The comment period for the independent directors rule ended a month ago, and as the Securities and Exchange Commis-sion nears a vote on the measure, speculation is increasing that it will bend to the industry's fierce opposition to having fund boards run by independent chairmen. SEC Chairman Christopher Cox recently said that one alternative might be appointing a lead independent director, and industry insiders have indicated that the SEC might merely call having an independent chairman a "best practice."
Should the SEC decide to walk away from the requirement that fund boards be overseen by impartial chairmen, it would negate much of the good that has been wrought through the 14 new regulations that have been put in place since the mutual fund trading scandal broke in 2003. Of all of the measures that have been passed, this is probably the most important, which is inevitably why it has elicited the greatest resistance.
Of course there are conflicts of interest in having a representative from a fund management company serve as chairman of a fund board that reviews that company's investment advisory contracts and fees.
Mercer Bullard, founder of Fund Democracy, recently argued that if funds were run by impartial boards, they would inevitably negotiate lower fees "and ensure that as much money as possible is being spent to benefit shareholders and not simply to distribute more fund shares or to line the fund manager's pockets through different kinds of kickbacks."
Bullard noted that empowering a chief compliance officer who reports to an affiliated chairman of the board negates the whole reason for putting a CCO in the position in the first place. "So you literally have a reporting system where the chief compliance officer is keeping an eye on the hen house and then going to report to the fox," Bullard said. "That is the best reason to require an independent chairman."
Studies have shown that increasing the number of independent directors improves fund governance at little cost. Funds run by a board with an independent chairman have lower fees, a more focused chairman and negotiate the lowest prices from service providers, which often are not affiliated with the fund complex.
Should the SEC bend on this critical rule, one would have to wonder if the industry learned any lasting lessons from the scandal.
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