The Securities and Exchange Commission is proposing several changes for the governance of mutual funds.
The changes, which could be adopted as early as the summer, include a requirement that the majority of mutual funds' board members be independent directors.
The proposals were unveiled here by Arthur Levitt Jr., the chairman of the SEC, to about 900 fund industry members attending the 34th annual Investment Company Institute's Mutual Fund and Investment Conference.
Like corporations, mutual funds have a board of directors to oversee issues such as portfolio management, fund performance, and fees. Unlike other companies, at least 40% of fund directors must be drawn from outside the investment company to act as a watchdog for investors' interests.
With 66 million Americans owning more than $5 trillion in mutual funds, there is a greater need for objective oversight, Mr. Levitt said.
"All fund boards should have a majority of independent directors, rather than 40% as the law currently requires," he said.
Mr. Levitt said many fund companies already "have boards that are at least 75% independent directors."
Mr. Levitt also outlined a proposal that calls for independent directors to nominate other outside directors.
"Wouldn't self-nominating directors be effective, not just in distribution issues, but in any conflict of interest with management?" he said.
A third proposal calls for access to outside counsel and auditors to ensure that directors are getting accurate and objective information.
Finally, Mr. Levitt said fund shareholders should have more specific information on which to judge the directors' independence.
Paul F. Roye, director of the SEC's division of investment management, said that the additional information would probably take the form of "beefing up" the data on the required statement of additional information, rather than additions to mutual fund prospectuses.
Mr. Roye spoke during a press conference held after Mr. Levitt's remarks. During that conference, Matthew P. Fink, the president of the Investment Company Institute, the mutual fund industry's Washington-based trade group, applauded the SEC's proposals.
The provision of independent directors has so far "worked sensationally," Mr. Fink said.
While most fund company boards already have a majority of independent directors, the proposals will move the holdouts over, he said.
Mr. Fink had earlier unveiled a six-member advisory group that will examine the best practices for fund directors. The group will work within the same time frame as the SEC and will include John Brennan, chairman of the Investment Company Institute and chairman and CEO of Vanguard Group.
