Fund-Board Independence Comes With a Price

June 23, 2004, may go down in mutual fund history as Independence Day. That's when the Securities and Exchange Commission approved new regulations requiring mutual fund boards of trustees to become more independent from the fund companies behind the funds they oversee.

Fund investors should be careful about this and other regulatory initiatives: What was designed to help may hurt.

When the new regulations take effect, mutual fund boards will need an independent chairman -- a fund company executive will not be allowed at the helm. Additionally, the boards will have to be 75% independent. The rule was approved in a contentious 3-to-2 vote.

All this regulatory hoopla is ostensibly to help stop fund companies from partaking in the sort of shenanigans that in recent years gave funds a bad name. How these and other proposed rules by the SEC, Congress and various state securities regulators will prevent the bending or breaking of existing rules once again is unclear, other than that these groups subscribe to the broad notion that reducing conflicts of interest is good by default, just like gobs of disclosure.

New regulations could mean that even more fund managers will depart to start low-regulation/high-fee investment products and drag formerly low-fee/high-regulation clients along for the (wild and expensive) ride.

Launching and operating a hedge fund costs about one-tenth as much as starting a mutual fund, largely because state and federal regulators can't shake down proprietors for information and fees (none of which prevented any of the fund company crimes against humanity of recent years -- they just enriched state coffers).

A hedge fund is like a mutual fund in that investor money is pooled and managed. Hedge funds are just private unregistered managed pools of money. Similarities quickly vanish, largely because of a huge regulatory gap.