From James Miller in the WSJ ($):
As an economist, I'm painfully aware that Adam Smith is one of the most over-quoted and least-understood figures in the history of Western civilization. So I hate to drag his name into a major dispute over how mutual funds should be regulated. But as an independent director on the boards of four mutual funds, I can't help wishing the politicians and regulators so bent on "reforming" the industry would take a closer look at Smith's concept that rational self-interest in a free-market economy leads to economic well- being.
If they did, they wouldn't have pushed for a rules change that sharply limits the freedom of mutual- fund boards to elect a chairman they feel is most qualified for the job. Specifically, the self-styled reformers, led by SEC Chairman William Donaldson, wouldn't have adopted a new rule -- part of a new layer of regulations approved by the commission last week -- that forbids boards from electing anyone employed by the company that manages the fund. ...
Funds chaired by interested directors account for the overwhelming majority of industry assets and generally outperform those headed by independent chairmen. So it's neither surprising nor scandalous that a majority of boards elect chairmen who work for the sponsoring company. Forcing the boards of these firms to elect less qualified chairmen will lower the returns of these firms, lower returns in the industry as a whole, make mutual funds a less attractive investment choice, and penalize investors whose savings are in these institutions and who find mutual funds the preferred choice for their 401(k)s.
As I've noted before, this "reform" will end up being a new tax on investors.
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