SEC Faces Lawsuit over Independent Fund Director Rule

The U.S. Chamber of Commerce has gone to federal court to stop a requirement that mutual fund boards have independent chairmen and majorities of independent directors.

The group, representing 3 million businesses, says the SEC's requirements go too far. The 1940 Investment Company Act says that only 40 percent of directors must be independent, the court papers say. The suit was filed last Thursday in U.S District Court for the District of Columbia and the U.S. Court of Appeals for the D.C. Circuit.

“There's no empirical evidence that an independent chairman or a 75 percent majority will have a positive effect on the performance of mutual funds,” said Stephen Bokat, the general counsel of the U.S. Chamber of Commerce, according to the Wall Street Journal. “To the contrary, there's evidence in the records that those who have independent chairmen actually don't perform quite as well.”

The SEC approved the rule on independent fund directors in June, and companies have until January 2006 to conform. At the time, SEC Chairman William Donaldson said the rule would help eliminate conflicts of interest when a fund director tries to please investors and managers at the same time. Critics say the insiders can provide excellent advice, and they question whether outsiders add any benefits.

A Chamber official told CBS MarketWatch that investors seek out fund companies based on the reputations of fund managers, not for hiring outsiders who are less familiar with the company.

The SEC's general counsel, Giovanni P. Prezioso, said the agency would fight the lawsuit, according to the New York Times. "The commission carefully complied with its legal obligations in adopting these rules and we expect to defend them vigorously in court," he said.

You may like these other stories...

By Teresa Ambord, Correspondent You'd think a man who masterminded the biggest Ponzi scheme in history would have ice water in his veins. The name Bernard Madoff has become synonymous with investment scams after his...
By Ken Berry In a new case decided by the US Supreme Court, the remnants of a tax shelter partially constructed by wily Texas billionaire Billy Joe McCombs - known informally as "Red" - collapsed like a house...
By Teresa Ambord, Correspondent The IRS has suffered numerous hits lately, though they'd be hard pressed to find much sympathy from the public. Recent months have seen fumble after fumble in the news, and here's...

Upcoming CPE Webinars

Apr 22
Is everyone at your organization meeting your client service expectations? Let client service expert, Kristen Rampe, CPA help you establish a reputation of top-tier service in every facet of your firm during this one hour webinar.
Apr 24
In this session Excel expert David Ringstrom, CPA introduces you to a powerful but underutilized macro feature in Excel.
Apr 25
This material focuses on the principles of accounting for non-profit organizations' revenues. It will include discussions of revenue recognition for cash and non-cash contributions as well as other revenues commonly received by non-profit organizations.
Apr 30
During the second session of a four-part series on Individual Leadership, the focus will be on time management- a critical success factor for effective leadership. Each person has 24 hours of time to spend each day; the key is making wise investments and knowing what investments yield the greatest return.