Friday, March 16, 2007

SEC Remains Divided on Independent Chair Rule

By James Hamilton, J.D., LL.M.

SEC Commissioner Roel Campos, speaking at the inaugural Directors Institute forum in Coral Gables, Florida, said he intends to push for finality on the proposed independent chair and 75% independent directors requirement for mutual funds. The SEC should be prepared to act on the rulemaking even if it results in a split vote, in his view. The comment period recently ended on two studies published by the SEC's Office of Economic Analysis that address the costs of the proposal. Commissioner Campos believes that various economic studies support the 75% independent board and chair requirement. He is troubled by attacks on the basic principle of the rules, which seem to be part of a broader strategy to keep the SEC from adopting any regulation.
It is likely that, if the independent chair rule is adopted, it will be by a split vote. In recent remarks, Commissioner Paul Atkins seems unconvinced of the efficacy of the governance rule. Citing the economic studies, he believes that the justification for what he called an industry-wide experiment seems even more tenuous. The studies instead lend support for the point that there is not a universally optimal governance structure, noted Commissioner Atkins, since independent chairs are better for some funds and interested chairs are better for other funds. Further, in his view, the optimal structure for a particular fund may differ over time.

Commissioner Campos emphasized that nearly every jurisdiction in the world has copied the SEC's and the exchanges' various independence rules for directors because they make sense and investors demand it. While acknowledging that independence does not guarantee that a director will act appropriately, he said it does removes an obvious financial interest or conflict of interest that may influence decisions in favor of the fund adviser over investors. He further emphasized that the purpose of the independent fund chair rule is not to improve performance but to eliminate a glaring conflict of interest.

In a recent letter to the SEC, the Mutual Fund Directors Forum said that it continues to believe that funds should be encouraged, at least as a best practice, to have an independent chair and a board composed of three-fourths independent directors. The Forum believes that a board with an independent chair and an independent super-majority will better represent shareholder interests.