Oh, the irony. Next Wednesday, roughly a week before our annual July 4 Independence Day celebration, the Securities and Exchange Commission will hold another vote on fund independence.
At issue is the SEC's requirement that mutual funds select chairs and 75% of their directors from outside the company. That rule was enacted almost exactly a year ago on a 3-2 partisan vote, with outgoing SEC Chairman William Donaldson casting the tiebreaking ballot.
The rule has apparently enraged some entrenched interests, including fund managers and the U.S. Chamber of Commerce. Opponents say that the cost of maintaining independence could prove punitive to funds. Following a lawsuit filed by foes of the rule, a recent U.S. Court of Appeals ruling affirms the SEC's authority to make the rule but requires it to study the cost of the measure.
That could take time, but next week's new vote makes it clear that Donaldson doesn't want to wait. As the vote approaches, staffers are reportedly compiling data to satisfy the court mandate. But make no mistake: This move is nothing more than an attempt to preserve a rule that press reports suggest would be tossed aside were appointed SEC Chairman Christopher Cox to take the helm as expected.
Opponents are skewering Donaldson for the timing, suggesting he's messing with the courts. Yeah, maybe. But consider the source of the attacks. You'll pardon me if I don't buy the we-don't-need-more-regulation argument from an industry with a questionable recent record of putting shareholders' interests first. Donaldson wants someone else on watch, and he's using his authority to ensure it happens. Good for him.
Others suggest that having potential chairs and board members disclose potential conflicts of interests ought to be enough. The legitimacy (or lack thereof) of that idea aside, funds honestly do have a reasonable complaint: They want the option to pick leaders from their own ranks. Makes sense to me. But the all-encompassing nature of their argument against independence obscures that, and it lessens chances for the reasonable debate their concern deserves.
If discussion's not an option, I'm siding with Donaldson. It's just too hard for me to sympathize with an industry that has $8 trillion in assets yet protests spending $18 million to give investors a little extra oversight. I mean, really, isn't that worth it? I guess that depends on whom you ask.
Fully independent Foolishness:
- Want huge returns from your funds? You'll need more than luck.
- Find funds for the cheapskate in you.
- Benefit from the fund price wars.