Posted on: Thursday, June 24, 2004
80% of fund boards must replace leaders
By Marcy Gordon
Associated Press
WASHINGTON — Mutual fund boards must have chairmen who are independent from the companies managing the funds, the Securities and Exchange Commission ordered yesterday in a narrow vote as the panel addressed a fund industry scandal.
The new rule, to take effect in 18 months, could shake up the $7 trillion industry to which some 95 million Americans entrust their savings. The boards of 80 percent of U.S. funds — or about 3,700 funds — will have to replace their chairmen, SEC officials say.
In a rare public display of dissension, two of the SEC's three Republican members said they could not support the far-reaching rule change because they had seen no evidence it would prevent abuses in the fund industry, while potentially inflicting harm on funds' operations.
"The benefits are illusory but the costs are real," Cynthia Glassman, one of the Republicans, said before the vote at the public meeting.
Glassman and Paul Atkins, who also cast a dissenting vote, said they could not endorse an action that, while well-intentioned, would force a sweeping change of that magnitude through an entire industry and likely raise costs for fund investors.
The vote to adopt the proposal was 3-2, as SEC Chairman William Donaldson and the two Democratic commissioners supported it in a politically unusual alignment.
Voting unanimously, the panel also ordered funds to provide more information to shareholders about their contracts with investment advisers and how they are approved.
The action came amid intense fund industry opposition and was the latest in a monthslong series of changes to mutual fund operations that the agency has undertaken to bolster investor confidence. The rule change that was adopted — the first in the series to split the panel — also requires that three-quarters of the directors on a fund company board be independent compared with half of the directors now. That mandate will affect almost 2,000 funds, Atkins said.
On Capitol Hill, Rep. Michael Oxley, R-Ohio, head of the House Financial Services Committee and a proponent of independent fund chairmen, cheered the change.
"Today is independence day for mutual fund investors," he said. "Finally, mutual fund investors will have someone leading the board who is focused on earning returns for shareholders, rather than earning fees from shareholders."
Donaldson, a Bush appointee and former Wall Street executive, insisted that independent chairmen were needed to avoid conflicts of interest that are built into the mutual fund system and to protect fund investors.
The chairman of a fund board typically also is the chief executive of the investment advisory firm, an arrangement that critics say allows the fund manager to dominate the board.
In some cases, directors sitting on the board "find it very difficult to say 'no' " to the fund manager, said Paul Roye, head of the SEC division that regulates mutual funds.
"We believe that a fund board with an independent chairman and independent leadership is more likely to ask the tough questions, more likely to say 'no' when necessary," Roye said.
The fund industry's trade group and several big-name fund companies fiercely oppose the change and lobbied SEC members against adopting it.
But Donaldson said an outpouring of support had come from ordinary investors since the agency proposed the rule change in January.
Critics of the proposal, including officials of big fund companies Fidelity Investments, T. Rowe Price and Vanguard Group, contend that it would not prevent abuses in the scandal-tainted industry.
Those companies are among several whose chairmen are senior executives of the firms that manage the funds and have been untouched by the trading scandal. At the same time, several fund companies cited for abuses by the authorities do have independent chairmen.
