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SEC Plan Would Force Fund Boards To Change

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A deeply divided Securities and Exchange Commission proposed rules on Wednesday that would force most of the nation’s mutual funds to replace their board chairmen with outsiders independent of the firms that manage the funds.

The proposal, which is expected to win final approval in the next few months, will affect not just mutual fund companies that have figured in recent investigations but giant firms like Fidelity Investments, the Vanguard Group and T. Rowe Price Associates, which have been left unscathed by the industry’s scandals. And several mutual fund companies involved in the investigations have independent chairmen and boards for their funds.

Still, some industry experts and government officials said that the proposal, if adopted, could begin to alter the way mutual funds govern themselves. Analysts estimate that the boards of about 80% of the nation’s mutual funds have chairmen who are senior executives of the funds’ management companies and would have to be replaced under the new rule.

Critics of the plan, including two Republican members of the commission, argue that by removing insiders from leadership roles at fund boards, the SEC could seriously undermine those boards’ effectiveness on behalf of investors.

But the supporters of the proposal — including the SEC’s chairman, William H. Donaldson, and the commission’s two Democratic members — reject that view, saying fund managers would still be consulted and could have a voice on the board, albeit a less dominant one.

As expected, the commission on Wednesday also proposed rules that would require funds to provide investors with greater disclosure of their relationships and potential conflicts of interest with brokers who recommend their funds. On Tuesday, the commission disclosed that a nine-month investigation had found widespread evidence that brokers received undisclosed payments for steering investors toward specific funds.

The proposals were part of a series of rules that the commission intends to adopt in the coming months in response to the scandals in the mutual fund industry.

Most of the proposals have provoked little debate, but the one about increasing the independence of the board to 75% of the directors, from the current 50%, and forcing the funds to appoint independent chairmen prompted a sharp discussion over governance and the costs and benefits of such an approach. The industry’s heavily influential trade organization, the Investment Company Institute, has lobbied against the proposal to require independent chairmen and prevailed upon a House committee last year to strip the provision from a bill on mutual fund regulation. In November the bill was approved by the House by a vote of 418 to 2.

While all five commissioners at the SEC supported issuing the proposals for comment, two of the Republican commissioners expressed serious misgivings about the plan.