SEC adopts new rules for mutual fund chairman independence

The Securities and Exchange Commission on June 23, 2004 adopted new rules to help ensure that mutual fund boards will be independent of the investment advisory company often connected with the fund.

Although most investors associate their mutual fund with an investment advisory firm, the mutual fund and the advisory firm are two separate entities.

For example, the Fidelity Magellan fund is an independent company (an investment company) which hires Fidelity Investments to provide investment advice to the investment company.

It has been reported that approximately 80 percent of mutual funds currently have a chairman which is directly affiliated with the sponsoring investment advisory firm.

The SEC, by requiring "independent" chairmen, apparently is hoping to weaken the link between investment companies (funds) and their sponsoring advisory firm.

For example, a non-independent fund chairman may not aggressively ask his "full-time" employer (the investment advisory firm) to lower advisory fees to the mutual fund.

Full information about the SEC ruling are at

Excerpts from the SEC press release follow :

  • Independent Composition of the Board. Independent directors will be required to constitute at least 75 percent of the fund's board. An exception to this 75 percent requirement will allow fund boards with three directors to have all but one director be independent. This requirement is designed to strengthen the presence of independent directors and improve their ability to negotiate lower advisory fees and other important matters on behalf of the fund.
  • Independent Chairman. The board will be required to appoint a chairman who is an independent director. The board's chairman typically controls the board's agenda and can have a strong influence on the board's deliberations.
  • Annual Self-Assessment. The board will be required to assess its own effectiveness at least once a year. Its assessment will have to include consideration of the board's committee structure and the number of funds on whose boards the directors serve.
  • Separate Meetings of Independent Directors. The independent directors will be required to meet in separate sessions at least once a quarter. This requirement could provide independent directors the opportunity for candid discussions about management's performance, and could help improve collegiality.
  • Independent Director Staff. The fund will be required to authorize the independent directors to hire their own staff. This requirement is designed to help independent directors deal with matters on which they need outside assistance.