SEC Says Mutual Funds Must Have Independent Chairmen

After a vigorous debate, the Securities and Exchange Commission squeaked through a rule change that will require mutual-fund companies to have independent chairmen.

The changes approved Wednesday, on a 3-2 vote, will also require 75 percent of fund seats be filled with independent directors, who must hold meetings separate from fund management, the Wall Street Journal reported. The rule will take effect by the end of 2005 and is part of a mutual-fund reform package the SEC is considering to combat abusive trading practices and conflicts of interest in the industry.

SEC Chairman William Donaldson noted the split within the SEC, but supported the change. Many mutual funds have chairmen who are executives from the fund-management company that runs the fund's portfolios. The chairman is then "trying to serve two masters" — investors and the fund-management company, he said.

"The leadership of an independent chairman will be the critical pivot point for avoiding potential conflicts of interest that can, in the future, lead to new forms of mismanagement, noncompliance and even fraud," Donaldson told the Journal.

But two Republican commissioners strongly opposed the rule, blasting the lack of "empirical data" that draws a connection between independent boards and better mutual fund performance or lower fees. The rule won’t do much to improve governance, and would probably increase costs for fund investors, they said.

Commissioner Cynthia Glassman pointed out that many of the top-rated funds have inside chairmen, while several of the funds sanctioned for abusive conduct, such as Putnam Investments, have independent chairs.

Fellow Republican Paul Atkins also criticized the SEC. "We appear to be more concerned with 'doing something' than we are concerned with making sure what we do is right." He said investors should be the ones to decide whether they want to invest in a fund with an inside chairman.

The change is expected to displace the sitting chairmen at about 80 percent of the nation’s mutual funds.

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