SEC Approves Rules to Boost Independence of Fund Directors

The Securities and Exchange Commission adopted a set of initiatives that will increase the number of mutual fund firms' independent directors and require improved disclosure about fund directors to shareholders.

The changes, which were expected, will require independent directors to constitute at least a majority of a mutual fund's board of directors instead of the 40% currently required by the Investment Company Act. The rules also require independent directors to select and nominate other independent directors, and that any legal counsel for those directors be independent as well.

As part of the new rules, fund companies must provide better information about directors to their shareholders including more details about their experience, the number of fund shares they own, potential conflicts of interest and information about the board's governing role in the fund.

The rules also specify other changes, which include preventing qualified individuals from being disqualified from serving as independent directors because they own an index fund that holds shares of the fund's adviser or other affiliates.

The SEC was widely expected to pass these rules early this year as part of its overall effort to improve mutual fund transparency and make the industry more friendly to individual investors.

"Mutual fund independent directors are an investor's front-line defense against conflicts of interest and other potential abuses," said Paul Roye, the director of the SEC's Division of Investment Management, in a press release. "Although no regulation can ensure director independence and effectiveness, the initiatives announced by the Commission today represent a significant step in providing fund directors with the tools, the access, and the power to faithfully fulfill their legal duty, and moral mandate as the shareholders' representative."