Experts Warn That New Mutual Fund Rules May Reduce Board Sizes

by Glen Shapiro, LawAndTax-News.com, New York

13 July 2005

Following the controversial decision by the US Securities and Exchange Commission to reissue a rule requiring 75% of a mutual fund's board to be independent, experts have warned that this may lead small and medium-sized fund firms to simply reduce their board sizes in order to comply with the rule.

Late last month, the day before former Chairman, William Donaldson left office, the SEC reaffirmed the contentious mutual fund rules which had been sent back by the courts for review.

The US Court of Appeals for the District of Columbia Circuit had voted unanimously just 10 days prior to send back to the SEC its ruling requiring at least 75% of a mutual fund's board, including the chairman, to be independent, demanding that the SEC should give thorough consideration to the rule's costs and alternatives.

The US Chamber of Commerce has launched a second appeal against the independence rule, leaving its future uncertain, especially in light of the appointment of free-market conservative, Congressman Christopher Cox, (R-Calif) as the new SEC Chairman.

However, speaking to Investment News this week, Shearman & Sterling partner and former high-ranking SEC official, Barry Barbash suggested that:

"I suspect that (it) may well be the case with smaller funds, to just terminate from the board the interested director."

Fears have been expressed by industry observers that if too many 'interested directors' are purged from mutual fund boards, the firms may find themselves understaffed, and lacking the necessary expertise.

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