Who says the lion will never lie down with the lamb?
The Investment Company Institute and individuals and lawyers who are challenging the independence of mutual fund directors briefly became strange bedfellows last month when the ICI refused to back a proposed Maryland law defining what makes mutual fund directors independent. Investors and lawyers challenging the independence of fund directors in court cases also bitterly opposed the law and worked to stop its passage.
The prospects for passage of the proposed law, which provided that fund directors do not lose their independence by serving on multiple boards in the same fund complex, collapsed when the ICI told the bill's author, James J. Hanks, Jr. of Baltimore, it did not support the proposal. Hanks, a prominent mutual fund lawyer, said that because the ICI did not back the proposal, he asked Maryland legislators to withdraw it.
The ICI did not back the new law because it covered the same ground as legislation the Maryland legislature passed in April 1998, Chris Wloszczyna, an ICI spokesperson, said last week. The ICI had supported the 1998 law, hiring a Maryland lobbyist to work towards its passage.
"We thought it was unnecessary," Wloszczyna said of the law proposed last month.
On Jan. 19, U.S. District Court Judge Robert Sweet ruled that under federal law, directors could lose their independence by virtue of getting paid to serve on several fund boards in the same mutual fund complex. As it now stands, Maryland law uses federal law to define what makes a fund director independent.
The law which Maryland legislators proposed in February, overrode Sweet's Jan. 19 decision. The proposal provided that, under Maryland's application of federal law, the fees that a director gets paid do not mar fund directors' independence.
Critics of the proposed Maryland law wanted to see it die, but not for the same reasons as the ICI. James Roumell, president of Roumell Asset Management, an investment advisory firm in Chevy Chase, Md., was so incensed by the proposal that he prepared to testify against the bill at a committee hearing Feb. 29.
The Maryland proposal insulates directors from oversight by removing their fees as an issue in judging the directors' independence, Roumell said.
"It's really an anti-consumer bill," Roumell said.
Roumell said he was shocked when he appeared at the committee hearing, signed up to testify and found that the other two individuals scheduled to speak on the proposal - one from the ICI and one from the Maryland Securities Association - planned to testify against it.
Roumell then called his lawyer to make sure that he wanted to testify against the proposal and not for it. The hearing was cancelled when one of the law's sponsors said he had withdrawn the proposal, Roumell said.
Roumell is one of several shareholders suing the directors of the Templeton Vietnam Opportunities Fund. The case includes allegations that the fund directors were not independent because of the fees they received from serving on multiple fund boards. Roumell, however, said he no longer owns shares of the fund and will not benefit if he prevails in the case.
The issue of Maryland law and mutual fund directors' independence is not entirely closed. Two Maryland shareholders are challenging the constitutionality of the existing Maryland law based on alleged procedural mistakes the Maryland legislature made when it passed the law in 1998. The Maryland Court of Appeals was scheduled to hear arguments in that case late last week.
If the Appeals Court finds that the current directors' law is unconstitutional, the fund industry conceivably could seek to return to the Maryland legislature and look for help again.
Kumar Barve (D), a representative in the Maryland House of Delegates' and one of the sponsors of the bill submitted last month, said in a brief interview last week that it is possible that a version of the directors' bill could be proposed in the future.