SEC to Post Indy Chairman Rule Again: Prospectus Overhaul Gains Momentum Under Cox
May 1, 2006
Securities and Exchange Commission Chairman Christopher Cox indicated last week that the regulator would seek additional public comment on its independent chairman rule, a likely sign that he intends to forge ahead with one of his predecessor's most controversial measures.
Speaking to reporters after a Senate Banking Committee testimony that ran the regulatory gamut, Cox said, "That's the direction we're going. In the next few days, we should be able to say something publicly."
Although there was no official statement from SEC prior to deadline, a fresh comment period for the independent chairman rule would signal yet another turn in what has been a roundabout bit of rulemaking.
First approved in 2004, the rule requires that the chairman of a fund's board of directors be entirely independent of the fund complex. It also says that at least 75% of a fund's board of directors must be independent. It was crafted because many of the scandal's illegal market-timing deals were approved by fund directors or carried out with their knowledge. But fund companies, including bigwigs like Fidelity Investments, claim it's too costly and would remove the industry's sharpest minds from key decision making.
So, last year, the U.S. Chamber of Commerce filed a lawsuit on the industry's behalf. The U.S. Court of Appeals concluded that the SEC was within in its authority to pass such a rule, but sent it back to the Commission for further cost analysis. Then just eight days after the Court's remand, the rule's champion and former SEC Chairman William Donaldson rushed a new vote before his departure. It passed by a 3-2 margin.
The Chamber filed suit again, arguing this time that the Commission did not perform sufficient cost analysis. The Chamber also won a stay of the rule, which was supposed to go into effect on Jan. 1.
Earlier this month, the Court decided that the Commission was sloppy in its analysis of the rule's impact during the remand and added that it would be within reason to vacate the rule entirely. Instead, the Court gave the Commission 90 days to solicit public comment on previously proprietary information that was used as a basis for some of the regulator's cost analysis.
Putting the information out for public comment would seem to affirm that Cox intends to go forward with rulemaking that was carried out under Donaldson, an objective he has gestured to in the past and one that has drawn intense speculation from the industry.
Whatever the case, officials with the Chamber said this satisfies one of their major contentions.
"This is what we were seeking," said Amar Sarwall, general litigation counsel at the Chamber. "Our goal was to obtain public notice and comment.
"We're definitely appreciative, but we'd also like to see the details. This was also pretty quick decision making on the part of the SEC, so we're very appreciative of that, too," Sarwall added.
In his remarks to the Senate committee, Cox also affirmed his goal to make mutual fund prospectuses more user-friendly.
As a member of Congress for 17 years, the California Republican said he learned that "the common sense of ordinary Americans is the essence and the strength" of a democracy. Most constituents are not investment bankers, or lawyers, or accountants, he continued, "but most of them are investors." When those investors can make sound decisions based on information that is understandable, accessible and accurate, competition in every corner of the financial marketplace is healthier.
But the disclosure that the industry provides to investors, Cox said, is so full of legal jargon and boilerplate disclosure that it obscures important information. That's why, he offered, the Commission decided three months ago to overhaul executive compensation disclosure. Now companies must provide one total compensation number, as well as clearly outline retirement benefits and termination payments. The compensation of board members must also be disclosed and a narrative detailing of how a board arrived at executive compensation packages must be filed with the regulator.
While some elements of the executive compensation disclosure rule are new and other existed previously, they all share, for the first time, rhetoric that leverages plain English, Cox said.
"I hope to advance this cause still further," he added, "so that, ultimately, every communication aimed at retail investors is so free of jargon and legalese that it could pass muster with the editors of the Money' section of USA Today."