SEC Mutual Fund Board Regulations

In 2004 SEC has passed several new regulations addressing directly the activities of mutual funds. These new regulations received a 3-2 vote and have a straight impact on the structure of the mutual funds' company boards. The new requirements are as follows:

1. An independent mutual fund chairman of the board.

   It has been estimated that approximately 80% of the mutual fund companies' chairmen are appointed insiders. Therefore, this new regulation will have a great impact on the mutual fund functions in that companies have to find replacements.
2. 75% independents in the board of directors.

   The number of independents in the board of directors was increased from a majority (50% +1) to 75%.

These two new regulations represent one of the most drastic changes in the composition of the mutual funds' board of directors. These rules will require the search and hiring of new members to meet the regulations. As a result a shortage of potential candidates may be experienced.

Unfortunately, SEC has made some lapses. They have not included a provision by which the investors will be guaranteed that the independents represent a better choice. Since some mutual funds may be tempted to hire unprofessional friends as independents in order to transfer more control to the CEO. But this may have negative consequences. So, we truly hope that mutual fund companies hire investor advocates for their boards so that they ensure the professional and knowledgeable management of the investors' assets.

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