Independent Fund Board Rule Kaput

March 27, 2007

Chuck Jaffe at MarketWatch writes:

Alas, when it comes to the debate over whether mutual fund boards should have chairmen and a supermajority of directors who are independent of the management company, it appears that fund interests are going to win out.

In 2004, the Securities and Exchange Commission passed a rule requiring all funds to appoint an independent chairman and to make three-quarters of the board of directors independent. The rule came in the aftermath of the rapid-trading scandals of 2003 and was universally applauded by consumer groups. But the Investment Company Institute and several big-name fund firms -- most notably Fidelity Investments -- railed against it, saying it was unnecessary and costly.

The rule was rejected twice in federal appeals court, which cited the SEC's administrative process as a big part of the problem. So the agency reopened the discussion.

In December the SEC released two reports from the Office of Economic Analysis examining the costs and benefits of having a chairman and 75% of the fund's board independent from the investment adviser. Both sides of the debate had until March 2 to file comments.

And while there is no official word from the SEC yet, it is pretty clear talking to agency insider's that the issue is dead."


While these independent fund boards are a great idea in theory, in practice we don't think the loss of this rule will be much of a negative for fund investors. These so-called independent directors would still have been appointed by the fund companies, so the true extent of their independence would have been debatable. Furthermore, the rapid-trading scandals of 2003 that this rule was a result of are probably not the kind of thing a once-a-quarter board of directors would have had uncovered. This rule would also have added significant costs to running a mutual fund, which would have unfairly hurt small and new fund companies.