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SEC examines fund directors
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February 23, 1999: 3:41 p.m. ET
Two-day conference looks at role of independent directors at mutual funds
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NEW YORK (CNNfn) - The U.S. Securities and Exchange Commission is examining the role of mutual-fund directors at a two-day conference in Washington to see whether they are doing their job as watchdogs on behalf of investors.
As mutual-fund assets continue to skyrocket into the trillions of dollars, the SEC should make improving the role of mutual-fund directors a top priority, Chairman Arthur Levitt said in opening remarks Tuesday.
"These issues are not academic or peripheral -- they directly affect every mutual fund investor." Levitt said. "One word above all must define a fund's overall management structure. That word is accountability. And, without strong independent directors, accountability is nothing more than words on a page."
People who sit on boards of directors at mutual funds are supposed to act as an independent watchdog to protect investors' rights. They approve fees and distribution and oversee pricing of shares, among other duties.
Directors meet at least quarterly and can earn a six-figure salary. By law, at least 40 percent of a fund's board must not be affiliated with the fund, its investment adviser or its principal underwriter.
A study by InvestmentNews, a weekly newspaper for financial advisers, found that the average pay level for fund directors rose 12 percent in 1997 to $103,000 at large companies. The 50 highest paid directors earned $170,000 to $600,000. The study raised questions about the independence of directors and their ability to advocate on behalf of shareholders, the newspaper said.
The SEC conference will examine, among other issues, whether the independent directors are effective in their job as watchdog; whether they can truly act as a check on a fund's management; and are they serving shareholder's needs, Levitt told the group.
One of the most important topics will be an examination of fund fees, Levitt said.
"While fund performance is unpredictable, the impact of fees is not," Levitt said in his speech. "A 1-percent annual fee will reduce an ending account balance by 17 percent after 20 years."
"Now, we all understand that directors aren't required to guarantee that their fund has the lowest fees," Levitt continued. "But they are required to ask whether fund investors are getting their money's worth."
The conference will also talk about whether more than 40 percent of directors should be independent.
Participating in the conference are independent directors from American Century, Vanguard, Eaton Vance, Neuberger and Berman, Scudder, Strong and Fidelity, among others.
Lawyers from mutual fund companies, investor advocates and people from the academic world are also attending. 
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