June 23, 2006
I believe the independent directors rule should be implemented. It is the function of the Securities Exchange Commission to regulate the mutual fund industry, so it is their DUTY to impose this rule on mutual funds. With billions of dollars invested by ordinary shareholders, it is prudent to apply this simple check on fund managers.
The argument that this is an undue burden for small funds seems weak to me. If the fund isnt making good enough returns, then it isnt serving its clients very well and it should go down. But all the evidence is that fund management is generating huge commissions for managers. They will not suffer.
We must not be nave. Mutual Fund managers have already demonstrated that they will cheat if given the chance, and we may not always have an Eliot Spitzer around to help us out. To be fair, many mutual funds have already implemented the independent directors rule. Whatever losses they have suffered seem not to have put them out of business, which proves that the financial burden is a lame excuse for failing to implement the rule.
I wont be nave either. Having independent directors does not assure that mutual funds will be run with the shareholders interests primary. But at least its a step that can and should be taken.