Fund Industry Pushes Back Again on SEC Independent Chair Rule

The SEC’s two-year Sisyphusian battle to impose an independent chair rule on the mutual fund industry drags on, the industry has pushed back hard at the latest iteration of the proposal. The Investment Company Institute strongly urged the SEC to abandon its attempt to require mutual funds to have an independent chair in the wake of an appeals court ruling delaying vacating the rule to give the Commission 90 days to seek additional public comment on its implementation costs. The comment period closed on August 21.

The ICI wasn’t even talking much about implementation costs. Rather, the Institute’s most compelling argument against the independent chair rule is that the culture of the boardroom has evolved to the point that it is not even needed. Through a variety of different means, the SEC's goals in proposing the independent chair rule have already been accomplished, argued the ICI, diminishing the possibility of benefits flowing from the requirement. In this regard, earlier in-place SEC fund governance reforms, which have gained wide acceptance, have obviated the need for the independent chair mandate.

According to the Investment Company Institute, regular executive sessions have increased cohesion among the independent directors, which has helped foster meaningful dialogue between the directors and fund management. Also, as a result of the annual board self-assessment requirement, directors continually revisit the effectiveness of how they operate. Even apart from any specific regulations, increased scrutiny, enforcement actions, and private litigation stemming from the trading scandals have heightened the attention of fund directors and fund management to the importance of maintaining a culture of compliance, regardless of whether the chair is independent.

In addition, the fact that the chief compliance officer must now meet at least annually in an executive session with the independent directors has created an opportunity for the chief compliance officer and the independent directors to speak freely about any sensitive compliance issues of concern to any of them. Similarly, the requirement that independent directors meet quarterly in executive session provides another opportunity for a full and frank discussion regarding the management of the fund.