©2005 Investment Company Institute. All rights reserved. Information may be abridged and therefore incomplete.
Communications from the Institute do not constitute, and should not be considered a substitute for, legal advice.
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May 3, 2005
TO: BOARD OF GOVERNORS No. 18-05
CLOSED-END INVESTMENT COMPANY MEMBERS No. 24-05
INVESTMENT COMPANY DIRECTORS No. 10-05
SEC RULES MEMBERS No. 55-05
SMALL FUNDS MEMBERS No. 38-05
RE: SEC RELEASES INDEPENDENT CHAIR REPORT TO CONGRESS
The Securities and Exchange Commission released a report to Congress regarding the
independent chair condition of the Commission’s 2004 exemptive rule amendments.1 The
report was issued in accordance with the Consolidated Appropriations Act, 2005, which
required the Commission to submit a report to the Senate Appropriations Committee that (i)
provides a justification for the final rules issued by the Commission requiring, as a condition for
reliance on ten exemptive rules adopted by the Commission, that a mutual fund’s board of
directors be chaired by an independent director; and (ii) analyzes whether mutual funds
chaired by independent directors perform better, have lower expenses, or have better
compliance records than mutual funds chaired by interested directors.
The report contains a discussion of mutual fund governance and conflicts of interest,
including the conflicts of interest of fund advisers and service providers, how the Investment
Company Act protects funds from conflicts of interest, and the responsibility of fund directors
to address conflicts of interest. The report also details the exemptive rules and the importance
of director involvement in monitoring closely fund activities under the rules.
The report then discusses recent mutual fund scandals involving market timing, late
trading, selective disclosure of fund portfolio holdings and undisclosed revenue sharing and
directed brokerage, as well as the Commission's enforcement response. Next, the report details
the independent chair condition of the 2004 exemptive rule amendments and provides an
analysis of the relationship between independent chairs and fund performance, expenses and
compliance.
Finally, the report recommends that the Commission and its staff should continue to
monitor how the presence of an independent chair on the board changes the independence and
2
effectiveness of the board, especially in the context of other recently adopted regulatory
changes.
In a separate letter to the Chairman of the Senate Appropriations Committee,
Commissioners Glassman and Atkins expressed their belief that the report fails to respond
constructively to Congress’s inquiry and offers no evidence to support its premises.2
Jane G. Heinrichs
Assistant Counsel