Uncle Sam wants you to know more about your independent mutual fund directors.

That's one of the four proposals laid out today by Arthur Levitt, chairman of the

Securities and Exchange Commission

, to strengthen the role that independent directors play in governing mutual funds.

But several industry observers say the proposals don't represent a radical change; they simply formalize current industry practice.

Independent directors are not employees of a mutual fund, but instead are supposed to be "uninterested" overseeers who watch out for shareholders' interests. They sit alongside interested directors, who are usually employees of the fund.

Less than a month after

calling mutual fund executives to meet with him in Washington, D.C., Levitt outlined his proposals today at a conference in Palm Desert, Calif.

They include:

  • Giving fund shareholders more information about how independent their directors are.
  • Requiring boards to have a majority of independent directors. Currently, only 40% of a board's directors must be independent.
  • Having independent directors nominate all new independent directors, instead of allowing fund companies do so.
  • Hiring separate legal counsel for management and for a fund's board.

"Whether shareholders realize it or not, how directors fulfill their responsibilities directly affect them every day," Levitt said in prepared remarks. "From negotiating and overseeing fees, to monitoring performance, to policing potential conflicts of interest, fund directors should be on the front lines in defense of the shareholder interest."

Levitt said he has asked the SEC's Division of Investment Management to take his proposals and turn them into "concrete reforms" as soon as possible. That means they'll probably evolve into full-fledged rules that the commission has the authority, by law, to enforce. Levitt said he would like to see something on the table by this summer. An SEC spokesman said Levitt "likes to see things done pretty quickly."

Exactly 28 days after the two-day conference in Washington exploring the role of independent directors, Levitt urged his staff to come up with concrete proposals "within 30 days." Today's proposals appear to be a result of that command.

Meanwhile, the

Investment Company Institute

, the mutual fund industry's trade group, announced today it will form an advisory group to look into developing a set of "best practices" for fund directors. That group will be headed by John J. Brennan, chairman of the

Vanguard Group

, who also serves as chairman of the ICI.

The advisory group isn't necessarily being formed in response to Levitt's proposals, says ICI spokesman Chris Wloszczyna. "It comes at a time when the SEC and the media and a lot of other people have been looking at the directors' issues," he says. "So it's the industry's attitude that it's an issue worth examining."

The group's findings will be forwarded to the SEC for review, according to a release.

Meanwhile, some observers are unimpressed by Levitt's proposals.

"I don't think they're going to make any big difference," says James Storey, a lawyer at

Dechert, Price & Rhoads

in Boston, who has served as legal counsel to several mutual fund boards and wrote a handbook on mutual fund law.

Storey says that most large fund companies already have a majority of independent directors on their boards, that those boards have their own counsel and that they nominate new independent directors.

In fact, independent directors who oversee funds with 12b-1 distribution fees are already legally required to nominate any new independent directors, he says.

John Markese, president of the

American Association of Individual Investors

, a Chicago-based investor education organization, says having independent directors nominate their successors is a positive step. But the definition "independent" still is too all-encompassing, he says. Under current rules, someone who has worked for the fund can leave and later return to be an "independent" director.

"I'd still rather still see completely independent directors, beyond just the technical sense of the word," Markese says.

Levitt addressed that complaint in his prepared remarks.

"I know that there are directors who may technically be considered to be independent, but who have had business or other relationships with management," Levitt said in his prepared remarks. "Shareholders should know that."

How Levitt's proposal will ensure shareholders know such things about their directors remains to be seen. Markese suggests giving shareholders the option of electing some independent directors themselves.

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