Funds Inch Toward Independent Chairs

Mutual funds are moving to comply with a new rule that requires them to have independent chairmen starting in 2006, despite a growing challenge to the rule.

Although the deadline is a year off, a number of companies are inching forward with early assessments of how they will meet the rule’s requirements.

“Right now, most companies are assuming it’s going to come into place and are trying to figure out how they’ll deal with it,” said Barry Barbash, a partner at Shearman & Sterling and former director of the Securities and Exchange Commission’s division of investment management. “Most boards don’t have independent chairs and they’re going to have to figure out how they’re going to get them.”

The SEC adopted the initiative this year, ordering companies to put independent chairmen into place on their fund boards by Jan. 16, 2006.

Since then, the U.S. Chamber of Commerce has challenged the rule in court. And Congress has ordered the SEC to justify it -- a spending bill passed last month requires the federal agency to submit a report by May 1 showing why the rule is merited.

Initially opposed by many firms, the independent chairman rule was among the most controversial of those issued by the SEC in the wake of the fund-trading scandals. The question is whether, all things being equal, investors are better off when fund companies have independent chairmen.

The rule is getting more attention from the industry now that firms have met an October deadline to comply with a raft of other mutual fund reforms that had kept them occupied.

Marguerite Bateman, managing director of the Independent Directors Council, a group of independent mutual fund directors formed this year, said, “It’s apparent to us that some boards are currently trying to evaluate the requirement and are considering what to do.”

The council plans to issue a report this month that gives guidance on complying with the rule. It will probe the role independent chairmen should take, what funds should look for when selecting a chairman and how much independent chairmen should be paid. The council formed a 17-member task force to study the issues.

Not everyone agrees on how companies will approach the problem of finding independent chairmen for fund boards. Many companies already have a lead independent director, and some observers say these directors most likely will be rotated into the chairman spot. Others say it won’t be so simple.

“I think all fund complexes will go through a robust process in selecting an independent chairman,” said Tony Evangelista, head of PricewaterhouseCoopers’ regulatory compliance practice for its investment management industry group.

Among companies that would have to make changes are some of the best-known in the industry. Fidelity Investments, Vanguard Group Inc. and T. Rowe Price Group Inc., for example, all have chairmen who also hold other positions at the company.

“The rule adopted by the SEC will require Jack Brennan to step down as chairman of the Vanguard funds sometime during the next 12 months,” said company spokesman John Demming. However, it won’t have any effect on Brennan’s role as chairman and chief executive of Vanguard, nor on his role as chief executive for the funds, Demming said.

Charles Johnson, chairman of Franklin Resources Inc., the parent company of Franklin Templeton Investments, would have to relinquish his role as chairman of most of the company’s U.S. mutual fund boards.

“Our plan is to meet the requirements at the deadline,” Franklin spokeswoman Lisa Gallegos said. “We wouldn’t speculate on possible changes.”