June 19, 2006
I write to comment on the proposal to require at least 75% of mutual fund boards to be independent and to require the board chairperson to be independent.
Mutual funds are designed to be entities existing for the sole benefit of their shareholders. As such, there is little, if any justification for allowing ANY board members who AREN'T independent of the fund's advisor/sponsor. Indeed, if there is a board member who is NOT independent of the fund's advisor, that person would seem to have an unameliorable conflict of interest. How could such a person negotiate a contract with the advisor "at arm's length?"
In my opinion, the proposed rule doesn't go far enough. The SEC should require ALL board members to be independent of the advisor/sponsor. Their ONLY loyalty should be to the fund's investors.
I urge you to remember that the Investment Company Act was designed to protect the rights of individual investors in mutual funds -- NOT to protect the interests of the fund advisors/sponsors.
The specific issue you asked for comment on was the cost of having an independent chair and independent board members. Mutual funds needn't pay their board members as lavishly as many now do. In fact, for the amount of effort expended, most mutual fund boards are grossly overpaid.
Thus, making more board members independent needn't increase a fund's expenses. The funds ought to be making their director compensation more reasonable (i.e., lower) regardless of the independence of board members.
Eric E. Haas