Sunday, March 04, 2007

Mutual Fund Governance

The current issue:
The SEC proposed a rule in 2004 requiring at least 75% of a mutual fund's boards to be comprised of independent directors. However a federal appeals court asked it to reconsider this rule, after which the decision has remained stalled.
Currently, the SEC is proposing a modified rule under which mutual fund boards are generally required to be headed by an independent chairperson. But if the board consists of at least 75% independent directors, and has a lead independent director, the fund will be exempt from this rule requiring an independent chairperson and may choose a chairperson.

How it affects mutual funds now:
It has been documented that most mutual funds now do have at least 75% independent directors on their boards. As such, the new rule may not make a significant difference to most mutual funds.

How valid is the rule:
This study among many others, has documented a fact that may be intuitive to some, but is an important observation all the same: funds with independent boards not only perform better, but also are more likely to replace underperforming managers when they do not perform well.
So the rule is backed by some solid justification.
And so what if most funds are already compliant: all that it means is that the cost of compliance is low ! So mutual funds are not going to add their voices to all those companies out there complaining about the cost of SOX!