Former SEC chief starts a fund directors school

The long-obscure and clubby world of mutual fund boards is getting more attention than it wants.

Former Securities and Exchange Commission chairman David Ruder is launching a group that hopes to sponsor education forums and establish a website aimed at empowering independent fund directors.

Dubbed the Mutual Fund Directors Education Council, Mr. Ruder’s effort has attracted an impressive roster of 52 corporate governance experts, academics, fund industry lawyers, independent directors, and fund industry executives.

The list ranges from New York lawyer Ira Millstein of Weil Gotshal & Manges and Columbia Law School professor John Coffee Jr. to former SEC investment management chief Barry Barbash and former New York State Comptroller Edward V. “Ned” Regan.

So far, the council’s start-up costs have been picked up by Northwestern University School of Law in Chicago, where Mr. Ruder — a former dean — still teaches.

But in the council’s bid to ensure credibility and independence, it won’t be accepting any money from fund companies — the constituency with the deepest pockets to underwrite such a venture.

Nor does Mr. Ruder expect much help from the Investment Company Institute, the fund industry’s Washington trade group.

Launched last August, the fledgling group attracted 140 to its first public meeting last week in Washington to publicize its existence and drum up financial support.

“It is not an endeavor that is going to work very well as a self-funding enterprise,” Mr. Ruder said in an interview earlier this month.

“[The mutual fund industry has] been cooperative, but I don’t really think that if we went to them, the ICI would find funding us very high on their list,” he says, noting that the group sponsors its own programs for independent fund directors.

Instead, Mr. Ruder, who chaired the SEC from 1987 to 1989, and his colleagues, plan to pass the plate among accounting firms, fund document publishers, custody companies and others who do business with fund companies.

But that strategy could run into problems. PricewaterhouseCoopers LLP, for example, is mulling its own director education program, which could compete with Mr. Ruder’s initiative.

Mr. Ruder says he may also charge a membership fee to directors.

With the $6.8 trillion mutual fund industry now the most popular way for Americans to participate in the equity and bond markets through employer-sponsored 401(k) plans and directly, effective oversight by fund directors has become a top concern of SEC Chairman Arthur Levitt.

Though Mr. Ruder says that he and the council have no agenda other than to serve as a “facilitator of information” for independent directors, the genesis of the group follows a series of SEC meetings last year and the agency’s proposal of new rules aimed at improving the current system of fund governance.

“We are now moving into a time where fund directors have the power to do what they want, but they haven’t gotten themselves to the understanding that they can exercise that power, nor have they really understood the fact that responsibility must accompany power,” says Mr. Ruder.

“Under an ideal corporate management structure, fund directors would have primary responsibility that shareholder interests are met — including oversight of the fund management.

“Those duties exist now, but fund directors don’t seem to be well-enough educated to do what they need to do,” he adds.

disinterested directors

The Investment Company Act of 1940 requires each fund to register with the SEC as an individual company with a board overseeing costs and operations on behalf of its shareholders.

The law specifies that 40% of directors be “disinterested,” that is, independent directors who aren’t affiliated with the fund management company.

Independent directors’ most significant duty is annually deciding whether to approve the advisory contract with the fund management company.

Mr. Regan, an independent director for OppenheimerFunds Inc., said at the conference on Friday that though it appears to be directors’ chief concern, “the word `performance’ is not in the ’40 Act.”

As the mutual fund industry has grown, some fund companies have reconfigured their boards so that a majority of directors are independent.

Some have even named an independent director as chairman of the fund board. Last October, the SEC proposed rules that would require a majority of independent directors on all fund boards, and that directors employ an independent attorney.

The SEC’s scrutiny of fund boards comes years after it focused on corporate boards. Independent directors now regularly oversee audit committees and interact directly with institutional investors.

“The directors are aware of their responsibilities and they have the power to exercise them,” says Mr. Ruder. “In the fund area, it’s not been the case because independent fund directors don’t have a majority vote.

“We’ve moved out of the darkness into the twilight where the fund directors have the authority and responsibility, but we need to move to the daylight where they are fully informed about what needs to be done and that they can — in cooperation with the funds — do the right thing.”

Mr. Ruder hopes to invite directors to Chicago this summer for the first of a series of informal meetings in which independent directors, attorneys and accountants would offer insights into a range of topics such as fund performance comparisons and negotiating advisory contracts, to pricing securities and understanding derivative risks.

Mr. Ruder also envisions taking the council’s training programs on the road to Boston, New York and other locations where fund companies are headquartered.

In addition to sponsoring conferences, the council hopes to serve as an information clearing house for fund governance developments and educational articles.

“This conference is crucial,” says Mr. Ruder, “because we are not going to exist without enthusiasm from our director targets.”