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U.S. Securities and Exchange Commission

SEC Adopts Rules Designed To Enhance Effectiveness of Mutual Fund Directors



Washington, D.C., January 3, 2001 – The Securities and Exchange Commission announced today that it adopted a comprehensive set of initiatives designed to enhance the ability of mutual fund independent directors to execute their most important role – the protection of investors. The text of the initiatives is available on the Commission's website at http://www.sec.gov/rules/finrindx.htm.

Today's action marks the culmination of the Commission's reevaluation of the role of mutual fund independent directors that began in May 1998 when Chairman Levitt announced that the Commission would host a roundtable on fund governance to work toward a consensus on whether changes were needed. At the roundtable, held in February 1999, the Commission brought together investor advocates, independent fund directors, fund managers, academics, and legal counsel. After evaluating the suggestions offered by roundtable participants, the Commission proposed a set of initiatives in October 1999 that formed the basis for the reforms announced today.

The independent directors of mutual funds play an important role in protecting the interests of mutual fund shareholders. From negotiating investment advisory contracts and overseeing fund fees, to policing potential conflicts of interest between the fund and affiliated parties, to monitoring fund performance, fund directors are charged with safeguarding fund investors' interests.

The reforms announced by the Commission today reaffirm the important role that independent directors play in protecting fund investors. They are intended to strengthen independent directors' hand in dealing with fund management, reinforce their independence, and provide investors with greater information to assess directors' independence.

Paul Roye, Director of the Commission's Division of Investment Management, said, "Mutual fund independent directors are an investor's front-line defense against conflicts of interest and other potential abuses. Although no regulation can ensure director independence and effectiveness, the initiatives announced by the Commission today represent a significant step in providing fund directors with the tools, the access, and the power to faithfully fulfill their legal duty and moral mandate as the shareholders' representative."

The initiatives announced by the Commission include the following.

Fund Governance Changes

Funds relying on any of ten commonly used exemptive rules (including the rule that permits funds to charge distribution fees (or "12b-1 fees")) will be required to have:

  • Independent directors constitute at least a majority of the fund's board of directors, rather than the 40 percent currently required by the Investment Company Act.

  • Independent directors select and nominate other independent directors.

  • Any legal counsel for the fund's independent directors be an independent legal counsel.

Fund Disclosure Changes

Funds will be required to provide better information about directors to their shareholders, including:

  • Basic information about the identity and experience of directors.

  • Fund shares owned by directors.

  • Information about directors that may raise conflict of interest concerns.

  • Information about the board's role in governing the fund.

Other Changes

The initiatives also will:

  • Prevent qualified individuals from being unnecessarily disqualified from serving as independent directors because they invest in index funds that hold shares of the fund's adviser or other affiliates.

  • Protect the independence of independent directors by requiring that joint "errors and omissions" insurance policies not exclude lawsuits against them brought by investment advisers.

  • Encourage the development of independent audit committees by exempting funds that have these committees from seeking shareholder approval of the fund's auditor.

  • Require funds to keep any records they rely on to assess the independence of independent directors and independent directors' counsel.

For further information, contact Robert E. Plaze at (202) 942-0716 or Susan Nash at (202) 942-0630.

Additional Materials Available on This Topic

Final Rule: Role of Independent Directors of Investment Companies