SEC Proposes Controversial Fund Rules

Washington (Jan. 16, 2004) -- The Securities and Exchange Commission proposed a number of controversial rules this week aimed at improving disclosures to investors and making mutual fund boards more independent, including one that would require that board chairmen be independent directors.

The proposals included a requirement that 75 percent of a fund's board (compared to a majority now), and all board chairs, be independent directors. Boards would also be required to assess their own effectiveness at least annually. The commission also proposed that independent directors meet separately at least once a quarter, and that independent directors be authorized to hire staff to help them with matters requiring “outside assistance.”

The SEC also proposed new point-of-sale disclosures regarding fees and a new confirmation statement for the sale of mutual fund shares, unit investment trust interests and 529 plan securities, that would spell out the sales loads and other charges that investors incur when they purchase mutual funds, as well as the compensation brokers receive.

Noting that its recent enforcement proceedings suggested that “some advisory personnel may have forgotten or ignored” their fiduciary duty to clients, the commission also proposed requiring investment advisers to adopt codes of ethics that address, among other things, personal trading by employees who have access to nonpublic information.

“As I have said before, every mutual fund investor should expect, and is entitled to, honest and industrious fiduciaries who sensibly put their money to work for them in our capital markets,” SEC chair William Donaldson said when the proposals were unveiled. “Investors also deserve a brokerage and mutual fund industry built on fundamentally fair and ethical legal principles.”

Donaldson said the commission's confirmation requirements “haven’t kept pace with the various ways that broker/dealers are paid for distributing mutual funds.” He noted that when the current confirmation rule was adopted in 1977, broker/dealers were paid for selling fund shares principally by a dealer concession based on the front-end load.

-- WebCPA staff