MUTUAL FUND GOVERNANCE ISSUES



In July 2004, the SEC issued final regulations to improve the governance of mutual funds. This regulatory action--and many other proposed and final rules--followed the initiation of numerous Federal and state investigations into improper market timing and late trading activities involving more than 30 mutual fund complexes.

 

One of the new governance rules required that independent directors comprise no less than 75 percent of a mutual fund board. Another new governance rule required that each mutual fund board be chaired by an independent director.

 

These two SEC final rules were challenged by the Chamber of Commerce in the U.S. Court of Appeals for the D.C. Circuit. On June 21, 2005, the Court remanded to the SEC for its consideration two deficiencies it identified in the rulemaking. The SEC responded a few days later by re-issuing the same provisions as final rules without modification. On April 7, 2006, the Court issued an opinion holding that the SEC violated the Administrative Procedures Act, by failing to seek comment on the data used to estimate the costs of these two governance rules. 

 

The SEC re-opened its public comment process for this rulemaking in June 2006, and again in December 2006. Since that time, the SEC has not issued a final rule regarding either of these two issues, although many mutual fund boards have moved voluntarily to require that independent directors comprise at least 75 percent of a fund board.  A substantial majority of fund boards also have moved voluntarily to elect a chairman who is an independent director. 

  • SEC Reopens Comment Period on its Investment Company Governance Rule
    On December 15, 2006, the SEC reopened the comment period on its proposed investment company governance rule. The purpose of the additional comment period is to permit public comment on two papers prepared by the SEC Office of Economic Analysis on this topic.
  • SEC Request for Additional Public Comments on its Investment Company Governance Rule
    On June 13, 2006, the SEC issued a request for additional public comment on whether its proposed investment company governance rule will promote efficiency, competition, and capital formation.
  • D.C. Circuit Decision Continuing a Stay on the SEC Investment Company Governance Rule
    On April 7, 2006, the U.S. Court of Appeals for the D.C. Circuit ruled that the SEC failed to comply with the federal Administrative Procedures Act by relying on materials not in the rule-making record without affording an opportunity for public comment. The effect of this decision is to continue a stay of the 75 percent independent director requirement and the independent chairman requirement.
  • SEC Response to the D.C. Circuit Regarding Its Investment Company Governance Rule
    On June 30, 2005, the SEC issued a response to the decision by the U.S. Court of Appeals for the D.C. Circuit regarding its investment company governance rule. The SEC response discusses the issues raised by the Court and concludes that the benefits of the 75 percent independent director requirement and the independent chairman requirement far outweigh their costs, and that the disclosure alternative does not afford adequate protection to fund investors. Accordingly, the SEC determined not to change the provisions of its final rule. The SEC Commissioners were split on this decision and the SEC response includes the concurring and dissenting views of several Commissioners.
  • D.C. Circuit Decision Invalidating SEC Final Rule on Investment Company Governance
    On June 21, 2005, the U.S. Court of Appeals for the D.C. Circuit ruled that the SEC violated the federal Administrative Procedures Act by failing to adequately consider the costs that mutual funds would incur to comply with the rule and by failing to adequately consider a proposed alternative to the requirement that the chairman of a fund board be an independent director.
  • SEC Final Rule: Investment Company Governance
    On July 27, 2004, the SEC issued a final rule to require mutual funds to adopt certain governance practices. The final rule is designed to enhance the independence and effectiveness of fund boards and to improve their ability to protect the interests of the funds and fund shareholders they serve. The most significant provisions in the final rule are: (a) a requirement that a fund board comprise at least 75 percent independent directors; and (b) a requirement that the chairman of a fund board be an independent director. This SEC rule was adopted on a 3-2 vote and the final rule includes the dissenting opinions of Commissioners Cynthia A. Glassman and Paul S. Atkins.
  • SEC Proposed Rule: Investment Company Governance
    On January 15, 2004, the SEC issued a proposed rule to require mutual funds to adopt certain governance practices. The proposed rule, which would apply to funds relying on certain exemptive rules, is designed to enhance the independence and effectiveness of fund boards and to improve their ability to protect the interests of the funds and fund shareholders they serve. The most significant proposals in this rule-making are: (a) a requirement that a fund board comprise at least 75 percent independent directors; and (b) a requirement that the chairman of a fund board be an independent director.

In July 2004, the SEC issued final regulations to improve the governance of mutual funds. This regulatory action--and many other proposed and final rules--followed the initiation of numerous Federal and state investigations into improper market timing and late trading activities involving more than 30 mutual fund complexes.

 

One of the new governance rules required that independent directors comprise no less than 75 percent of a mutual fund board. Another new governance rule required that each mutual fund board be chaired by an independent director.

 

These two SEC final rules were challenged by the Chamber of Commerce in the U.S. Court of Appeals for the D.C. Circuit. On June 21, 2005, the Court remanded to the SEC for its consideration two deficiencies it identified in the rulemaking. The SEC responded a few days later by re-issuing the same provisions as final rules without modification. On April 7, 2006, the Court issued an opinion holding that the SEC violated the Administrative Procedures Act, by failing to seek comment on the data used to estimate the costs of these two governance rules. 

 

The SEC re-opened its public comment process for this rulemaking in June 2006, and again in December 2006. Since that time, the SEC has not issued a final rule regarding either of these two issues, although many mutual fund boards have moved voluntarily to require that independent directors comprise at least 75 percent of a fund board.  A substantial majority of fund boards also have moved voluntarily to elect a chairman who is an independent director. 

Document Title: 
SEC Reopens Comment Period on its Investment Company Governance Rule
Document Desc: 
On December 15, 2006, the SEC reopened the comment period on its proposed investment company governance rule. The purpose of the additional comment period is to permit public comment on two papers prepared by the SEC Office of Economic Analysis on this topic.
Document Title: 
SEC Request for Additional Public Comments on its Investment Company Governance Rule
Document Desc: 
On June 13, 2006, the SEC issued a request for additional public comment on whether its proposed investment company governance rule will promote efficiency, competition, and capital formation.
Document Title: 
D.C. Circuit Decision Continuing a Stay on the SEC Investment Company Governance Rule
Document Desc: 
On April 7, 2006, the U.S. Court of Appeals for the D.C. Circuit ruled that the SEC failed to comply with the federal Administrative Procedures Act by relying on materials not in the rule-making record without affording an opportunity for public comment. The effect of this decision is to continue a stay of the 75 percent independent director requirement and the independent chairman requirement.
Document Title: 
SEC Response to the D.C. Circuit Regarding Its Investment Company Governance Rule
Document Desc: 
On June 30, 2005, the SEC issued a response to the decision by the U.S. Court of Appeals for the D.C. Circuit regarding its investment company governance rule. The SEC response discusses the issues raised by the Court and concludes that the benefits of the 75 percent independent director requirement and the independent chairman requirement far outweigh their costs, and that the disclosure alternative does not afford adequate protection to fund investors. Accordingly, the SEC determined not to change the provisions of its final rule. The SEC Commissioners were split on this decision and the SEC response includes the concurring and dissenting views of several Commissioners.
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Document Title: 
D.C. Circuit Decision Invalidating SEC Final Rule on Investment Company Governance
Document Desc: 
On June 21, 2005, the U.S. Court of Appeals for the D.C. Circuit ruled that the SEC violated the federal Administrative Procedures Act by failing to adequately consider the costs that mutual funds would incur to comply with the rule and by failing to adequately consider a proposed alternative to the requirement that the chairman of a fund board be an independent director.
Document Title: 
SEC Final Rule: Investment Company Governance
Document Desc: 
On July 27, 2004, the SEC issued a final rule to require mutual funds to adopt certain governance practices. The final rule is designed to enhance the independence and effectiveness of fund boards and to improve their ability to protect the interests of the funds and fund shareholders they serve. The most significant provisions in the final rule are: (a) a requirement that a fund board comprise at least 75 percent independent directors; and (b) a requirement that the chairman of a fund board be an independent director. This SEC rule was adopted on a 3-2 vote and the final rule includes the dissenting opinions of Commissioners Cynthia A. Glassman and Paul S. Atkins.
Document Title: 
SEC Proposed Rule: Investment Company Governance
Document Desc: 
On January 15, 2004, the SEC issued a proposed rule to require mutual funds to adopt certain governance practices. The proposed rule, which would apply to funds relying on certain exemptive rules, is designed to enhance the independence and effectiveness of fund boards and to improve their ability to protect the interests of the funds and fund shareholders they serve. The most significant proposals in this rule-making are: (a) a requirement that a fund board comprise at least 75 percent independent directors; and (b) a requirement that the chairman of a fund board be an independent director.