The decision by the US Securities and Exchange Commission (SEC) that mutual fund companies must have chairmen independent of the fund managers is likely tro lead to a change at the top at four out of five companies. The SEC also ordered that 75 per cent of fund directors be similarly independent, and that fund directors be free to hire staff if they wish.
The $7.4 trillion US mutual fund industry had lobbied fiercely to block the independent chairman rule, arguing that it was unnecessary and impractical. But SEC Chairman William Donaldson voted for it, siding with SEC Commissioners Harvey Goldschmid and Roel Campos. Donaldson is a Republican; the other two are Democrats. Two more Republicans on the five-member commission — Paul Atkins and Cynthia Glassman – voted against the rule.
However, a poll has found that financial advisers who sell mutual funds want independent chairmen. Boston-based mutual fund company MFS Investment Management, which commissioned an independent market research firm to poll 252 IFAs who sell mutual funds to retail investors, says it found 62 per cent think it important that the chairman of a mutual fund company’s board does not work for the management company. 79 percent of those surveyed do not tell their clients whether a fund board chairman is independent, MFS added.
While many mutual fund boards already employ outsiders to monitor management fees and executive compensation, chairmen are often insiders. At Fidelity Investments, the world’s biggest mutual fund company, the company’s chief executive, Edward Johnson III, is also the chairman of the Fidelity funds’ trustees.
Putnam Investments has an independent board chairman, but was the first to be charged with fraud in a trading scandal, while Fidelity has not been caught up in the scandal.
The MFS poll also found that 79 percent of those surveyed support a requirement that fund shareholders receive an estimate of their expenses for the funds every quarter.
Respondents were evenly divided on measures against market timing. Many of those polled thought a mandatory 2% redemption fee imposed on investors who get in and out of funds fast, might penalize innocent investors.