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Letter from Commissioners Glassman and Atkins re: Staff Report on the Exemptive Rule Amendments of 2004: The Independent Chair Condition

by

Commissioner Cynthia A. Glassman
Commissioner Paul S. Atkins

U.S. Securities and Exchange Commission

April 29, 2005

The Honorable Thad Cochran
Chairman
Committee on Appropriations
United States Senate
S-128 Capitol Building
Washington, DC 20510

Dear Chairman Cochran:

In voting on whether to send the attached Staff Report on the Exemptive Rule Amendments of 2004: The Independent Chair Condition as required by Consolidated Appropriations Act, 2005, we dissented. We do not believe that the staff report adequately responds to the questions directly posed in the Act. Unfortunately, we were not given at any point in the process an opportunity to provide constructive input on what we would consider a responsive report.

The Act required the SEC to (a) provide a justification for our rule that requires that the chair of the board of directors of a mutual fund be an independent director and (b) analyze whether mutual funds chaired by independent directors perform better, have lower expenses, or have better compliance records than mutual funds chaired by inside directors. Instead of addressing these requirements, the report mainly rehashes the SEC’s arguments made when it proposed and adopted the new rule. The bulk of the report is merely a lengthy history of the SEC’s exemptive rules and a description of the recent market timing and late trading enforcement cases.

As to the Act’s first requirement, the report does not provide a valid justification for the independent chair rule. The report claims that the rule might improve management of funds’ conflicts of interest and that the goal of managing conflicts is to “deter overreaching by fund managers and protect the interests of fund investors.” Yet, the report does not demonstrate that the rule will accomplish any of this at all. It does not attempt to tie the exemptive rules to the enforcement actions or explain how having an independent chair could have averted the problems in those funds at fault that lacked an independent chair.

As to the Act’s second requirement, the report found that “the empirical data regarding the relationship between an independent chairman and fund performance and fees are inconclusive.” In addition, the report relied solely on conjecture to state that, in conjunction with other rules, the independent chairman requirement might positively affect compliance. Significantly, the report failed to mention that the relative proportion of late trading and market timing cases by funds with independent chairs was roughly equivalent to their relative proportion of all mutual funds.

In our view, managing conflicts of interest is a means to an end, not an end in itself. The end under applicable statutes is clearly investor protection. To us, that translates into three tangible goals – protecting investors from fraud, maintaining good performance, and keeping costs down. Indeed, we note that the Act’s second requirement implicitly recognizes this by focusing on these three criteria for judging the merits of the rule.

In short, the report fails to respond constructively to your inquiry and offers no evidence to support its premises. We fail to see how the report justifies a rule that requires 80% of mutual funds to restructure their boards.

Sincerely,

Cynthia A. Glassman
Commissioner
Paul S. Atkins
Commissioner

Copies to:

The Honorable Robert C. Byrd
Ranking Member
Committee on Appropriations
United States Senate
S-112 Capitol Building
Washington, DC 20510

The Honorable Richard C. Shelby
Chairman
Subcommittee on Commerce, Justice, and Science
Committee on Appropriations
United States Senate
S-146A Capitol Building
Washington, DC 20510

The Honorable Barbara A. Mikulski
Ranking Member
Subcommittee on Commerce, Justice, and Science
Committee on Appropriations
United States Senate
144 Dirksen Senate Office Building
Washington, DC 20510

 

http://www.sec.gov/news/speech/spch050205cagpsa.htm


Modified: 05/02/2005