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Fund Directors Look Outside

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A majority of mutual fund directors are independent members who are increasingly meeting without management and more often, according to data released Thursday by an industry trade organization.

The study by the Investment Company Institute found that in recent years the ratio of independent directors to total board members has “consistently exceeded” requirements of the Securities and Exchange Commission and the ICI’s recommendations.

Congress mandated in 1940 that at least 40% of fund directors have no ties to fund companies, but the SEC in 2001 called for a majority of directors to be independent. New rules set by the SEC in 2004 upped the requirement to 75%, including board chairmen, starting in January 2006. The ICI recommends that two-thirds of board members be independent.

The stricter SEC rules have not been implemented pending the outcome of a lawsuit filed by the U.S. Chamber of Commerce.

The survey showed that the average ratio of independent directors increased to 78% in 2004 from 71% ten years earlier. The average number of independent directors for each fund complex held steady at eight during that span.

The majority of board chairmen are not independent, however. The data showed that 43% of funds had an independent chairman in 2004, compared to 22% in 1996. Another 18% had an “independent lead director,” who served as the primary liaison between independent directors and fund companies. The ICI had recommended that boards name an independent lead director.

The study, conducted for the Independent Directors Council, an ICI affiliate, also found that 73% of boards met without fund company management in 2004, up from 58% in 2002 and 28% in 1998. The increase, the report said, came in response to the newest SEC rules, which require independent directors to meet sans management at least once each quarter, and to a 1999 ICI recommendation.

In addition, the study showed that while the majority of boards hold four regularly scheduled meetings annually, directors “quite often meet more frequently” than that. According to the data, 20% of boards scheduled five or six meetings each year in 2004, up from 5% ten years earlier, while the number holding seven or more meetings doubled to 6%.

Another finding of the study was that the number of fund companies requiring directors to own shares of the funds they oversee increased to 21% in 2004 from 6% in 1996. The number of complexes encouraging directors to be fund shareholders dipped to 32% in 2004 from a high of 37% in 2002, however.

Recently adopted SEC rules require fund directors to disclose their fund share ownership.

“In general, while individual fund boards may differ, as a group they have gravitated toward practices thought to best serve the interests of shareholders,” the ICI said. has more mutual fund news from Standard & Poor’s available here.


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