Tuesday, April 11, 2006

Independent directors on mutual fund boards: Part 1

I'm usually the biggest fan and supporter of the SEC's regulations holding companies up to better corporate governance and disclosure standards.

So I was disappointed this week when the SEC's rule requiring 75% of the directors on the board of mutual funds to be independent, was struck down by the courts.
When this action was applauded by finance correspondents and writers at many top newspapers, I didn't know what to think.

The issue seems to have little to do with whether the rule is a good one or not, but the procedural problems regarding the way it was introduced. The US Chamber of Commerce has argued that "the SEC did not adequately consider compliance costs or regulatory alternatives" while making this rule. What compliance costs? 3,700 funds would have had to seek new (independent) chairmen at the time this rule was introduced, among other things.

However, in a heartening move, most mutual funds seem to have moved to comply with the requirement anyway in the last two years.
News sources say that more than half the industry already has independent chairman and more than 75% have boards made up of mostly independent directors.
The Mutual Fund Directors Forum, contrary to what you may expect, has supported the independence rule and includes the governance measures as industry best practices.

Procedural shortcuts may have been taken, but few people are taking issue with the rule itself. I'm still a strong supporter of the SEC.

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