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| Visions & Revisions |
Mutual Antipathy
Debra Ryono
07/01/2004
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Congress should create a new oversight body to regulate the fund
industry.
The pervasive, systemic nature of the mutual fund scandal has
demonstrated that we need structural changes in the way funds are regulated, and
the SEC has not proposed any such changes. One proposal I have put forward is
the creation of a Mutual Fund Oversight Board that would have inspection and
enforcement authority over fund boards.
The Oversight Board would be charged
with identifying potential problems in the fund industry and ensuring that fund
boards are actively addressing these problems before they spread. For example,
the board would promulgate informal, minimum standards for fund boards regarding
a range of issues, including fee negotiations, fair value pricing, market timing
policies, redemption policies and distribution practices. It would establish
clear standards for fund directors to give them the guidance they need to
effectively protect shareholders’ interests, and enforce those standards when
fund directors ignore their duties. The model for the board, the Public Company
Accounting Oversight Board, is considered one of the most effective creations of
the Sarbanes-Oxley Act.
Congress must create this Mutual Fund Oversight Board
because the SEC does not have the authority to create it.
Many of the industry’s problems stem from a lack of fund board
independence.
The current mutual fund scandal could not have been so widespread without
a major failure by fund directors to take fundamental steps to protect
shareholders. Strengthening the independence of fund boards, along with the
creation of the Oversight Board, would increase effectiveness. It is
self-evident that the current legal requirement that a fund board be at least 40
percent independent is inadequate to ensure that the independent directors, and
not the fund manager, control the fund. It defies logic to believe that a fund
chairman who is also CEO of the fund manager can effectively police the fund
manager on behalf of the fund. It is outrageous that a former director or
executive of the fund manager can be considered legally independent under the
law.
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