SEC Approves Tighter Governance Rules For Mutual Funds

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

25 June 2004

A divided Securities and Exchange Commission (SEC) on Wednesday narrowly approved plans to oblige mutual fund firms to appoint independent chairmen.

In only the second non-unanimous vote since the appointment of William Donaldson as chairman of the US regulator last year, the Commission additionally approved proposals requiring that 75% of fund boards be comprised of independent directors, who must hold separate meetings without the presence of fund management.

The two Republican Commission members who opposed the move, Cynthia Glassman and Paul Atkins argued that it would not have a significant effect on fund governance, and would likely drive costs up for investors.

However, Mr Donaldson this week stressed that the change is necessary in order to remedy "inherent" conflicts in the fund industry.

"This requirement provides independent directors the leadership that they need to be truly effective day-in, day-out into the future. The leadership of an independent chairman will be the critical pivot point for avoiding potential conflicts of interest that can, in the future, lead to new forms of mismanagement, noncompliance and even fraud."

The new rules will come into force at the end of next year.

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