The SEC voted today (3-2) to require that mutual funds' chairmen must be independent of the fund advisor. One of the dissenting members, Commissioner Cynthia Glassman, appropriately blasted the SEC for acting without evidence justifying this requirement:
When we voted to propose the fund governance package, I challenged the proponents of this rule to come up with empirical data that would support the rule. I wanted to know whether there was any significant positive correlation between funds with high performance and/or low costs and having an independent chair. No one met that challenge. The Commission itself didn't commit resources to study this question, and the proponents have not provided any compelling quantitative or qualitative support. As the adopting release acknowledges, the Commission is "not aware of any conclusive research that demonstrates that the hiring of an independent chairman will improve fund performance and reduce expenses, or the reverse."
I find it absolutely outrageous that the SEC would adopt such a major change without having done - or at least collected - a cost-benefit analysis. But it becomes even more outrageous when one considers Glassman's further complaints:
It is a fact that many of the top-rated funds today based on high performance and low fees have inside chairs. Why should we tell shareholders they can no longer have the form of governance that produced this high level of performance? And further, why should we require them to pay for it? There can be no doubt that this requirement will add to fund expenses. An independent chair cannot be expected to have ? and in most cases, will not have ? hands-on knowledge about fund operations. Therefore, to be effective, the chair would have to hire a staff. Shareholders will bear that expense as well as the likely additional cost of the independent chairman. In sum, the benefits are illusory, but the costs are real.
In effect, the SEC just imposed a new tax on all mutual fund investors and for no good reason. And people wonder why I complain about over- regulation.
See also my earlier post SEC Adopts Mutual Fund Director Independence Requirement.