Blogging Moves Into the Enterprise | T. Rowe Price Hits the Ground Running | Messaging Fit for FIX: Was IM Made to Order? | The Independent Chair Rule: Milestone or Millstone? | Company Index |
The Independent Chair Rule: Milestone or Millstone?
October 1, 2004
Depending on whom you talk to these days, the controversial SEC rule mandating that fund chairmen be independent is either an important step toward reform or a legal minefield. As the industry creeps toward the January 2006 compliance deadline, some of its most influential voices are fighting hard to roll it back.
On Sept. 2, the U.S. Chamber of Commerce announced that it plans to file suit to overturn not only the SEC's independent chair rule but also a companion rule requiring that 75 percent of a fund's directors be independent. "The SEC has overreached its authority, resulting in a rule that is bad for investors and contrary to the intent of Congress," says Stephen Bokat, senior vice president and general counsel at the U.S. Chamber of Commerce, which has a number of mutual funds as members.
Bokat contends that the independent chair ruling is really the kind of governance issue that Congress intended to leave to the states. "The effect of the rule is pretty dramatic," he says. "Not many funds are in compliance; a lot of funds are starting to crank up [in order to comply]. We filed now because we would like to have a ruling."
When the SEC voted 3-2 to require mutual funds to have independent board chairmen, it also voted to allow funds some 18 months to comply. The relatively long period was tacit acknowledgment of the substantial reorganization requirements that have been triggered by the new rule--as indicated by the estimated 80 percent of the industry's 8,000-plus mutual funds that are currently not in compliance. However, the 18-month period also allows plenty of time for opposition to organize, as funds contemplate the costs and problems of mandated management shake-ups.
Critical Mass
Controversy dogged the
proposal from the start. In addition to a close vote to
approve--two Democrats voting for the rule and two Republicans
against it, with SEC Chairman William Donaldson breaking the
tie--the SEC itself noted that the rule "was the most controversial
among the fund governance standards we proposed." The 152 comments
it received were evenly divided between those who supported the
rule and those who opposed it.
The rule's opponents are powerful. Fidelity
Investments, the largest fund company in the industry, whose
chairman, Edward C. "Ned" Johnson III, would have to step down to
bring Fidelity into compliance, has repeatedly declared its
opposition, and is backing the new lawsuit. "We believe that the
SEC should have refrained from enacting this rule," says Fidelity
spokesman Vincent Loporchio. "Based on their lawsuit, it would
appear that the Chamber shares our views."
The SEC, however, is hardly backing down. "The Commission carefully complied with its legal obligations in adopting these rules, and we expect to defend them vigorously in court," says the SEC's general counsel, Giovanni Prezioso.
Some legal experts think the suit has merit. "The Chamber has a point," says one former SEC official, who adds that the issue of whether or not the SEC has the power to trump state law is an interesting one. "Most of these mutual funds are incorporated in Delaware. It is a question whether that corporate structure can be dictated to by federal authority as opposed to the states," he says. However, the Chamber's other contentions are not likely to stand, the official predicts, including the assertion that the SEC failed to follow its own guidelines.
