Mutual fund rules to go back to SEC

WASHINGTON — Post-scandal rules that could reshape the mutual fund industry, designed to protect investors from abuses, were thrown into doubt Tuesday by a federal appeals court ruling that they must get new scrutiny from regulators.

The departure later this month of the head of the Securities and Exchange Commission, combined with the ruling by the U.S. Court of Appeals for the District of Columbia Circuit, cast doubt on the rules’ future.

In a 3-0 ruling, the appeals court said the regulations mandating that chairmen of mutual funds be independent from the companies managing the funds must be returned to the SEC. There, they will be examined for the costs that mutual funds would incur to comply and for consideration of alternatives to the requirement of independent fund chairmen.

The rules, adopted by a divided SEC last year, also require that at least 75 percent of the directors on mutual fund boards be independent, up from the current mandatory minimum of 50 percent.

They could shake up the sprawling $8 trillion 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 fund industry has fiercely opposed the independent chairman requirement.

A champion of the regulations, SEC Chairman William Donaldson, recently announced that he is leaving on June 30 and it is unclear whether the agency would be able to review the regulations and deal with the pending issues before then.

“This rule becoming effective is now highly in doubt,” said Lynn Turner, a former SEC chief accountant.

Donaldson, a former Wall Street executive, pushed for the regulations amid an industrywide scandal that brought to light trading abuses that favored big hedge funds and other customers of mutual funds at the expense of ordinary investors. Donaldson insisted that independent chairmen were needed to avoid conflicts of interest and to protect fund investors.

The chairman of a mutual fund board typically also is the chief executive of the investment advisory firm, an arrangement that critics say allows the fund manager to dominate the board.

In a 3-2 vote a year ago, Bush appointee Donaldson sided with the two Democrats on the panel in an unusual political alignment to get the regulations through. They are scheduled to take effect next year.