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New Rules Governing Fund Directors Adopted by SEC

Washington, DC, July 28, 2004 - The SEC recently adopted amendments to the Investment Company Act intended to enhance the independence and effectiveness of fund boards.

Background

In January 2004, the SEC proposed amendments to improve the governance standards of investment companies that provided for greater independence of fund boards, particularly boards of funds that rely upon certain exemptive rules allowing them to engage in transactions that would otherwise be prohibited under the Investment Company Act and that present conflicts of interest between the fund and its management company.

Investment companies must comply with the final rules by January 16, 2006. Among other things, the final rules require that:

  • the independent directors of a board that relies on any of the exemptive rules constitute at least 75 percent of the board;
  • the chairman of each fund board be an independent director, who must preside over meetings of the board of directors and have substantially the same responsibilities as would a typical chairman of a board;
  • fund directors perform an evaluation of the effectiveness of the board and its committees at least once annually;
  • independent directors meet at least once quarterly in a separate session, without directors who are interested persons of the fund present;
  • funds relying on the exemptive rules expressly authorize independent directors to hire employees and to retain advisers and experts necessary to carry out their duties; and
  • funds retain copies of written materials that directors consider when approving the fund’s advisory contract.

ICI Position

In a statement following the adoption of the rules, ICI President Paul Schott Stevens said, "The Institute pledges to help mutual funds implement the SEC's new governance reforms, including the independent chair requirement, fully and effectively. In this as in other areas, we are committed to ensuring that regulatory requirements and business practices serve the interests of current and future mutual fund investors."

The Institute has long supported measures to strengthen the ability of fund boards to fulfill their oversight responsibilities and protect fund shareholders. In 1999, the Institute convened an Advisory Group on Best Practices for Fund Directors, which recommended a series of best practices for fund governance that resembles many of the measures now required by the SEC. In a March 2004 comment letter, the Institute expressed support for many of the SEC’s proposed rules and noted that most of the proposals - in conjunction with rules that have already been adopted by the Commission - should help fund directors fulfill their important responsibilities.

Related Links

In addition to the links below, a section of this website is devoted to fund governance issues.