Principles for Fund Governance and Practice
This statement reflects principles to which the TIAA-CREF investment companies aspire to conform, and which we intend to apply to other companies’ funds that we offer to our customers. While TIAA-CREF recognizes that there can be good faith differences of opinion about governing structures and practices, we believe our industry should take steps to demonstrate that investment companies operate for the benefit of shareholders (the funds’ investors), that their pricing and costs are open to scrutiny, and that they treat all investors fairly regardless of account size.
These principles should be read in conjunction with TIAA-CREF’s Statement Regarding Fund Governance and Practices, which discusses our view of the opportunity that funds have to come together to restore the trust of individual investors. The principles are not a recitation of law, but rather a set of measures reflecting ways in which funds can put shareholders’ interests first.
Principle One
We believe the following governing structures can help funds operate for the benefit of shareholders.
- At least three-fourths of a fund’s directors, including its chairman, should be independent of the fund’s investment management company (with serious consideration given to a board comprised entirely of independent directors);
- A fund's board should meet regularly in private, without management present;
- Directors should retain independent legal counsel;
- Only independent directors should serve on the audit and nominating committees; and
- The audit committee should include one or more financial experts qualified to oversee the fund’s independent auditor.
Principle Two
Regular elections of directors promote board accountability to shareholders.
- Shareholders should regularly have the opportunity to elect directors, whether via a public company-style proxy process or other means.
Principle Three
Fund directors should be highly qualified
- Directors should be people of high character, experience and competence
- To ensure that directors are dedicating sufficient time and attention to their board responsibilities, boards should develop guidelines governing the number of corporate board memberships their directors may have.
Principle Four
Fund advisers should provide shareholders with information on how the fund compensates portfolio managers.
- A fund’s investment adviser should disclose the structure of portfolio manager compensation and the methodology used to determine such compensation.
- Shareholders have a right to know whether portfolio managers have incentives to focus on short- or long-term performance.
Principle Five
Funds should voluntarily cease the practice of directing brokerage in return for distribution.
- As an interim measure, funds should quantify the amount of brokerage business sent to brokers for distribution and include that amount in their 12b-1 fees.
Principle Six
Funds should be fully transparent with respect to fees, expenses and costs.
- Brokers should separate trading costs from research costs so that investment advisers can disclose them to investors.
- In the interim, the fund industry would do well to closely examine proposals to improve soft dollar disclosure, paying particular attention to the preservation of high quality research and the goal of true transparency.
- Ultimately, advisers should pay for investment research from their own profits, thereby ending soft dollar arrangements.
Principle Seven
Funds should be fully transparent with respect to revenue sharing arrangements their advisers have with brokerage firms that engage in fund sales.
- Fund advisers should disclose the range of these payments and the brokers who received them.
Principle Eight
All fund shareholders deserve to be dealt with fairly.
- Certain distinctions in fees and discounts among groups of investors within a fund, depending on whether the fund is sold directly or through a broker, or the quantity of shares purchased, may be appropriate provided they are fully disclosed.
- No shareholder should get preferential treatment other than as fully disclosed.
- Funds should not share confidential information relating to holdings or trading strategies with certain shareholders who can then profit from that information at the expense of others.
- Funds should develop reasonable policies and procedures to address abusive short-term trading and market timing, and should apply these policies consistently.
June 2, 2004
