Independent boards
NEW YORK – The two-year tussle over a regulation requiring that mutual fund chairmen be independent has pitted The Vanguard Group Inc. against John C. Bogle, its founder. It’s thrown the former governor of Minnesota against the son of a Supreme Court justice.
On its face, what’s at stake is the composition of the boards of mutual funds. But the hope in some quarters and the fear in others is that if the regulation is enacted it will have implications for the governance of all public companies.
“Call it the rub-off effect,” said C. Meyrick Payne, a senior partner at the consulting firm Management Practice Inc., which specializes in mutual fund governance. “Serious people believe that this is the beginning of separating the regular chief executive from the chairman.”
Arne H. Carlson, former governor of Minnesota and now the independent chairman of RiverSource Funds, which was recently spun off from the American Express Co., agrees. “Part of this is a corporate CEO fear that their control will be placed in jeopardy.”
The proposed rule by the Securities and Exchange Commission, first introduced in 2004, would require that 75 percent of mutual fund boards be independent and work under an independent chair.
Those in favor of the rule say more independent boards will negotiate lower management fees.
Those opposed say it would “create additional bureaucracy for fund advisers, thereby stifling the creation of new fund offerings for investors,” as lawyer Samuel E. Whitley wrote in comments to the SEC. Others add that there is no empirical evidence the new rules would do any good.
The SEC approved the rule after a series of mutual fund scandals came to light in 2003. Many of the scandals involved special trading privileges for wealthy investors that nipped into the profits of every other investor. To date, the scandals have resulted in assessed fines and disgorgement of $3.4 billion from the companies.
The independent chairman rule is “a centerpiece of our efforts” in regaining investors’ trust in the fund industry, then-SEC chairman William Donaldson said in February 2004.
The rule met with immediate opposition from the fund industry and organizations including the American Enterprise Institute and the U.S. Chamber of Commerce, which filed a federal suit in 2004 challenging the proposal.
“The independent chair requirement will prevent independent directors of mutual funds from deciding for themselves whether an independent or management chair is best for the fund; will strip investors of the option they currently have to invest in a fund chaired by a management director if they so choose; and will force the vast majority of mutual funds to change their governance structure in a manner the record shows will adversely affect the funds, the investing public and the economy,” according to the suit filed by the Chamber. The lead lawyer on the suit was Eugene Scalia, son of U.S. Supreme Court Justice Antonin Scalia.