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SEC Outlines Plan for Tighter Control of Mutual Fu

By Staff Writer

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The chairman of the Securities and Exchange Commission told Congress on Tuesday that he supported a plan for an overhaul of the way mutual funds govern themselves, forcing their chairmen and three-quarters of their directors to be independent.

Responding to a crisis both in the mutual fund industry and at the commission, which until recently never looked for trading abuses, the SEC chairman, William H. Donaldson, outlined proposals beyond those he announced on Friday.

The proposals would require more independent directors, 75% of the board, up from the current 50%. They would require directors of funds to perform annual evaluations of their effectiveness and would permit them to hire their own staff so they would not rely too heavily on the fund’s investment advisers. They would also require funds to disclose more details about their fees.

Donaldson’s plan did little to discourage some lawmakers from pushing legislation that would go beyond the steps being considered by the commission.

Representative Richard H. Baker, a Louisiana Republican who heads a subcommittee of the Financial Services Committee, said he expected that the House would soon take up a measure he has sponsored that would tighten regulation.

“We all — regulators, legislators, investment advisers, mutual fund managers, broker-dealers, the financial press and investors — have spent much time lately wondering how the current abuses could have happened,” Donaldson said in testimony before the Senate Committee on Banking, Housing and Urban Affairs. “A significant reason is because the industry lost sight of certain fundamental principles – including its responsibilities to the millions of people who entrusted their confidence, the fruits of their labor, their hopes and dreams for the future to this industry for safekeeping.”

He also acknowledged that the commission had failed to find problems early enough. None of the current cases against a dozen mutual fund firms came about as a result of inspections by the SEC.

Officials say that the inspectors were never assigned to look for abusive trading practices like those that have been revealed, although a recent industry survey by the commission found that such practices might be pervasive.

“For too long, the commission has found itself in a position of reacting to market problems, rather than anticipating them,” Donaldson said. “There are countless reasons for this – not the least of which include historically lagging resources and structural and organizational roadblocks. The time for excuses has long passed.”

He said that in two weeks, the commission would vote on proposals to end after-hours trading in mutual funds and to require greater disclosure of fund policies on quick market-timed trades.

While Representative Baker pushes his bill in the House, the Senate is not expected to take up a measure before next year. Some lawmakers have filed bills, but Senator Richard Shelby, the Alabama Republican who heads the Senate banking committee, has said he is not convinced of the need for new laws.