September 24, 2007
Independent Chair Rule Appears Dead in the Water
Of the 14 regulations that came out of the mutual fund trading scandal, the two most important were the creation of a chief compliance officer and the requirement that three-quarters of a fund's board of directors, including its chairman, be independent.
Although the Securities and Exchange Commission passed the independent chairman rule twice, a federal appeals court ruled in favor of the U.S. Chamber of Commerce lawsuit against the rule twice.
Since holding a comment period on the rule a third time this past spring, the SEC has been virtually silent about the measure, leading us to conclude that the rule is dead. Not only that, but the SEC hasn't even taken the watered-down step of recommending the appointment of an independent chairman as a best practice or requiring a lead independent director, sort of a second-in-command to the chairman.
The current director of the SEC's division of investment management, Andrew "Buddy" Donohue, will certainly leave behind a paltry legacy as far as shareholders are concerned. During his tenure, he has done virtually nothing to protect investors. Likewise, SEC Chairman Christopher Cox's three biggest contributions so far have been to set the groundwork for more navigable SEC filings via extensible business reporting language (XBRL), to warn seniors against investment fraud and to uncover more misdeeds at hedge funds.
The industry's fierce opposition to the independent chairman rule only underscores its significance. Naturally there are conflicts of interest in having a representative from a fund management company serve as chairman of a fund board responsible for reviewing the company's investment advisory contracts and fees.
Mercer Bullard, founder of Fund Democracy, has 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."
All seven former chairmen of the SEC endorsed the independent chairman rule in a comment letter to the Commission.
Too bad current SEC Chairman Cox can't agree.
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