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Fund Forward

SEC Expected to Fold on Independent Chairman Rule

The comment period for the independent directors rule ended a month ago, and as the Securities and Exchange Commis-sion nears a vote on the measure, speculation is increasing that it will bend to the industry's fierce opposition to having fund boards run by independent chairmen. SEC Chairman Christopher Cox recently said that one alternative might be appointing a lead independent director, and industry insiders have indicated that the SEC might merely call having an independent chairman a "best practice."

Should the SEC decide to walk away from the requirement that fund boards be overseen by impartial chairmen, it would negate much of the good that has been wrought through the 14 new regulations that have been put in place since the mutual fund trading scandal broke in 2003. Of all of the measures that have been passed, this is probably the most important, which is inevitably why it has elicited the greatest resistance.

Of course there are conflicts of interest in having a representative from a fund management company serve as chairman of a fund board that reviews that company's investment advisory contracts and fees.

Mercer Bullard, founder of Fund Democracy, recently argued that if funds were run by impartial boards, they would inevitably negotiate lower fees "and ensure that as much money as possible is being spent to benefit shareholders and not simply to distribute more fund shares or to line the fund manager's pockets through different kinds of kickbacks."

Bullard noted that empowering a chief compliance officer who reports to an affiliated chairman of the board negates the whole reason for putting a CCO in the position in the first place. "So you literally have a reporting system where the chief compliance officer is keeping an eye on the hen house and then going to report to the fox," Bullard said. "That is the best reason to require an independent chairman."

Studies have shown that increasing the number of independent directors improves fund governance at little cost. Funds run by a board with an independent chairman have lower fees, a more focused chairman and negotiate the lowest prices from service providers, which often are not affiliated with the fund complex.

Should the SEC bend on this critical rule, one would have to wonder if the industry learned any lasting lessons from the scandal.

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

Recent Posts

Mutual Funds Must Go High-Tech-v. 3.0

Over the last number of years, mutual fund transfer agencies and shareholder communications companies have tried to convince shareholders to accept paperless summary prospectuses, proxies, trade confirmations and electronically stamped signatures. Fund supermarkets and web home pages have broadened their horizons to include market commentary, videostreaming and personal financial news. At the same time, exchange-traded funds, funds-of-funds, hedge FoFs, unified managed accounts, target dates, 401(k) auto enrollment and heightened awareness among people throughout the country of the difficulties of being retired-have taken off.

Test of the Massey Mine

Fund giant boards of directors at AllianceBernstein, American Funds, Fidelity, Vanguard and others are reportedly starting to bring about meaningful change in the corporations in which they are invested. Proof should come any day now, when the shareholder proxy votes from the annual meetings are released. Fund chief executive officers spoke about the power and influence their proxies wield in an interesting Reuters article last week, "Mutual Funds Seek to Shed 'Rubber Stamp' Tag."


In 2011, 401(k) plans will turn 30, but the milestones the mutual fund industry has reached in this time are but a nanosecond in the history of U.S. retirement policy. Executives we interviewed for this special edition of Money Management Executive for the Investment Company Institute's meeting in Washington, speak to important milestones of the recent past and into the future. Look inside for observations and forecasts by Ted Benna, Robert L. Reynolds, Dan Fuss, David C. John, Steven Miyao and others.

At Age 30, It's Time for a Revamping for the 401(k)

This year marks the 30th anniversary of the 401(k), the revolutionary retirement savings vehicle that has been annihilating pension plans, empowering individuals to take part in the stock market-and, sadly, that left retirees with the misfortune of leaving the workforce in 2000 or 2008 very badly off. The cracks in the system are prompting many asset managers, regulators and retirement experts to take a hard look at 401(k)s and how they can be fixed.

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Lee Barney

Lee Barney served as editor of Money Management Executive from 2002 to 2010. Previously, at United Media’s Wall Street & Technology magazine and Risk/Waters Information Services, she covered financial IT. For, she wrote the daily “Meet the Street” column covering a broad spectrum of market-moving events. Lee began her career as a reporter in Tokyo with The Japan Times and was executive editor of Spotlight magazine.