Bank mutual fund managers say they have little to fear from the new Securities and Exchange Commission guidelines on independent directors.
The SEC, which issued the stricter guidelines Wednesday, said in a press statement that they were "designed to enhance the ability of mutual fund independent directors to execute their most important role - the protection of investors."
But others said that the guidelines address a problem that does not exist, and that compliance will be expensive for shareholders and will prevent some qualified people from becoming fund directors.
The guidelines, which will become effective May 12, require mutual funds to a majority of independent directors on their boards. The independent directors are responsible only for overseeing mutual fund fees, monitoring financial performance, and preventing conflicts of interest.
To be independent, a director cannot have any affiliation with the fund's underwriter or investment adviser, and cannot own more than 5% of the fund's shares.
The guidelines also require that new independent directors be nominated by current independent directors rather than by the fund company; that the directors' attorneys also be independent of the fund; and that the fund company disclose any information about the directors, such as ownership of fund shares, that may present conflicts of interest.
Cathy Coult, a spokeswoman for U.S. Bancorp's First American Funds unit, said she expects the guidelines will have a minimal impact on banks. Since most banks created their mutual fund boards under the strict auspices of the Glass-Steagall Act of 1933, independent directors already constitute the majority of their boards, she said. Seven of First American's eight board members are independent.
Those institutions that would need to worry about the new guidelines are the smaller banks that created financial holding companies under the Gramm-Leach-Bliley Act, and they need to worry only if they have more than $50 million of assets under management, she said.
R. Gregory Knopf, managing director and head of Unionbancal Corp.'s Highmark Funds, said the guidelines will be particularly important to banks, because more and more banks are creating and enhancing their proprietary fund families.
Though all six members of the San Francisco company's mutual fund board of directors are independent, Mr. Knopf said he does not think directors' independence is a prime consideration for investors.
"I don't think if you have one or two interested directors it is that big a problem," said Mr. Knopf, whose parent company is mostly owned by Bank of Tokyo-Mitsubishi. "I think a director with a personal interest in the company takes a greater interest in what is going on. It's important to have a nice mix between those with an interest and those free of any conflict of interest."
Arthur Brown, a partner in the Washington office of the Kirkpatrick & Lockhart law firm, said SEC Chairman Arthur Levitt made passage of the guidelines a high priority even though there is virtually no history of regulatory action in this area.
Indeed, in Wednesday's SEC press statement Mr. Levitt said that independent directors have helped keep the mutual fund industry "remarkably" free of scandal.
Mr. Brown said the SEC's interest in the issue was sparked by a number of lawsuits brought by fund shareholders, who alleged that the directors' independence was compromised by their close relationships with the adviser. Most of the issues raised by these lawsuits - virtually all of which were ultimately dismissed - were settled by state legislation in Massachusetts and Maryland, Mr. Brown said.
That fact has caused some to question why the SEC bothered to adopt a rule at all. One securities lawyer in Washington said the new guidelines could cost fund shareholders a substantial amount of money as directors are forced to hire new counsel to make decisions.
Don Phillips, managing director at Morningstar, said that the shareholder suits led many fund directors to ask the SEC what their role should be in protecting shareholders, and that the SEC felt there was room for clarification. Perhaps most important, the SEC emphasized that independent directors not only advise the funds but run them, Mr. Phillips said.
The SEC began eyeing regulation in February 1999, when it held a roundtable to discuss the appropriate role and responsibilities of independent investment company directors. A month later Mr. Levitt announced that the agency would consider regulations to enhance the directors' roles and encouraged comments from the industry.
Three months later the Investment Company Institute, a Washington trade organization, issued a series of voluntary "best practices" for the mutual fund industry. These "best practices" went above and beyond what the SEC ordered Wednesday by recommending at least two-thirds of the directors of all investment companies be independent.
Mr. Phillips said that as a result of the institute's recommendations and the SEC's attention to the issue, a majority of the directors at most mutual funds now are independent.
Fund companies with less than $50 million of assets under management will be exempt from the guidelines. As of December 1999 only 299 companies had less than $50 million, the SEC said.
Related Content Online: