Independent Directors of Funds Gain More Power

New rules giving independent directors of mutual fund companies more power were adopted Wednesday by federal securities regulators in an effort to better protect the millions of Americans who invest in the funds.

The Securities and Exchange Commission proposed the rules in October 1999. They included a requirement that the boards of most mutual fund companies have a majority of independent directors.

Under current rules, 40% of fund companies’ directors must be independent of the company, though most large fund companies voluntarily have a majority of independent directors.

The new rules are designed to reinforce the independence of directors, strengthen their hand in dealing with management and provide investors with more information to assess the directors’ independence.

Independent directors play an important role in keeping the mutual fund industry remarkably free of scandal, SEC Chairman Arthur Levitt has said.

Levitt, who has earned a reputation for trying to protect the small investor while becoming the longest-serving chairman of the watchdog agency, announced last month that he is leaving in early February.

President-elect George W. Bush has not yet nominated a successor.

The duties of fund directors include overseeing mutual fund fees, monitoring financial performance and preventing conflicts of interest.

Only a few small fund companies would be exempt from the regulations.

The changes by the federal regulators came in the wake of several cases of mutual fund managers being accused of improperly enriching themselves with investors’ money.

Among the other new rules adopted by the SEC:

* New independent directors of mutual fund companies must be nominated by current independent directors rather than fund company managers or investment advisors.

* Attorneys for independent directors also must be independent, not representing fund company management or close affiliates.

* Fund companies must disclose basic information about directors, as well as information that may raise conflict-of-interest concerns. They also must disclose directors’ ownership of shares in the company’s group of funds to help investors assess whether the directors’ interests are aligned with their own.

The new rules are available on the SEC’s Web site at https://www.sec.gov/rules/finrindx.htm.