SEC Chairman Calls For Tighter Regulation of Mutual Funds

The chairman of the Securities and Exchange Commission outlined a plan for tighter regulation of mutual funds before Congress Tuesday, and responded to criticism that the SEC failed to find problems in the industry early enough.

SEC Chairman William H. Donaldson told Congress that he supported a plan to force mutual fund chairmen and three-quarters of the directors to be independent. Half of the board is required to be independent now, the New York Times reported.

Under the proposals, fund directors would be required to perform annual evaluations of their effectiveness. They would be allowed to hire their own staff so they would not rely too heavily on the fund's investment advisers. Funds would also be required to disclose more details about their fees.

Donaldson, in testimony before the Senate Committee on Banking, Housing and Urban Affairs, said the industry "lost sight of certain fundamental principles — including its responsibilities to the millions of people who entrusted their confidence, the fruits of their labor, their hopes and dreams for the future to this industry for safekeeping."

He acknowledged, however, that the SEC has not inspected for late trading and market timing for many years. "Clearly, we can improve the effectiveness of the way we go about doing things," he said.

Cases against a dozen mutual fund firms came about as a result of investigations by state regulators, not the SEC.

"For too long, the commission has found itself in a position of reacting to market problems, rather than anticipating them," Donaldson said. "There are countless reasons for this — not the least of which include historically lagging resources and structural and organizational roadblocks. The time for excuses has long passed."

He said that on Dec. 3, the commission would vote on proposals to end after-hours trading in mutual funds and to require greater disclosure of fund policies on quick market-timed trades. The SEC will also vote on requiring strong compliance programs and the proposal to require an independent chairman and more independent directors.

Matthew Fink, president of The Investment Company Institute, the industry's main trade organization, suggested that it did not matter whether the board’s leader was independent. He said four of the 12 mutual fund companies under investigation had independent chairmen.

Some lawmakers are planning to go beyond the proposals outlined by the SEC and push their own legislation to tighten regulations.


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