Securities and Exchange Commission
Chairman William Donaldson had a few words for mutual fund directors Wednesday night: Shape up.
Donaldson addressed the Mutual Fund Directors Forum, a nonprofit membership organization for investment company independent directors. After mentioning the raft of trouble roiling the fund industry -- including late trading, abusive market-timing, selective disclosure of portfolio holdings, undisclosed payments for "shelf space" to gain placement on brokers' preferred lists and, "worst of all, fund insiders facilitating or participating in this abusive activity" -- he reminded the directors of their role in this mess.
"While I will touch on our enforcement and regulatory responses to these problems," Donaldson said, "I want to emphasize the critical role that you ... play in the solution to the ills that currently befall the mutual fund industry."
Lest the directors feel too complacent in their role as investor watchdogs, Donaldson warned that the SEC's investigation into the various fund debacles will also target the directors themselves. "We are carefully looking at the role that independent directors played, if any, in the problems at these firms. We are asking whether the directors were aware of these abuses, and whether there were red flags that were ignored," Donaldson said. "When we find those who harm investors, we will pursue them aggressively -- even when they turn out to be fund directors."
Directors must be "extremely vigilant" in a few key areas, Donaldson said -- pricing of portfolio securities, fund fees and performance. In addition to the rulemaking the SEC is generally considering in these areas, there will likely be some rules targeted directly at the directors themselves, Donaldson said. For instance, the SEC will consider a proposal that would require directors to explain in annual reports the basis upon which they determined that the fund's fee levels were reasonable and appropriate. (For more on independent fund directors,