Wednesday, November 14, 2012

In Letter to SEC, Fund Industry Applauds NYSE Proposal to Exempt Open-End and Closed End Funds from Compensation Committee Standards

In a letter to the SEC, the Investment Company Institute supported the NYSE’s proposal to exempt both closed-end and open-end investment companies from listing standard compensation committee requirements because of the fundamental structural differences between investment companies and operating companies. Primarily, most investment companies enter into a contract with an investment adviser that manages the fund’s securities portfolio in conformance with the fund’s stated investment objectives and policies. As a result, said the Institute, these investment companies do not have compensated executives and thus have no need for compensation committees to oversee executive compensation.

Section 952 of the Dodd-Frank Act requires the SEC to adopt rules directing the national securities exchanges to prohibit the listing of any equity security of an issuer that is not in compliance with compensation committee and compensation adviser requirements. Pursuant to Section 952, the SEC adopted Rule 10C-1 directing the establishment of listing standards that require each member of a listed issuer’s compensation committee to be a member of the board of directors and to be independent as defined in the listing standards. Rule 10C-1(b)(1)(iii)(A) exempts registered open-end investment companies from the compensation committee member independence listing standards. The SEC rule does not explicitly exempt other types of investment companies registered under the Investment Company Act of 1940, including closed-end investment companies. The SEC did, however, expressly confirm the authority of each exchange to exempt any additional categories of issuers as such exchange determines is appropriate. The NYSE proposes to exempt both open-end and closed-end funds registered under the Investment Company Act from the proposed compensation committee independence requirements.

The ICI fully supports the NYSE’s proposal to exempt both open-end and closed-end funds registered under the 1940 Act from the new compensation committee requirements. These issuers typically are externally managed and do not employ executives or by their nature have employees. The NYSE recognizes that both closed-end and open-end funds registered under the 1940 Act do not generally have compensation committees because of their unique structure and that it would be a significant and unnecessarily burdensome alteration in their governance structure to require them to comply with the proposed new requirements. Moreover, noted the ICI, any potential conflicts of interest that are raised with respect to compensation paid to investment advisers are adequately governed by the corporate governance standards provided in the Investment Company Act.

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