Washington Addressing an industry scandal, a deeply divided Securities and Exchange Commission voted Wednesday to require mutual fund boards to have chairmen who are independent from the companies managing the funds.
In a rare public display of dissension, two of the panel's three Republican members said they could not support the far-reaching rule change because they had seen no evidence that it would prevent abuses in the fund industry and it could have harmful effects on funds' operations.
"The benefits are illusory but the costs are real," Cynthia Glassman, one of the Republicans, said.
The vote to adopt the proposal was 3-2, as SEC Chairman William Donaldson and the two Democratic commissioners supported it in a politically unusual alignment.
The action came amid intense fund industry opposition and was the latest in a series of changes to mutual fund operations that the agency has undertaken to bolster investor confidence. The rule change also requires that three-quarters of the directors on a fund company board be independent, compared with half now.
Donaldson, a former Wall Street executive, insisted that independent chairmen were needed as a way to avoid conflicts of interest that are built into the mutual fund system and to protect fund investors.
The chairman of a fund board typically also is the chief executive officer of the investment advisory firm, an arrangement that critics say allows the fund manager to dominate the board.
In some cases, directors sitting on the board "find it very difficult to say 'No'" to the fund manager, Paul Roye, head of the SEC division that regulates mutual funds, said at the meeting. "We believe that a fund board with an independent chairman and independent leadership is more likely to ask the tough questions, more likely to say 'No' when necessary," he said.
The new rule, to take effect in 18 months, could shake up the $7 trillion mutual fund industry. Some experts estimate that the boards of 80 percent of U.S. funds -- or about 3,700 funds -- will have to replace their chairmen.