The Securities and Exchange Commission is headed in the right direction with mutual fund board governance, according to several former commissioners of the SEC. Five of them met to discuss various issues at the Security and Exchange Commission Historical Society.

Problems of transparency in mutual funds first arose in the 1970s, according to Roderick Hills, who had been commissioner from 1975 to 1977. During that time, the SEC looked at the investment management aspect of fund regulation, but " Dick Zecker [the SEC’s first economist] and others were quite concerned about the fact that we had all those rules but we didn’t have any transparency, and we didn’t have any independence on mutual fund boards," Hills said.

"We did not have simple things like transparency, and we had no requirement for independence on the boards, so the need for independence on mutual fund boards is, I think, critical," Hills concluded.

While it is useful to look at good governance practices at industrial companies as a model for mutual fund boards, those standards are not automatically applicable, Hills stressed, because mutual funds have no employees and are "a creature of the fund complex."

"There is an obvious tendency to take all the things that represent good governance in the corporate world and automatically slide it over and automatically say it would be good in the mutual fund world, and some of them are," Hills said. "But it isn’t automatically true that everything that is true for a widely-traded public company is necessarily the right answer for mutual funds."

The nominating and governance committee is key for mutual funds, added former Chairman Arthur Levitt (1993-2001). "In the years ahead, it seems to me that’s going to be the single most important thing in corporate governance," he said. Beyond independence in the board chairman, finding highly qualified individuals for positions as mutual funds directors is a tough but important question.

"And how do you motivate the directors to act as if they’re independent?" asked David Ruder, who was commissioner from 1987 to 1989.

Sometimes, punitive measures must be taken, according to G. Bradford Cook, commissioner in 1973. He commented, "You can lead a horse to water, but sometimes you have to whack them over the head with a two-by-four."

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