- The Washington Times - Wednesday, June 29, 2005


A divided Securities and Exchange Commission voted yesterday to affirm a controversial rule that requires mutual fund companies to appoint independent chairmen for their funds.

SEC Chairman William Donaldson, who is resigning from the agency as of today, sided with the commission’s two Democrats in the 3-2 vote that reconsidered the measure at the direction of the U.S. Court of Appeals for the District of Columbia. On June 21, the court questioned the high costs that would be incurred by fund companies and also ordered the SEC to consider alternatives.

The commission, however, simply affirmed its previous rules, stating that the costs involved with retaining independent chairmen, and also raising the number of independent directors on a fund board to 75 percent from the current 50 percent, were not onerous for the $8 trillion mutual fund industry. The majority on the commission also decided that alternatives — such as simply having a given mutual fund disclose whether it had an independent chairman or not — would be ineffective.

“Today’s recommendation addresses the court’s concerns, which the commission takes quite seriously,” Mr. Donaldson said yesterday. The outgoing chairman has long been a proponent of independent mutual fund directors taking on a greater role in governance in the wake of the mutual fund scandals that rocked the industry after the dot-com bubble burst.

Cynthia Glassman, one of the Republican commissioners who voted against the measure, called the hearing a mockery because of the short time frame for answering the court’s concerns and Mr. Donaldson’s impending departure. Mr. Donaldson, a Bush appointee who often sided with the Democratic commissioners, was roundly criticized by his fellow Republicans for pushing through a vote.

President Bush appointed Rep. Christopher Cox of California, a free-market conservative, as Mr. Donaldson’s replacement. He has yet to be confirmed by the Senate, and some Republicans felt Mr. Donaldson should have deferred to Mr. Cox on the mutual fund issue.

“In my view, a prudent response to the court’s mandate would be for the commission to seek public comment on the issues identified by the court,” Mr. Glassman said.

Mr. Donaldson dismissed those criticisms, however, saying the current commission and staff had been wrestling with the mutual fund rules for over a year.

“The staff and this commission have a strong foundation of experience with the fund governance rules, and that experience has enabled us to address these issues raised by the court within a relatively short period of time,” Mr. Donaldson said, “albeit with the assistance of truly herculean efforts on the part of our staff.”

The measure, first proposed 18 months ago, was designed to protect investors by ensuring fund overseers would be insolated from the larger financial interests of the institution that owns them.

The SEC staff’s research on the potential costs of the rule was compiled in a new study, presented at the hearing, that concludes the financial burden would be minimal.

The rule, scheduled to take effect next year, could shake up the mutual fund industry to which some 95 million Americans entrust their savings. The boards of 80 percent of U.S. funds — or about 3,700 funds — would have to replace their chairmen, according to SEC officials.

The rule also requires that at least 75 percent of the directors on mutual fund boards be independent, up from the current mandatory minimum of 50 percent.

Some industry experts say the new independent chairmen would replace chairmen who are more well-versed in fund operations and therefore they would have to hire additional staff to assist them.

The U.S. Chamber of Commerce, which brought the suit against the SEC that put the mutual fund rule before the U.S. Court of Appeals for the District of Columbia Circuit, threatened Tuesday to sue the agency again.

The SEC action “is a dangerous attempt to circumvent our legal and regulatory system,” Chamber President Thomas Donohue said at a press conference. The group “has every intention to return to the court and sue the SEC.”

A Chamber of Commerce spokesman could not be reached for comment immediately after the vote.

On a far more harmonious issue, the SEC voted 5-0 to ease restrictions on executives’ comments in the weeks before their company goes public in a stock sale. The change loosens restraints on the so-called quiet period preceding IPOs, part of a broader plan to ease regulation of new stock offerings.

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