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News June 28, 2004 Issue

SEC Adopts Fund Governance and Board Adviser Approval Rules

Whether you think it was rulemaking by “gut instinct” (Commissioner Paul Atkins) or “common sense” (Commissioner Harvey Goldschmid), the independent chairman and 75 percent independent requirements for fund boards are here to stay.

As expected, Commissioners Atkins and Cynthia Glassman passionately dissented, reading lengthy prepared statements during the open meeting. Among other things, they criticized their colleagues for proceeding with the rulemaking despite a lack of empirical data showing that independent chairmen and 75 percent independent directors would lead to better fund performance.

Of particular interest to advisers, Atkins warned that placing heightened responsibility with fund directors would lead to a diminished role for advisers in protecting fund investors. “Our only reference to the advisers’ fiduciary duties is in the footnotes when we summarize the enforcement cases that arguably led to this package,” said Atkins, referring to the draft adopting release. “What message are we sending regarding the adviser’s fiduciary obligations?” The next day, Atkins repeated his biting criticisms at the SIA soft dollar conference.

Chairman William Donaldson, clearly forewarned of his colleague’s views, responded with a prepared statement of his own (see "Related Document," below).

The SEC also adopted rule amendments requiring funds to describe in their shareholder reports how their boards selected the fund’s adviser.