Now available on the SECâ€™s website is a transcript of a April 27, 2006 speech by SEC Commissioner Paul Atkins given to the Investment Adviser Association. Thereâ€™s nothing particularly surprising in the speech given Atkinsâ€™ well-publicized opposition to many of former Chairman Donaldsonâ€™s initiatives, but it is still a good read.
In particular, he focuses on the mutual fund rule requiring independent chairmen and 75% independent boards. Hereâ€™s a quote:
To be honest, the tortured history of this rule is quite a curiosity for me. It is an unlikely subject of such a pitched battle. Its proponents have praised it as being the supposed “centerpiece” of the SEC’s regulatory scheme for mutual funds. But, as the court of appeals has now pointed out twice to the SEC, the agency has failed to take an honest look at the costs and benefits of the rule, as the law requires us to do. Never mind that some of the more egregious offenses in the late-trading and market-timing scandals occurred at funds with independent chairmen and 75% independent boards. Never mind that the rule is inherently anti-competitive in that its burdens fall especially heavily on start-ups, who have a harder time coaxing and paying non-affiliated people to serve on boards, much less to commit the time necessary to serve as chairman.
Finally, never mind that investors do not seem to care about this provision. It always struck me as odd that this matter would be touted as so important to investors, yet no fund that I know of has ever marketed itself on the basis of who sits on its board or who serves as chairman of the board. Investors tend to be rational people (at least much of the time!). They invest often on the basis of who is the portfolio manager; in fact, some portfolio managers are known to have groupies. Investors also invest often on the basis of who the fund advisor is and what other related funds and features the advisor offers. They often invest in consideration of fees â€” front-end loads, back-end loads, redemption fees, and so forth. They also often invest on the basis of performance, try as we might to tell them that past performance is no indication of future performance. But, no one that I have ever heard of invests on the basis of the make-up of the board.
Atkins then talks about SOX 404. In his view, the problem is not with the concept or the SECâ€™s implementing regulations. Instead, the problem is with the implementation of PCAOBâ€™s 300-page-long Auditing Standard No. 2. Hence, he calls for a reworking of the standard so that it is tailored to different sizes of companies.
The issue the SEC is and should be focusing on is the amount of fees being paid by mutual funds. The SEC appears to be of the belief that and independent chairman or the 75% Independent Board will help control fees. What they should be demanding is disclosure of compensation paid to portfolio managers and other top executives. The mutual fund goverance structure should not be a mechanism for avoiding such disclosure.