In October, in conjunction with proposed regulations, the SEC announced the formation of the Mutual Fund Directors Education Council, a regulator-inspired initiative that will be administered at Northwestern University in Chicago. David S. Ruder, a law professor at Northwestern and former SEC chairman from 1987 to 1989, will chair the council that will consist of fund industry executives, lawyers and independent directors.
The council's mission is to foster the development of programs to promote a culture of independence and accountability in fund boardrooms. Freelance reporter Lori Pizzani recently spoke with Ruder about the council.
MFMN: What has happened since SEC chairman Levitt announced the formation of the Mutual Fund Directors Education Council on Oct. 13?
Ruder: The Council members had a closed meeting back in October. The next step will be for us to have a two-day public meeting on Feb. 17 and 18 in Washington, D.C.
We are advertising this event to directors. We are currently in the process of obtaining the names of mutual fund board members - both independent and affiliated members - so that we can compile a comprehensive mailing list of directors.
We are moving slowly to see what kind of enthusiasm we encounter. Our next event will be to test the waters at the conference.
MFMN: Why include "interested" or "affiliated" directors if the goal is to better educate independent fund trustees?
Ruder: We are focusing on independent directors, but we will include all directors in our mailing as well as lawyers representing a mutual fund, but not the fund's adviser. It is not our intention to create a schism between interested and disinterested directors.
MFMN: Beyond the group's mission statement, what's the goal of the council?
Ruder: The goal is to involve the SEC with independent trustees; to be sure the attitude comes from the SEC and is not filtered through advisory companies.
I'd like to see "best practices" extended to all the funds, and to do that we need to educate all directors. Right now the education function in fund complexes is not uniform. The idea is to have all independent directors of all funds understand what their responsibilities are, what their power is and what their tools are.
The ideal would be a harmonious working relationship between the outside directors and interested directors without domination by the interested directors.
MFMN: Haven't we already seen fund board activism instigated by independent trustees increase in recent times as exemplified by the Navellier and Yacktman cases?
Ruder: Yes. We're seeing a natural movement where independent fund directors are exercising their authority much more than in the past. But mutual funds are trailing the corporate world.
Over the past 10 to 15 years, there's been a change in the management of public corporations. The rise of independent directors has become a much more important feature in corporate governance in the non-mutual fund industry. Corporate directors now have their own meetings, their own counsel, a lead director and an audit committee.
But unlike the directors of an auto company, a bank, or an oil company that have different issues to deal with, there's a commonality in the mutual fund industry. The subject matter is the same for all fund boards.
The past role of the independent director has been largely to approve the fund's advisory contract and oversee service providers. But we are going to see independent directors involved in more of an oversight role in the future.
This is being fueled by the enormous rise of assets in mutual funds. It's not that there are industry problems or the industry is in distress. But it's an area that needs protection against a breakdown. The education of independent directors is important for these directors and the fund complexes as well in looking to avoid a breakdown in how these funds are managed.
MFMN: Where did the Mutual Fund Directors Education Council idea come from?
Ruder: The idea for creating this organization came from a law school alumnus. Two years ago, I broached the subject with Chairman Levitt. Then, eventually, we formulated the project.
We deliberately decided not to involve the Investment Company Institute or service providers such as lawyers, and accountants who could have a vested interest so that we could have an independent relationship with fund trustees. Since I am connected with the University, it seemed natural. Northwestern University will administer the program so there's another layer of independence.
MFMN: How will the directors' education program be structured?
Ruder: We don't know how it will be structured yet. Our next drawing board plan will be to create an executive educational program for directors. But we're going to crawl before we walk and walk before we run.
We might have two or three groups of directors including new directors who want to cover the basics. We may want to have independent directors of small fund complexes without the resources to educate their board members.
MFMN: Isn't there an education program for corporate directors? Could a similar program be developed for fund directors?
Ruder: Yes, Stanford University administers it. Stanford has a corporate executive program. We have seen all of the materials for the Stanford program. We are not unwilling to copy them.
MFMN: Will independent fund trustees be required to successfully complete the director education program?
Ruder: You're getting way ahead on that count. Some trustees may want to be better informed. Some complexes currently have well-versed, very independent trustees. We may look to them to become the instructors. Right now we're gathering a roster of volunteers to become instructors.
MFMN: How will the Mutual Fund Directors Education Council be funded?
Ruder: Initially, Northwestern is paying for our small expenses. But we hope to add a full-time staff person soon. Funding is a problem. We may look to sponsors. The Stanford Program has sponsors. We will seek funds but not from directors themselves.
MFMN: Won't the cost of sending trustees through the education program add to the expenses of a fund?
Ruder: Not significantly. Even if you had a 10-director board and each paid $500 a year or $3,000 a year, or whatever, to be educated, it wouldn't really affect the expense ratio.
But we will charge something. I happen to believe people don't respond well to something for free.