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SEC Sketches Out Director Reforms

NEW YORK - The Securities and Exchange Commission is considering several amendments to the Investment Company Act to strengthen the role of independent directors of mutual fund companies, Paul Roye, the SEC's director of investment management, said last week. Roye spoke at a conference hosted by The Practising Law Institute of New York.

In addition, the SEC is considering issuing guidelines on when a director should be considered an "interested party." The SEC is also contemplating giving mutual funds guidance on whether directors can use a fund's assets for litigation in a proxy fight, and clarifying when a fund can pay legal expenses for an independent director, Roye said.

The SEC's objective is to "delegate more authority to independent directors," Roye said. "Independent directors need more support from us and shareholders need our support to safeguard their interests. What's good for shareholders is ultimately good for the industry."

The SEC may require a majority of a fund's board to be independent directors, Roye said. The SEC may also require independent directors to be "self-nominating," meaning that only independent directors can vote on their replacements.

"Over time, independent directors will leave, and we want to ensure the new ones will not have any affiliation with management," Roye said.

The SEC may also require a fund company's outside counsel to be independent of management, Roye said. The objective would be to insure that "the hard questions get asked and directors have the information they need to make decisions," Roye said.

Finally, the SEC might require mutual fund companies to supply their shareholders with more detailed information about their directors. This additional information might include whether directors are associated with management, hold shares, or represent several portfolios at the firm, Roye said.

Roye acknowledged that many shareholders may not pay attention to such information.

"But by disclosing it, it will discourage activities that would raise questions of independence," Roye said. "[While] the mutual fund industry has been free of scandals that have plagued other sectors of the financial industry, . . . sunlight is the best disinfectant."