The Securities and Exchange Commission on Wednesday outlined its long-awaited proposals for strengthening the role played by independent directors on the boards of fund companies.
Outside directors, whose responsibilities include determining fees and expenses, have long been seen as shareholder advocates. With the number of mutual fund shareholders topping 83 million and their investments totaling more than $6 trillion, the SEC has sought ways to better ensure that directors are serving shareholders' interests.
The commission is seeking comment on whether the rules should require a simple majority or two-thirds of a fund board to be drawn from outside the investment company. Currently, according to the Investment Company Act of 1940, only 40% of a board's directors must come from outside.
The SEC proposals also call for outside directors to be self-nominating and for fund companies to provide better information on directors, including their identities and experience, whether they own shares of the fund, and potential conflicts of interest.
"Clearly the initiative is designed to reinforce the important role independent directors play in protecting shareholders' interests," said Paul F. Roye, the director of the SEC's investment management division, in an interview.
"There are fund companies that embrace these concepts and those that don't. We're trying to set these as baseline standards for all funds," he said.
The proposals, however, garnered mixed reactions from industry observers.
Some said they did not expect to see major changes in the day-to-day operations of fund boards because many of the proposals merely codify practices already followed by the majority of investment companies.
Others expressed concern over specific proposals -- such as one that would require that legal counsel to outside directors be independent, meaning they have not represented the fund's management or close affiliates for the preceding two years.
David A. Sturms, a partner with Vedder, Price, Kaufman & Kammholz, a Chicago-based law firm, said that under the two-year requirement for retaining legal counsel, outside directors would be "severely restricted in whom they can choose and may even have to sever some existing relationships."
Instead, he said, outside directors should be free to choose outside counsel of their choice, with guidance from the SEC on certain factors that could add or detract from that person's independence.
Other observers said they were generally pleased with the proposals, particularly with increased disclosure requirements.
"One of the best ways to instill confidence in the system is to make sure shareholders have the information they need to evaluate the independence of outside directors," said Richard Herring, an outside director for the BT Funds, which are managed by Deutsche Asset Management, a unit of Deutsche Bank AG, Frankfurt.
Mr. Roye of the SEC said basic information, such as the directors' ages and the number of portfolios they oversee, would appear in a fund's annual report.
