SEC Calls for Independent Fund Heads

WASHINGTON —  The Securities and Exchange Commission, seeking to head off another scandal in the mutual fund industry, ruled Wednesday that fund chairmen can’t also work for the companies that run the funds.

The measure was approved 3 to 2 over the objections of leading mutual fund companies and the industry’s trade group, which said it would needlessly disrupt operations.

Proponents, including Republican SEC Chairman William H. Donaldson, supported the measure as a way to ensure that mutual fund chairmen hold the interests of ordinary shareholders paramount.

Eight in 10 fund boards are presently headed by someone who also is an executive for the fund company.

Critics contend that so-called inside chairmen can’t fairly represent shareholders on issues such as management fees.

“Fund shareholders want, and have a right to have, their mutual funds managed in the interest of the funds’ shareholders -- and no one else,” Donaldson said.

He described the independent chairman regulation as a “keystone” of mutual fund reforms being planned.

The regulation mandates that three-fourths of the directors on mutual fund boards be independent of the fund company; currently, the requirement is for a majority. The regulation also requires independent directors to meet among themselves at least quarterly and authorizes them to hire their own advisors.

Funds will have about 18 months to fully comply.

Mutual funds offer people a chance to invest in various mixes of stocks and bonds and for decades have been considered a trustworthy investment vehicle by tens of millions of Americans.

Then, last fall, New York Atty. Gen. Eliot Spitzer revealed a raft of abusive trading practices at several well-known funds that benefited favored, high-stakes investors over average shareholders.

The disclosures sparked a furor on Capitol Hill, but legislative proposals have bogged down. That has shifted pressure on the SEC to reform the $7.5-trillion industry.

Several measures, including restrictions on after-hours trading, are still in the works. But few of the proposals have been as controversial as the measure enacted Wednesday.

Two of the SEC’s three Republican commissioners -- Cynthia A. Glassman and Paul S. Atkins -- vehemently opposed it, deriding what they viewed as a lack of factual evidence to back it up and the costly disruptions it would impose on funds.

The mutual fund industry has contended that independent board directors already wield influence under current rules that give them the responsibility of approving the contract with the funds’ management companies.

In addition, opponents said there was no reason to think independent chairmen would have been able to prevent any of the abusive trading practices that have come to light. Scandals have touched firms with independent chairmen, Putnam Investments and Bank of America, and with insider chairmen, such as Strong Financial Corp.

“We’ve imposed a lot of costs on the funds already,” Glassman said, referring to new disclosure requirements and other rules previously approved. “This is another cost. I don’t see the benefits.”

The sharp division is expected to arise again next month, when the SEC may consider a proposal to improve shareholder clout at company proxy meetings. That measure, supported by Donaldson and the commission’s two Democrats, has provoked opposition from much of corporate America. SEC officials have been struggling behind the scenes to fashion a compromise, with little success.

As for the new rules governing mutual funds, the industry appeared to resign itself Wednesday to the coming change.

“Mutual fund companies are accustomed to new rules, from Congress or the SEC,” said Vin Loporchio, a spokesman for Boston-based Fidelity Investments, the nation’s largest mutual fund company. “We will comply fully, and we’d expect that the changes will be seamless for our shareholders.”

Fidelity’s 292 funds fall under the purview of a sole board of trustees that has long been run by Edward C. Johnson III, its chairman and chief executive.

While Johnson will give up his board of trustees chairmanship, “He will continue to provide day-to-day management oversight of the company,” Loporchio said. “This rule really does not change the way Fidelity Investments is run at all.”

Vanguard Group Inc., where CEO John Brennan chairs some three dozen boards responsible for 126 funds, also downplayed the effect on shareholders.

“Our senior management team, our crew and the boards are going to continue to focus and serve the interests of the fund shareholders as we have done throughout our existence,” Vanguard spokesman Brian Mattes said.