7 Ex-SEC Chairmen Endorse Fund Plan

In an unusual show of unity, seven former chairmen of the Securities and Exchange Commission on Tuesday endorsed an agency plan that would require mutual funds to have independent chairmen, as a way to avoid potential conflicts of interest on fund boards.

The proposal, scheduled for an SEC vote next week, is opposed by much of the $7.5-trillion fund industry.

In a letter to the SEC, the former officials said that an independent chairman -- that is, someone who isn’t connected to a fund’s management company -- would provide needed support for other independent directors on fund boards “by setting the board’s agenda, controlling the conduct of meetings, and enhancing meaningful dialogue” with other fund executives.

“We believe an independent board chairman would be better able to create conditions favoring the long-term interests of fund shareholders than would a chairman who is an executive” of the fund company, they wrote.

The letter was written by former Republican SEC Chairman David S. Ruder, and included the signatures of Republicans Richard Breeden, G. Bradford Cook, Roderick Hills and Harvey L. Pitt, as well as Democrats Arthur Levitt and Harold Williams.

Mutual fund management companies profit from the advisory fees paid out of fund assets. Those fees must be approved by fund boards. Industry critics say fund chairmen who are tied to management are inherently biased in favor of management’s interests rather than investors’.

Under current law, fund boards must have a majority of independent directors. The proposal the SEC will consider next week would increase the required share of independent directors to at least 75%, in addition to mandating that the chairman be independent.

Those opposed to requiring independent chairmen for funds contend that a fund should have the right to pick the chairman who best serves its needs.

The SEC proposal is a key part of the agency’s response to revelations of abusive trading and favoritism that have battered the fund industry since fall.

Ruder, a professor of law at Northwestern University, said the letter might be the first time former heads of the SEC have weighed in unanimously on the side of a pending rule.

On the five-member SEC, the proposal is believed to have the support of Chairman William H. Donaldson, a Republican, and Democratic Commissioners Harvey J. Goldschmid and Roel C. Campos. Republican Commissioners Paul S. Atkins and Cynthia A. Glassman are seen as opposing the change.