Yesterday, the Securities and Exchange Commission turned up the heat on the mutual fund industry by requiring that funds maintain a board of trustees that is at least 75% independent from management. The new rule is expected to take full effect in 18 months.
Frankly, it's about time the Feds took the lead. To date, New York Attorney General Eliot Spitzer has been the main force in busting miscreant mutual fund managers. His work has eliminated the dubious tactic called late trading and reduced mutual fund fees for common investors. Yesterday's ruling mixes in heavily independent boards that will keep an eye on management, ensuring at least some representation for the average Janes and Joes with money in funds.
The news shouldn't come as a shock. It didn't to Janus (NYSE:JNS), which has had only one insider on its board, founder Tom Bailey, for years. Bailey had been the board's chairman, but was replaced in that role by Dennis Mullen, a private investor and a director for Red Robin Gourmet Burgers (NASDAQ:RRGB), in March of this year. (Perhaps that's why fellow Fool Rick Munarriz asks that you forgive Janus.)
But the SEC's cry for freedom couldn't come at a worse time, according to some. Published reports feature interviews with small-fund managers who say they'll be forced to handle costs they can't afford by hiring more staff and holding more meetings. They say those costs will eat into returns and make the mutual fund business undesirable for them and others. You know what? So be it.
As it is, fund tracker Morningstar pegs the number of available mutual funds at more than 14,000, but follows only 1,600 of them. Surely some of those not tracked by Morningstar are worthy. Heck, they might even be candidates for Motley Fool Champion Funds. But surely some are absolute disasters. After all, over the past 10 years, more than 75% of equity mutual funds have underperformed the returns of the benchmark S&P 500 index.
This isn't to say that the SEC has an interest in stifling mutual fund innovation. To the contrary. But, really, haven't we gotten too much of a mediocre thing when it comes to funds today? I'd say so. The spirit of the SEC's ruling is to improve the conduct and performance of the 14,000+ funds already out there, and that's a good thing.
Shannon Zimmerman really does scour 14,000+ funds each month to find the best picks for you. Perhaps that's why we keep him locked in the basement. Give Motley Fool Champion Funds a try risk-free for 30 days.
Fool contributor Tim Beyers wishes mutual fund managers would quit whining and get on with the reforms. If they did, he might actually get interested in funds again. Tim owns no shares in the companies mentioned, and you can view his Fool profile here.
