(a)(1) (1998). § 4 of the Act divides investment companies into face-amount certificate companies, unit
investment trusts, and management companies. 15 U.S.C. § 80a-4 (1998). Management companies are
classified as either open-end or closed-end companies. An open-end management company (a mutual
fund) is defined as a “management company which is offering for sale or has outstanding any redeemable
security of which it is the issuer.” 15 U.S.C. § 80a-5(a)(1) (1998). A closed-end management company is
“any management company other than an open-end company.” 15 U.S.C. § 80a-5(a)(2) (1998). Thus, each
mutual fund is a separate company, in which investors can purchase or redeem shares at the current net
asset value and in which the number of shares available to the public is not fixed. Strougo v. Scudder,
Stevens, & Clark, Inc., 964 F. Supp. 783, 788 (S.D.N.Y. 1997).
3
See e.g. INVESTMENT COMPANY INSTITUTE, UNDERSTANDING THE ROLE OF M UTUAL FUND DIRECTORS at
3 (1999); Burks v. Lasker, 441 U.S. 471, 484 (1978) citing Tannenbaum v. Zeller, 552 F.2d 402, 406 (1977)
and Hearings on H.R. 10065 before a Subcommittee of the House Committee on Interstate and Foreign
Commerce, 76th Cong., 3d Sess., 109 (1940).
1Rather than attempt to resolve the current debate, however, I then ask an
antecedent question. Assuming arguendo that the criticisms of the financial press are
correct, can and do shareholders use the tools available to them to protect themselves? If
the interests of shareholders are protected by the actions that shareholders can take, then
there is less reason to be concerned with the alignment of the independent directors with
the adviser. The paper addresses three “moves” that shareholders can take. Part Five
addresses the ability of shareholders to redeem their shares when the board takes actions
that the shareholders dislike. Part Six addresses the shareholder’s exercise of their voting
rights under the 40 Act. Part Seven addresses the connection between the actions of the
board and law suits by shareholders.
I conclude that, among the three moves, redemptions provide the greatest level of
protection to shareholders. However, the ability to redeem does not protect shareholders
in a manner equivalent to the protection that the board and the independent directors are
supposed to provide under the 40 Act. There is evidence suggesting that shareholders
redeem in the face of something public, such as a proxy battle between the board and the
investment adviser. However, there are reasons to believe that shareholders cannot use
the redemption option to police the more mundane decisions of the board and the adviser.
To that extent, the ability to redeem cannot serve as an effective alternative to the
watchdog role that the independent directors should fulfill. If it is true that the watchdog
role is illusory, then the shareholders are left largely unprotected. While the moves may
have some policing effect on the board, they are not equivalent to the protection the board
is supposed to provide.
2Part One: The Regulation of Mutual Funds
The following section sets forth an overview of the various sources of mutual
fund regulation. While the full body of regulation includes both federal and state law,
and both statutory and common law, the bulk of mutual fund regulation and the most
important source for purposes of this paper is the 40 Act. The other sources of
regulation, which are described briefly below, are important for understanding the
constraints on the operations of mutual funds, but are secondary to the 40 Act.
Federal Law
At the federal level, mutual funds are subject to two bodies of regulation. The
first includes two federal statutes aimed directly at the operation of investment
companies: the 40 Act and the Investment Advisers Act of 1940 (“Advisers Act”).4
These two statutes have their origins in the Public Utility Holding Company Act of 1935,
which authorized the Securities and Exchange Commission (the “SEC”) to conduct a
study of investment companies.5 The resulting study6 (the “Investment Trust Study”),
found that mutual fund investors were not adequately protected because of several
problems endemic to the investment company industry in the 1930’s. It found that
mutual funds often were operated for the benefit of fund managers and their affiliates,
rather than for the benefit of investors.7 Since mutual funds provided an investment
vehicle for the untrained investor, the potential for abuse was significant. Disclosures to
4
Investment Advisers Act of 1940, 15 U.S.C. §§ 80b-1 et seq. (1998).
5
Public Utility Holding Company Act of 1935, ch. 687, § 30, 49 Stat. 803, 837 (1935) (current version at
15 U.S.C. § 79z-4); HOWELL E. JACKSON & EDWARD L. SYMONS, JR., REGULATION OF FINANCIAL
INSTITUTIONS 817 (1999); William J. Nutt, A Study of Mutual Fund Independent Directors, 120 U. PA. L.
REV. 179, 181 (1971).
6
SECURITIES AND EXCHANGE COMMISSION, REPORT ON THE STUDY OF INVESTMENT TRUSTS AND
INVESTMENT COMPANIES (1939-1942).
3fund shareholders often were insufficient or dishonest, and embezzlement of fund
investments was common.8 Insiders often were allowed to redeem stock at terms more
favorable than those offered to non-insiders.9 As one commentator has noted, “the liquid,
mobile, and readily negotiable nature of cash and securities made it easy for persons to
embezzle, steal, or use them for improper purposes or to foster their own interests rather
than those of shareholders.”10
The two statutes enacted in 1940 were written to address specifically the concerns
raised in the Investment Trust Study.11 The 40 Act, which constitutes the bulk of mutual
fund regulation, imposes certain requirements on the structure of mutual funds designed
to protect shareholders. While the Securities Act of 193312 (the “Securities Act”) and the
Securities Exchange Act of 193413 (the “Exchange Act”) rely on the deterrent effect of
disclosure, such requirements were thought insufficient to protect shareholders against
the abuses of the mutual fund industry.14 Instead, as described in more detail below, the
40 Act imposes a system of substantive requirements on mutual funds, including a board
of directors, of which 40 percent of the members must not be “interested.”15
The Advisers Act, which also grew out of the Investment Trust Study,16 requires
that persons engaged in the business of advising others on the value of or investment in
securities be registered with the SEC.17 The definition of “investment adviser”
7
Nutt, supra note 5, at 181.
8
JACKSON & SYMONS, supra note 5, at 815.
9
Id. at 815.
10
THOMAS P. LEMKE, ET AL ., 1 REGULATION OF INVESTMENT COMPANIES § 2.03 at 2-5 (1999).
11
Nutt, supra note 5, at 181.
12
Securities Act of 1933, 15 U.S.C. §§ 77a et seq. (1998).
13
Securities Exchange Act of 1934, 15 U.S.C. §§ 78a et seq. (1998).
14
LEMKE, ET AL ., supra note 10, § 1.01, at 1-3.
15
Investment Company Act of 1940 §10(a), 15 U.S.C. § 80a-10(a) (1998).
16
1 TAMAR FRANKEL, THE REGULATION OF M ONEY M ANAGERS C§7, at 22 (2000).
17
Investment Advisers Act of 1940 § 202(11), 15 U.S.C. § 80b-2(11) (1998).
4specifically excludes certain individuals who could be said to provide advice on
investing, including (among others) banks, lawyers, accountants, and publishers.18 Those
who do fall within the definition of “investment adviser” are subject to certain
restrictions, including a prohibition on performance-based compensation19 and specific
anti-fraud provisions.20 The Advisers Act also requires advisers to meet record-keeping,
and reporting requirements.21 The Advisers Act is considered by many to not impose
significant restraints on the operations of investment advisers primarily because of its
“relatively lax enforcement provisions,”22 and is thought by some to be the securities act
with “the fewest teeth in it.”23
The Securities Act and the Exchange Act constitute the second body of federal
regulation of mutual funds. Before the mutual fund may offer shares to the public for
sale, it must satisfy the disclosure requirements of the Security Act.24 The Exchange Act
imposes periodic disclosure requirements on issuers who wish to list their securities on
exchanges.25 While the 40 Act is directed specifically at the activities of investment
companies, the applicability of the Securities Act and the Exchange Act make mutual
funds subject to the broader panoply of federal securities regulations.
18
Id. at § 80b-2(11). For a sampling of the definitional issues arising under the Advisers Act, see Lowe v.
SEC, 472 U.S. 181 (1985); Applicability of the Investment Advisers Act to Financial Planners, Pension
Consultants, and Other Persons Who Provide Investment Advisory Services as a Component of Other
Financial Services, Investment Advisers Act Release No. IA-1092, 39 S.E.C. Docket 494, October 8, 1987.
19
Investment Advisers Act of 1940 § 205(a)(1), 15 U.S.C. § 80b-5(a)(1) (1998); JACKSON & SYMONS,
supra note 5, at 821.
20
Investment Advisers Act of 1940 § 206, 15 U.S.C. § 80b-6 (1998); SEC v. Capital Gains Research
Bureau, Inc., 375 U.S. 180 (1963).
21
INVESTMENT COMPANY INSTITUTE, 1999 M UTUAL FUND FACTBOOK, at 33 (May 1999).
22
JACKSON & SYMONS, supra note 5, at 821.
23
1 FRANKEL, supra note 16, C§7, at 24.
24
Registration of a mutual fund under the Security Act is met by filing Form N-1A, which also satisfies the
registration requirements of the 40 Act. TAMAR FRANKEL & CLIFFORD KIRSCH, INVESTMENT
M ANAGEMENT REGULATION 180 (1998).
5State Law
Since each mutual fund is organized as a separate company with a board of
directors under the 40 Act, the body of state law that applies to traditional corporate
boards also applies to the boards of mutual funds.26 State law imposes on a corporate
director a duty of care, which requires that the director act with “that degree of skill,
diligence, and care that a reasonably prudent person would exercise in similar
circumstances.”27 Additionally, state law treats the managers, advisers, directors and
officers of mutual funds as fiduciaries subject to the duty of loyalty. The duty of loyalty
prohibits the fiduciaries from acting other than for the sole benefit of the investors.28
Recently, as discussed in more detail in Part Seven, there have been a number of
derivative suits filed against mutual fund directors for violation of fiduciary duties under
state law. 29
The state in which the fund is organized is likely to have a body of statutory and
common law applicable to the form of organization chosen. For example, a fund
organized as a Delaware corporation would be subject to the entire body of Delaware
corporate law. In addition, state Blue Sky Laws historically played an important role in
regulating the operations of mutual funds. That role was curtailed in 1996 with the
passage of the National Securities Markets Improvement Act, which set forth important
25
JACKSON & SYMONS, supra note 5, at 819.
26
The phrase “traditional corporate board” refers to the prototypical board of directors of the large,
publicly-held company. For example, in the same way state law imposes certain duties on the members of
the board of, say, IBM, state law imposes those same duties on the members of the board of a mutual fund.
27
ROBERT C. CLARK, CORPORATE LAW § 3.4, at p. 123 (1986); see also INVESTMENT COMPANY INSTITUTE,
INTRODUCTORY GUIDE FOR INVESTMENT COMPANY DIRECTORS 5 (1995).
28
FRANKEL & KIRSCH, supra note 24, at 49.
29
See Strougo v. Scudder, Stevens, & Clark, Inc., 964 F. Supp. 783 (S.D.N.Y. 1997); Strougo on Behalf of
Brazilian Equity v. Bassini, 1 F. Supp. 2d 268 (S.D.N.Y. 1998).
6exemptions from state regulation for securities issued by investment companies registered
under the 40 Act.30
This brief overview is not meant to be exhaustive. It is intended to provide a
sampling of the restraints that mutual funds face as well as provide a basis for
understanding both the current debate surrounding the industry and the moves that
shareholders can take to protect themselves.
Part Two: Regulation of Mutual Funds Under the 40 Act
In response to the problems documented in the Investment Trust Study, Congress
adopted certain substantive requirements for the mutual fund industry. To understand the
current debate surrounding the industry, it is necessary to have a picture of the typical
mutual fund under the 40 Act. The following sets forth a description of several of the
requirements that Congress imposed in response to the problems addressed in the
Investment Trust Study.
First, each investment company must register with the SEC before it can use the
jurisdictional means to offer, sell, or otherwise engage in transactions with regard to its
shares.31 To register, an investment company files Form N-1A, which is comprised of
two parts: a prospectus, which must be delivered to investors, and a statement of
additional information, which investors may receive upon request.32
The fund prospectus is part of the system of disclosure requirements imposed by
the 40 Act and designed to supplement the reporting requirements of the Securities Act
30
FRANKEL & KIRSCH, supra note 24, at 51.
31
Investment Company Act of 1940 §§ 7, 8, 15 U.S.C. §§ 80a-7, -8 (1998); 1 FRANKEL, supra note 16,
C§8, at 32. For a description of an investment company, see fn. 2, supra. For a complete definition, see
Investment Company Act of 1940 § 3(a)(1), 15 U.S.C. §§ 80a-3(a)(1) (1998).
7and the Exchange Act.33 For example, the 40 Act requires that mutual funds disclose
their policies on engaging in certain activities,34 their investment policies,35 the name and
address of any affiliates,36 and the business experience of all officers and directors.37
Additional filings must be made with the SEC to keep the information in the registration
statement “reasonably current.”38 Also, the fund must make semi-annual disclosures to
its shareholders, including of financial statements and the compensation of directors.39
In order to address the problem of self-dealing, Congress chose to prohibit certain
transactions altogether. Under § 17(a) of the 40 Act, a mutual fund may not engage in
many transactions with affiliates.40 The SEC has the authority to exempt transactions
between an investment company and an affiliate upon application of the affiliate.41
Additionally, Congress put an end to the practice of “pyramiding,” in which one mutual
fund would control another through the ownership of a significant amount of the latter’s
shares. The 40 Act prohibits an investment company from acquiring more than a small
percentage of the securities of another investment company.42
Corporate Governance Structure
Perhaps the most significant requirement of the 40 Act relates to the governing
structure of a mutual fund. The statute requires a corporate form of governance in which,
32
FRANKEL & KIRSCH, supra note 24, at 180.
33
Robert A. Robertson, In Search of the Perfect Mutual Fund Prospectus, 54 BUS. LAW . 461 (1999).
34
Investment Company Act of 1940 §8(b)(1), 15 U.S.C. § 80a-8(b)(1) (1998).
35
Id. at § 80a-8(b)(2).
36
Id. at § 80a-8(b)(4).
37
Id. at § 80a-8(b)(4).
38
Id. at § 80a-29(b).
39
Id. at § 80a-29(e).
40
Id. at § 80a-17(a).
41
Id. at § 80a-17(b).
42
Id. at § 80a-12(d).
8like a traditional company, a board of directors sits atop each mutual fund.43 This
structure is required regardless of whether the fund is organized as a corporation, a trust,
or in some other form.44 In order to sit on the board, a director must be approved by a
majority vote of the shareholders.45
Unlike a traditional company, a mutual fund is nothing more than a “large pool of
liquid assets.”46 The fund itself has no employees to run the company day-to-day.
Rather, the board contracts out the operation of the fund to the investment adviser.47 The
40 Act envisions a system in which the board of the T. Rowe Price Growth and Income
Fund selects and contracts with T. Rowe Price (the investment adviser) to manage the
fund assets and make investment decisions. In theory at least, the T. Rowe Price Growth
and Income Fund is considered an entity distinct from T. Rowe Price.
The general purpose of the board of directors is to oversee the operations of the
fund by the adviser and to evaluate the fund’s performance. Among their duties, the
board of directors is responsible for overseeing the distribution of the fund’s shares, for
approving the contract with the underwriter, and for monitoring the adviser’s compliance
with the investment policies set forth in the fund prospectus.48 Since the adviser serves
under contract, one of the major responsibilities of the board is to negotiate, approve and
review the adviser contract.49 Under section 15(a) of the 40 Act, the contract must set
forth the adviser’s compensation, be approved initially by the shareholders, and be
43
Id. at § 80a-10(a).
44
Richard M. Phillips, Deregulation Under the Investment Company Act – A Reevaluation of the Corporate
Paraphernalia of Shareholder Voting and Boards of Directors, 37 BUS. LAW . 903 (1982).
45
Investment Company Act of 1940 §16(a), 15 U.S.C. § 80a-16(a) (1998).
46
INVESTMENT COMPANY INSTITUTE, supra note 27, at 3.
47
Id. at 3.
48
Investment Company Act of 1940 §15(b), 15 U.S.C. § 80a-15(b) (1998).
49
2 FRANKEL, supra note 16, E§25.2, at 73.
9reviewed annually by the board.50 In carrying out its duties, the board is to gauge the
performance of the adviser and the reasonableness of the adviser’s fees.51
One advantage of a mutual fund as an investment vehicle is the ability to redeem
shares at will. Consequently, the valuation and pricing of the shares is significant.52 The
SEC requires that mutual fund shares be priced, based on current net asset value, at least
once daily.53 The board of directors is given the responsibility of overseeing the
valuation process. While it is not responsible for conducting the actual pricing, the board
is obligated to establish procedures that ensure proper pricing54 and the timing of the
daily calculation.55
Independent Directors
One of the principal problems of the industry prior to 1940 was self-dealing by
management.56 The appointees of the investment adviser would sit on the board of
directors and protect the adviser’s interests, while the interests of the shareholders went
unprotected.57 Additionally, Congress was concerned because the dominating role of the
50
Investment Company Act of 1940 §15(a), 15 U.S.C. § 80a-15(a) (1998).
51
Nutt, supra note 5, at 231.
52
Michael E. S. Frankel, Derivatives and Risk: Challenges Facing the Investment Management Industry, in
FINANCIAL SERVICES REVOLUTION: UNDERSTANDING THE CHANGING ROLE OF BANKS, M UTUAL FUNDS,
AND INSURANCE COMPANIES at 359 (Clifford E. Kirsch, ed., 1997).
53
17 CFR 270.22c-1 (1998). The net asset value of a mutual fund is calculated by dividing the difference
between the value of the securities in the fund’s portfolio and the liabilities of the fund by the number of
shares outstanding. INVESTMENT COMPANY INSTITUTE, supra note 3, at 14. For a discussion of the issues
arising under the pricing requirements of the 40 Act, see THOMAS P. LEMKE, ET AL ., supra note 10, § 9.02
at 9-4 to 9-46.
54
INVESTMENT COMPANY INSTITUTE, supra note 27, at 12. The directors lack of involvement in the actual
daily NAV calculations reflects the appropriate limits of directors in fund operations. Such involvement
would transform the role of director into one of daily management, which is contrary to the purposes of a
corporate governance structure. See e.g. Ed Cameron, Statements made at the Conference on the Role of
Independent Investment Company Directors, U.S. Securities and Exchange Commission, Feb. 23, 1999.
See also CLARK, supra note 27, § 3.2, at 105-6.
55
17 CFR 270.22c-1(d) (1998).
56
LEMKE, ET AL ., supra note 10, § 2.03, at 2-5.
57
FRANKEL & KIRSCH, supra note 24, at 243.
10adviser meant that “the forces of arm’s-length bargaining do not work in the mutual
industry in the same manner as they do in other sectors of the American economy.”58
In response, Congress imposed a requirement that at least 40 percent of the
members of the board not be “interested persons of such registered company.”59 Though
independent directors must be approved by the shareholders,60 they, like the interested
directors, are nominated by the adviser.61 The theory is that if a portion of the directors
are not beholden to the interests of the adviser, these directors can better protect the
interests of the shareholders.62
Under the 40 Act’s definition of an “interested person,”63 the following would be
considered “interested” and, thus, would not count toward satisfying the 40 percent
requirement of § 10(a): any officer, director, employee, or shareholder of the adviser or
any immediate family members thereof; “any officer, director, employee, or 5 percent
58
S. Rep. No. 91-184, p. 5 (1969).
59
Investment Company Act of 1940 §10(a), 15 U.S.C. § 80a-10(a) (1998). The 40 Act refers to persons
who are and are not “interested.” While the 40 Act does not use the term “independent,” I will use the term
interchangeably with “disinterested” to refer to those directors who are not interested under § 2(a)(19).
60
Id. at § 80a-16(a).
61
Roger M. Klein, Who Will Manage the Managers?: The Investment Company Act’s Antipyramiding
Provision and Its Effect on the Mutual Fund Industry, 59 OHIO ST . L.J. 507, 540 (1998).
The selection process for independent directors recently has come under heightened scrutiny. In
October, 1999, the SEC issued for comment a series of proposed rule changes under the 40 Act. One of the
proposals would require that, for mutual funds relying on certain exemptive rules, the independent directors
must be selected and nominated by the incumbent independent directors. U.S. SECURITIES AND EXCHANGE
COMMISSION, PROPOSED RULE: ROLE OF INDEPENDENT DIRECTORS OF INVESTMENT COMPANIES, Rel. IC-
24082, 17 CFR 239, p. 7 (1999) . The comment period
for the proposals ended on January 28, 2000 and, to date, the proposals have not been adopted.
SEC Chairman Arthur Levitt has touted the use of self-selecting independent directors as
necessary to enhance further the role of the independent directors in safeguarding the interests of
shareholders. Arthur Levitt, Keeping Faith with the Shareholder Interest: Strengthening the Role of
Independent Directors of Mutual Funds, Address before the Mutual Funds and Investment Management
Conference (Mar. 22, 1999). Additionally, the Investment Company Institute argues that, “control of the
nominating process by the independent directors helps dispel any notion that the directors are ‘hand picked’
by the adviser and therefore not in position to function in a true spirit of independence.” INVESTMENT
COMPANY INSTITUTE, REPORT OF THE A DVISORY GROUP ON BEST PRACTICES FOR FUND DIRECTORS:
ENHANCING A CULTURE OF INDEPENDENCE AND EFFECTIVENESS at 14 (1999).
62
Burks v. Lasker, 441 U.S. 471, 484 (1978).
63
Investment Company Act of 1940 §2(a)(19), 15 U.S.C. § 80a-2(a)(19) (1998).
11shareholder of a registered broker-dealer,” or any person who has acted as legal counsel
for the fund within the last two fiscal years.64
The independent directors are given additional responsibilities in areas where the
potential for self-dealing between the board and the adviser could arise. For example, in
addition to being approved by the shareholders,65 the adviser contract also must be
approved by a majority of the independent directors.66 Since the adviser’s fees are set
forth in the contract, Congress chose to provide a layer of protection to the shareholders
by requiring majority approval by the independent directors. Likewise, a majority of the
independent directors must approve the underwriting contract,67 and select the fund’s
public accountant.68 According to Professors Frankel and Kirsch, the importance of the
independent directors has risen in the last twenty years as they have been given additional
responsibility in supervising the adviser and the interested board members.69
In October, 1999, the SEC issued for comment a series of proposals designed to
enhance the role of the independent directors. For funds relying on certain exemptive
rules,70 the SEC proposed that at least 50 percent of the members of the board be
independent directors.71 Since virtually all funds rely on one or more of these rules, the
64
INVESTMENT COMPANY INSTITUTE, supra note 27, at 9.
65
Investment Company Act of 1940 §15(a), 15 U.S.C. § 80a-15(a) (1998).
66
Id. at § 80a-15(c).
67
Id. at § 80a-15(c).
68
Id. at § 80a-31(a).
69
FRANKEL & KIRSCH, supra note 24, at 236.
70
The following exemptive rules would be affected: Rule 10f-3, Rule 12b-1, Rule 15a-4, Rule 17a-7, Rule
17a-8, Rule 17d-1(d)(7), Rule 17e-1, Rule 17g-1(j), Rule 18f-3, and Rule 23c-3. U.S. SECURITIES AND
EXCHANGE COMMISSION, PROPOSED RULE: ROLE OF INDEPENDENT DIRECTORS OF INVESTMENT
COMPANIES, Rel. IC-24082, 17 CFR 239, p. 5 (1999) .
71
Id. at 6. In issuing the proposal for comment, the SEC requested opinions on whether the requirement
should be a two-thirds super-majority or a 50 percent simple majority. The overwhelming response has
been against requiring a super-majority. See e.g. Letter of Victor R. Siclari, Senior Corporate Counsel,
Federated Investors, Inc., at 3 (Feb. 2, 2000) .
The two-thirds proposal grew out of a report by the Investment Company Institute (the “ICI”)
recommending that “independent directors constitute at least two-thirds of the directors of every investment
12effect would be to impose a majority requirement on all boards.72 However, the vast
majority of mutual fund boards are already made up of a majority of independent
directors.73 Under current law, funds relying on Rule 12b-1 are required to have a board
composed of a majority of independent directors.74 Rule 12b-1 allows funds to finance
the distribution of their shares from the assets of the fund subject to certain conditions 75
and is relied upon by the majority of existing funds.76 To that extent, the effect of the
proposed amendments would be to require a change in the composition of the board of
only the relatively small number of funds that do not rely on Rule 12b-1.
Independent Directors as “Watchdogs”
In Burks v. Lasker, the Supreme Court stated that Congress’ purpose in imposing
the structure it did in the 40 Act was to “‘place unaffiliated directors in the role of
‘independent watchdogs,’ who would ‘furnish an independent check upon the
company board.” INVESTMENT COMPANY INSTITUTE, supra note 61, at 10. However, in its comment to the
SEC proposals, the ICI recommended against a formal requirement of a two-thirds majority. It explained
this apparent shift in opinion by stating that “the fact that the industry has endorsed these fifteen
recommendations as “best practices” does not mean they would be appropriate as rules, or conversely, that
[SEC] rule proposals would be appropriate as best practices.” Letter of Craig S. Tyle, General Counsel,
Investment Company Institute at 3 (Jan. 28, 2000) . The ICI went
on to find that a two-thirds majority would impose a significant administrative burden on mutual fund
boards.
72
Letter of Victor R. Siclari, Senior Corporate Counsel, Federated Investors, Inc., at 2 (Feb. 2, 2000)
; see also U.S. SECURITIES AND EXCHANGE
COMMISSION, PROPOSED RULE: ROLE OF INDEPENDENT DIRECTORS OF INVESTMENT COMPANIES, Rel. IC-
24082, 17 CFR 239, n. 66 (1999) .
73
FRANKEL & KIRSCH, supra note 24, at 243.
74
17 CFR 270.12b-1 (1998) (distribution of shares by registered open-end management investment
company).
75
LEMKE, ET AL ., supra note 10, § 7.05[2][a], at 7-21.
76
Letter of Victor R. Siclari, Senior Corporate Counsel, Federated Investors, Inc., n. 6 (Feb. 2, 2000)
; see also U.S. SECURITIES AND EXCHANGE
COMMISSION, PROPOSED RULE: ROLE OF INDEPENDENT DIRECTORS OF INVESTMENT COMPANIES, Rel. IC-
24082, 17 CFR 239, n. 66 (1999) .
13management’ of investment companies.”77 The role of the independent directors as
watchdogs is frequently cited as the cornerstone to protecting the interests of
shareholders. In a speech recommending proposals to strengthen the role of independent
directors, SEC Chairman Levitt said, “From negotiating and overseeing fund fees, to
monitoring performance, to policing potential conflicts of interest, fund directors should
be on the front lines in defense of the shareholder interest.”78 Recently, the president of
the Investment Company Institute, Matthew P. Fink, stated that “the system of
independent oversight that governs our industry is at the heart of a regulatory system and
fiduciary culture that puts investors first.”79 Likewise, the Investment Company Institute
claims that the watchdog role “provides investors with the confidence of knowing that
directors oversee the advisers who manage and service their investments.”80
The image underlying these statements is that of the independent directors
stepping in to oppose the rest of the board and the adviser when necessary to protect the
fund shareholders. A discussion of whether the independent directors have as much
power as these statements imply is provided in Part Three below. For present purposes, it
is important to note that the structure set up by the 40 Act, with certain additional duties
assigned to the independent directors, is not inconsistent with these statements.
77
Burks v. Lasker, 441 U.S. 471, 484 (1978) citing Tannenbaum v. Zeller, 552 F.2d 402, 406 (1977) and
Hearings on H.R. 10065 before a Subcommittee of the House Committee on Interstate and Foreign
Commerce, 76th Cong., 3d Sess., 109 (1940).
78
Arthur Levitt, Chairman, U.S. Securities and Exchange Commission, Address before the Mutual Funds
and Investment Management Conference (Mar. 22, 1999)
.
79
Matthew P. Fink, President, Investment Company Institute, Address before the Mutual Funds and
Investment Management Conference (Mar. 22, 1999).
80
INVESTMENT COMPANY INSTITUTE, supra note 3, at 3.
14At least two commentators have cautioned against overemphasizing the role of
the independent directors.81 Professors Frankel and Kirsch question the degree to which
the independent directors really are to serve as watchdogs over conflict of interest
transactions. While it is true that the independent directors are responsible for overseeing
the advisory contract and fees (a conflict of interest transaction), most other conflict
transactions are either expressly prohibited or reserved to the SEC.82 In contrast, the
disinterested directors of a traditional corporate board have the power to authorize a
conflict of interest transaction by the board.83 In the mutual fund context, such authority
is largely removed from the hands of the independent directors. Instead, the 40 Act either
reserves such authority to the SEC or prohibits the subject transactions altogether. Thus,
argue Professors Frankel and Kirsch, the watchdog role of the independent directors is
not as significant as is often thought.84
Part Three: Industry Structure and Debate
While the description of the fund governance structure given in the Part Two is
correct, the picture is not complete. In order to understand the criticisms of the
independent directors and the corporate governance structure addressed below, it is
81
See FRANKEL & KIRSCH, supra note 24, at 242-43, 347-48.
82
Investment Company Act of 1940 §17, 15 U.S.C. § 80a-17 (1998).
83
See CLARK, supra note 27, § 5.2.1, at 166-69; DEL. CODE A NN. Tit. 8, § 144 (1999) (transaction between
corporation and another entity in whom one or more of the corporation’s directors have an interest is not
void or voidable if the interest is disclosed and the disinterested directors approve, the interest is disclosed
and the shareholders approve, or if the transaction is fair to the corporation).
84
In Burks v. Lasker, the Supreme Court found that, “The cornerstone of the ICA’s effort to control
conflicts of interest within mutual funds is the requirement that at least 40% of a fund’s board be composed
of independent outside directors…This “watchdog” control was chosen in preference to the more direct
controls on behavior exemplified by the options not adopted.” Burks v. Lasker, 441 U.S. 471, 482-84
(1978). Professors Frankel and Kirsch pose the question of whether the Burks Court stressed too heavily
the watchdog role of the independent directors given their relatively minimal authority over conflict of
interest transactions under § 17 of the 40 Act. FRANKEL & KIRSCH, supra note 24, at 242-43.
15important to understand the relationship between the members of a board and the
investment adviser.
Although it is true that each mutual fund has a board of directors, in practice, the
same directors may serve on the boards of many funds with the same investment adviser.
For example, the same directors, including those considered independent, of the Fidelity
Magellan Fund may also serve on the board of the Fidelity Contra fund as well as
numerous other funds for which Fidelity serves as the investment adviser.85 This system
of inter-locking or clustered boards is the defining characteristic of a “fund complex,”
which refers to a group of funds managed by the same investment adviser. For example,
the Vanguard Group’s nine-member board oversees more than 100 different mutual funds
in the Vanguard complex.86 Each separate fund in the complex has its own board of
directors as required by the 40 Act. However, the membership of the boards are
identical.87
Based on the description of the governance structure in Part Two, one might
suspect that the board is responsible for selecting the investment adviser. While the
board must approve and renew the adviser contract, the board is not as distinct from the
adviser as it would first appear. It is the adviser who nominates individuals to serve as
directors, both interested and independent.88 The existence of clustered boards means
85
Professor Ronald Gilson of the Stanford and Columbia Law schools serves as an independent director on
30 boards of American Century Funds. Kathleen Day, Fund Directors Under Duress; Independent Board
Members Draw Fire on Watchdog Role, THE W ASHINGTON POST , Apr. 4, 1999, at H1.
86
Id. at H1.
87
The 40 Act does not contain any affirmative prohibitions on the use of the fund complex structure. To
the extent that each fund separately retains the corporate governance structure and satisfies the 40 percent
requirement under § 10(a), the system is acceptable. Of course, it is possible to question whether the
independent directors of inter-locking boards are “interested” because of their relationship to the adviser.
That is the issue raised in Strougo v. Scudder, Stevens and Clark, Inc., 964 F. Supp. 783 (S.D.N.Y. 1997),
discussed below in the context of shareholder derivative suits.
88
Klein, supra note 61, at 540.
16that the board, while sitting atop each mutual fund, operates within the larger umbrella of
the fund complex. Although it is technically true that the board contracts out the day-to-
day services of the fund to the adviser, one should not consider the board and the adviser
to be relative strangers to each other or subject to arm’s length bargaining. 89
The corporate governance structure described in Part Two is consistent with a
system in which an investor selects a fund distinct from its investment adviser. To the
extent that the fund contracts out its services to the investment adviser, an investor may
purchase shares of a fund because of the characteristics of the fund itself irrespective of
the identity of the investment adviser. If the investor is unhappy with the board’s
selection of an investment adviser, then the shareholder can redeem the shares or take
other action. In reality, the investor selects a fund, at least in part, because of the
investment adviser.90 When investors buy shares of the Janus Olympus Fund, it likely is
Janus that attracts them to the fund rather than some characteristic of the fund unrelated
to Janus. For example, an investor may choose Janus (the investment adviser), and then
select from those offered within the Janus family, the fund which best suits the person’s
investment goals.
Criticisms of the Corporate Governance Structure
In recent years, the corporate governance structure of mutual funds has faced
increased criticism on two fronts. First, a line of cases have at least raised the possibility
89
It is important to note that the lack of arm’s length dealing existed prior to 1940 and is one of the reasons
that Congress chose to impose the 40 percent requirement of § 10(a). S. Rep. No. 91-184, p. 5 (1969). The
presence of the independent directors was to provide some layer of protection against self-dealing between
the adviser and the board, even if that protection did not rise to the level of that provided by arm’s length
bargaining.
90
Edward Wyatt, When Empty Suits Fill the Board Room: Under Fire, Mutual Fund Directors Seem
Increasingly Hamstrung, N.Y. TIMES, June 7, 1998, § 3, at 1.
17that the independence of the independent directors serving on inter-locking boards can be
called into question. These cases are discussed in Part Seven below, which addresses the
deterrent effect of suits by shareholders. Second, the financial press has criticized the
role that directors play in policing the actions of the adviser, often citing the seemingly
excessive salaries paid to directors and the minimal amount of work that directors
perform. The following section sets forth the arguments on both sides.
Many of the articles criticizing the role played by independent directors proceed
down two routes. First, the articles portray the independent directors as “mere props,”
citing examples of fund directors paid handsomely for little work.91 Second and more
illuminating, these articles question the independence of the independent directors and,
thus, set up a dichotomy between the reality as they see it and the statements by those
within the industry such as SEC Chairman Levitt stressing the watchdog role of the
independent directors.92
Many of the press articles open with a story of how a certain fund director sits on
the boards for, say, Fidelity, attends five or six meetings per year, and receives $75,000
per year in salary for what amounts to a few days work.93 One commentator opened with
the statement that, “Sitting on the board of a mutual fund may be one of the cushiest jobs
in corporate America. Independent directors at many big fund firms can earn annual
salaries of well over $100,000, plus they often get fat pensions.”94 When discussing the
91
David A. Sturms, Enhancing the Effectiveness of Independent Directors: Is the System Broken, Creaking
or Working?, 1 VILL. J.L. & INV. M GMT . 103, 115 (1999).
92
Reflecting this dichotomy, one commentator described the SEC’s Roundtable on the Role of Independent
Investment Company Directors held on February 23 and 24, 1999 as “Levitt’s dog-and-pony show.”
Charles A. Jaffe, Investing in Mutual Funds: Don’t Depend on Directors for Protection, CHI. TRI ., Feb. 28,
1999 at 3.
93
See e.g. Day, supra note 85, at H1.
94
Charles Gasparino & Pui-Wing Tam, Mutual Fund Boards: No Comfort?, W ALL ST . J., Feb. 5, 1999 at
C1.
18growing use of retirement plans for independent directors, another article began with,
“Some say that it’s Christmas all year round for the independent directors on mutual fund
boards. Now, there’s a new ornament on the tree.”95
Such statements may be true. However, investors probably would not show much
concern with the perks afforded independent directors if those directors are adequately
protecting shareholder interests. Much of the press on mutual funds has questioned the
degree of independence of the independent directors. First, some have questioned how it
is possible for the directors of a board that meets only infrequently and that is responsible
for a family of funds to serve effectively as watchdogs for the shareholders.96
Additionally, since the information that the boards receive in advance of their meetings
comes from the adviser itself, it is argued that these boards automatically approve the
decisions made by the adviser.
The industry responds to this critique by noting that there are scale economies to
having one group of directors for all of the funds. One of the advantages to the
management company of having clustered boards is that it is administratively much less
expensive and less burdensome. If the same directors serve on the boards of over 100
funds within a complex, these directors need not attend meetings for each fund
separately. Rather, it is more efficient to have one board meeting that covers the issues
raised by all of the funds.97
One can ask how well one meeting can deal with the issues surrounding 100
separate funds. The industry’s response is four-fold. First, the issues raised by a fund are
95
Carole Gould, Yet Sweeter Deals for Directors, N.Y. TIMES, Dec. 27, 1992, § 3, at 14.
96
Day, supra note 85, at H1.
97
James J. Hanks, Jr., Straightening Out Strougo: The Maryland Legislative Response to Strougo v.
Scudder, Stevens & Clark, Inc., 1 VILL. J.L. & INV. M GMT . 21, n. 22 (1999).
19common to the all funds in the complex.98 Second, having one board oversee all funds
guarantees consistency in the services offered by the funds in the complex. Third, it
would be prohibitively difficult and expensive to hold 100 separate meetings every few
months.99 Lastly, separate slates of directors for each fund would dilute the power of the
boards over the investment adviser.100
Much of the press also questions how well the independent directors can (or do)
stand up to the investment advisers. Since Fidelity pays more than $200,000 in annual
compensation to many independent directors, it is difficult to imagine the board objecting
to Fidelity’s operation of the funds.101 One commentator has noted that “The reality is
that independent directors, along with the rest of the board, often just rubber-stamp
management’s decisions.”102
Perhaps the most significant step that a board could take in opposing the
investment adviser would be to reject the contract and replace the adviser altogether.103
Such a step would seem plausible under the description of a mutual fund given in Part
Two, since the board contracts with the adviser to perform the day-to-day operations.
However, since, in reality, the fund is created by the adviser, who then nominates the
directors and pays their salaries, it is difficult to imagine the board rejecting the adviser.
98
See id. at n. 22 (“Many issues addressed at a board of directors’ meeting of one mutual fund in a complex
must also be addressed at the meetings of other funds in the same complex.”)
99
See id. at n. 22 (“If each mutual fund in a complex must have a separate set of independent directors, the
costs of educating each set of independent directors about the issues for which it is responsible could be
significant and would be paid by shareholders.”)
100
Day, supra note 85, at H1.
101
Gasparino & Tam, supra note 94, at C1.
102
Paul J. Lim, Your Money Funds and 401(K)’s: Despite Plan to Fortify Independent Directors,
Shareholders Must Be Their Own Watchdogs, L.A. TIMES, Mar. 28, 1999 at C3. See also Jaffe, supra note
91, at 3. (“When it comes to how your mutual fund is being governed, assume that no one else is looking
out for you.”)
103
One commentator has referred to this power of the board as the “nuclear threat.” Sturms, supra note 91,
at 135.
20For example, the chances that the board of the Fidelity Magellan Fund will replace
Fidelity with another investment adviser are minimal at best.
As discussed in Part Six below, one board recently did move to replace the fund’s
investment adviser. The response was a proxy battle in which the shareholders voted to
retain the existing investment adviser. Many of the shareholders, rather than choose sides
in the fight, chose to redeem their shares.104 Despite this example, a move to replace the
investment adviser is generally considered an unlikely response by a board unhappy with
the management provided by the investment adviser.
If the threat of replacing the adviser were credible, it would serve as a powerful
tool for the directors in their dealings with the adviser. However, to the extent that the
chances of the threat being acted upon are minimal, one can argue that this lowers the
power of the board over the adviser. The industry’s response to this argument is that,
while it is true that the chances of being used are small, it is nonetheless an important tool
that the board has in dealings with management.105 Since the action of removing the
investment adviser is so drastic, the threat is credible even if the changes of being
exercised are small.
Many within the industry consider boards to be effective. In addition to the threat
of replacing the investment adviser, supporters argue that the process of seeking board
approval is itself useful.106 Producing the information that independent directors must
analyze in order to make decisions is thought to force the adviser to identify and address
issues that either never would have been raised or that would have been noticed at a much
later date. Additionally, supporters point out that independent directors do oppose the
104
Id. at 106.
105
Id. at 135.
21adviser. Few knew of the instances of this because the “the media do not trumpet this
fact or simply do not know the inner workings of the investment company board
room.”107 Even those within the financial press admit that the mutual fund industry has
remained free of scandals relative to many other industries. At least part of this
phenomenon is attributable to the “directors [making] sure that funds stay on the right
side of the law.”108 Lastly, some argue that the costs of the system are minimal enough
that it should be retained even if the benefits are small. One study estimated that the cost
of independent directors to shareholders is 0.005%.109
Part Four: The Shareholders
This paper does not seek to decide the issue of whether the boards can and do
adequately protect the interests of the shareholders in the world of the fund complex.
Rather, the paper addresses the following issue: assuming arguendo that the criticisms
offered by the press have merit, are shareholders nevertheless adequately protected?
Even if the directors are beholden to the adviser in the way that many in the financial
press have made them out to be, is it possible that shareholders are still adequately
protected?
Figures One and Two present two modes of thinking about the structure of the
mutual fund industry. Figure One represents the model as described in Part Two. The
board of directors, whose interests are aligned with the shareholders, polices the adviser
for the benefit of the shareholders. Within the board itself, the 40 Act assigns certain
106
Id. at 136.
107
Id. at 136.
108
Jaffe, supra note 92, at 3.
109
Sturms, supra note 91, at 136.
22responsibilities to the independent directors, which serve as checks on the behavior of the
interested directors. Figure Two represents the structure of the industry if the criticisms
of the corporate governance structure in the world of the fund complex are accepted as
true. The interests of the board are aligned with the adviser rather than the shareholder,
and the interests of the independent and interested directors are the same. As a result, the
board of directors does not police the adviser and the independent directors do not police
the interested directors. Figure Two presents the issue addressed by the remainder of this
paper: Assuming arguendo that the structure depicted in Figure Two is true, to what
extent do the shareholders themselves police the operations of the board and the adviser?
The following sections, then, seek to gauge the weight or thickness of the arrow from the
Shareholder box to the Board of Directors box. If the actions that the shareholders can
take provide a sufficient check on the board and the adviser (the solid arrow in Figure
Two), then there should be less concern with the board’s alignment with the adviser.
Alternatively, if the policing effect of the shareholders is minimal (represented by the
dotted arrow in Figure Two), then the current structure of the industry may leave
shareholders unprotected.
The remaining sections of the paper address three possible moves by the
shareholders that can serve as checks on the activities of the board and the adviser. Part
Five addresses the ability of shareholders to redeem their shares when the board takes
actions inconsistent with the shareholders’ wishes. Part Six addresses whether
shareholder voting serves as a limit on board behavior. Lastly, Part Seven addresses the
recent line of shareholder derivative suits that have at least questioned the independence
of directors on clustered boards. The analysis of these three possible moves by the
23shareholders should provide some sense of the weight that shareholders retain vis-à-vis
the board of directors. In other words, the analysis should help to gauge the extent to
which the shareholders are protected even though, in the context of fund complexes, the
board is more closely aligned with the adviser than envisioned in Part Two.
The “Typical” Mutual Fund Investor
Before addressing these moves directly, it is necessary to have a picture of the
“typical” fund shareholder. This description serves as a backdrop and will help
determine the weight to assign to each of the shareholders’ moves.
The average mutual fund investor is 44 years old, middle class, married,
employed, with a median household income of $55,000 and financial assets of $80,000
excluding the primary residence.110 Of this amount, mutual fund investments account for
roughly $25,000 or 31 percent.111 In 54 percent of households owning funds, men and
women share investment decision making. Men are the sole decision makers in 24
percent and women are the sole decision makers in 22 percent of households.112
The average fund investor owns four mutual funds with equity funds accounting
for the largest type of fund held. Among fund-investing households, 88 percent hold
equity funds, 48 percent hold money market funds, 42 percent hold bond funds and 35
percent hold hybrid funds (i.e. those investing in both stocks and bonds).113
51 percent of mutual fund shareholders were born between 1946 and 1964 (the
Baby Boom Generation); 22 percent were born after 1964 (Generation X); 27 percent
110
INVESTMENT COMPANY INSTITUTE, supra note 21, at 44-45.
111
Investment Company Institute, Frequently Asked Questions About Mutual Fund Shareholders, at 2
(Dec. 1999) .
112
Id. at 2.
24were born prior to 1946 (the Silent Generation).114 Additionally, more than 80 percent of
mutual-fund owning households are headed by persons in their primary income-earning
years (ages 25 to 64), with the heaviest concentration between the ages of 35 and 44.115
A mere 17 percent of mutual fund owners are retired.116 Fifty percent of fund
shareholders have a four-year college degree while 30 percent have an associate degree
or attended college.117
Nearly all mutual fund investors consider their investments long-term. 98 percent
of shareholders say their investments constitute long-term savings and 86 percent claim
not to be concerned about short-term fluctuations. Additionally, 77 percent cite
retirement savings as their primary financial goal.118
Consistent with these investment purposes, employer-sponsored retirement plans
are an important aspect of mutual fund ownership. As of the end of 1998, retirement
plans accounted for 35 percent of all mutual fund assets.119 Of the $1.9 trillion in mutual
fund assets arising through retirement plans, half were held by IRA’s and half were held
by employer-sponsored accounts such as 401(K) plans.120 Fifty percent of mutual fund
shareholders claim that their primary channel for purchasing mutual funds is an
employer-sponsored retirement plan. 121 Among all fund shareholders, only 28 percent
own funds solely outside of these plans; 38 percent own funds solely through these plans;
and 34 percent own funds both inside and outside of employer-sponsored retirement
113
INVESTMENT COMPANY INSTITUTE, 1998 PROFILE OF M UTUAL FUND SHAREHOLDERS, at 3 (Summer
1999).
114
Investment Company Institute, supra note 111, at 1.
115
INVESTMENT COMPANY INSTITUTE, supra note 21, at 44.
116
Id. at 44.
117
INVESTMENT COMPANY INSTITUTE, supra note 113, at 1.
118
Id. at 6.
119
INVESTMENT COMPANY INSTITUTE, supra note 21, at 47.
120
Id. at 49.
25plans.122 However, nearly fifty percent of all fund shareholders indicate that their first
fund purchase was through their employer-sponsored retirement plan.123
On a macro level, the amount of assets invested in mutual funds has grown
significantly in the last thirty years. The total amount of fund assets rose from $47.6
billion in 1970 to $495.4 billion in 1985. By 1998, that amount had grown to $5.5
trillion.124 In 1998 alone, the amount of assets in mutual funds increased by 24 percent
from the year before, representing the fourth consecutive year in which growth exceeded
20 percent.125 Between 1979 and 1998, the number of funds rose from 524 to 7,314126
and the number of mutual fund complexes grew from 119 to 419.127
As of June 1999, 82.8 million individuals in 48.4 million or 47.4 percent of
households in the United States invested in mutual funds.128 In 1980, 4.6 million or 5.7
percent of U.S. households owned mutual fund shares.129 As of the end of 1998,
individuals held 78 percent of mutual fund assets, fiduciaries held 12 percent and other
institutional investors held 10 percent.130
121
Investment Company Institute, supra note 111, at 1.
122
INVESTMENT COMPANY INSTITUTE, supra note 113, at 7.
123
Investment Company Institute, supra note 111, at 1.
124
INVESTMENT COMPANY INSTITUTE, supra note 21, at 67. Of the $5.5 trillion invested in mutual funds in
1998, $2,978.2 billion was invested in equity funds, $830.6 billion was invested in bond funds, $1,163.2
billion was invested in taxable money market funds, $188.5 billion was invested in tax-exempt money
market funds, and $364.7 billion was invested in hybrid funds (those investing in both stocks and bonds).
125
Id. at 1-2.
126
Id. at 69.
127
Id. at 38.
128
Investment Company Institute, supra note 111, at 1; Investment Company Institute, U.S. Household
Ownership of Mutual Funds in 1999, INVESTMENT COMPANY INSTITUTE, FUNDAMENTALS: INVESTMENT
COMPANY INSTITUTE RESEARCH IN BRIEF, at 1 (Sept. 1999).
129
INVESTMENT COMPANY INSTITUTE supra note 128, at 1.
130
INVESTMENT COMPANY INSTITUTE, supra note 21, at 41. Fiduciaries are defined to include banks and
individuals serving as trustees, guardians or administrators. There has not been much movement in these
percentages in the last few years. In 1990, households accounted for 74 percent of fund ownership,
fiduciaries accounted for 16 percent and other institutional investors accounted for 10 percent.
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