Researchers Cast Doubt on Usefulness of SEC Mutual Fund Rules

Newswise — Researchers at the University of Missouri-Columbia College of Business have found that regulations passed by the Securities and Exchange Commission in hopes of improving mutual fund governance in response to recent scandals may not be as effective as originally anticipated by regulators.

The SEC regulations passed in June required mutual fund boards of directors to consist of at least three-fourths outside directors and that chairmen of the boards must be outside directors. Outside, or independent, directors are individuals who are not employees of the mutual fund and do not have a professional relationship with any recent legal counsel of the fund. However, MU finance professors Steve Ferris and Sterling Yan found that mutual funds with higher percentages of outside directors or independent chairs don't charge lower fees and aren't less likely to be involved in scandals.

"There is no evidence to show that funds with independent chairs charge lower fees or have a greater level of compliance with existing regulations," Ferris said. "These were among the primary arguments in favor of this requirement, so it is not clear what benefits this requirement provides."

Ferris and Yan note that the mutual fund industry’s opposition to independent chairs emphasizes that such chairs may be less familiar with the company, can hurt the fund's earnings performance, need a larger staff, and require more education about the fund. Another argument against requiring outside chairs is that it limits the position to a specific type of individual rather than allowing for selection of the best person.

The study suggests the SEC should focus on board size, outside director compensation and the number of funds each director oversees since these aspects were found to be significantly related to fund fees and the likelihood of fund scandal. The researchers studied a sample of 448 mutual fund families for 2002.

The SEC passed these rules following the mutual fund scandal that broke in 2003 as a result of the investigative efforts of Eliot Spitzer, New York state attorney general. The regulations were an attempt to improve the quality in governance of mutual funds and to make the funds more responsive to shareholders.