A top T. Rowe Price Group executive told senators yesterday that requiring mutual fund boards to have independent chairmen is "unwarranted" by recent industry scandals and would do nothing to protect investors from potential management abuses.
The Securities and Exchange Commission has proposed the rule as part of its stepped approach to reforming the $7.2 trillion mutual fund industry in the face of recent trading scandals. James S. Riepe, vice chairman of Baltimore-based T. Rowe Price and chairman of the firm's funds, told the Senate banking committee that the proposal "makes no sense to me."
"Recent events demonstrate that having an independent chair is no silver bullet," Riepe said. "Since independent directors constitute at least a majority ... of fund boards, why should they not be allowed to determine who the chair should be?"
Riepe's view is widely shared within the embattled mutual fund industry, which has otherwise supported most of the SEC's recommendations to increase the transparency of mutual fund fees and ban certain industry sales practices that have raised costs to investors. Some question whether having outside chairmen overlooking the funds will lead to better oversight that would catch shareholder abuses before they occur.
The Senate committee, led by Alabama Republican Richard Shelby, is considering legislation that would complement recent SEC regulatory reform measures. The House passed a reform bill last year, and three senators, led by Peter Fitzgerald of Illinois, recently introduced a bill that would revamp the way the industry does business.
At yesterday's hearing, Shelby raised questions about the SEC's ability to police the industry.
For years, many fund industry practices that harmed investors "were open secrets on Wall Street, yet they continued unabated and undetected by the SEC," Shelby said. "Frankly, the prevalence of these problems must necessarily raise questions about the SEC's compliance and examination programs."
Yesterday, the SEC proposed additional reforms aimed at further curbing those practices by requiring mutual funds to impose a 2 percent fee on sales of fund shares held for five or fewer business days. The commission voted 4-1 to seek public comment for at least 45 days on the so-called "redemption fee" proposal before taking any final action. The proposal is intended to reduce abusive rapid trading in fund shares,
Market timing is not illegal unless mutual funds discourage it publicly while allowing selected investors to practice it at the expense of other investors.
T. Rowe Price has been untouched by the scandals that have tainted some of the biggest and best-known firms in the industry. Riepe praised the SEC for taking on regulatory reform and repeated past appeals for Congress to make certain the SEC is adequately funded.
But Riepe also said that the recent scandals were "failures of management," and not fund governance. "Fund directors cannot and should not be expected to oversee day-to-day management of a fund's activities," he said.
If implemented, industry experts say, the new regulation would prove logistically difficult for many fund companies. It is estimated that 80 percent of mutual fund companies would have to replace their chairmen to comply with the rule. And finding people willing to serve could prove difficult because the recent scandals have scared off some director candidates, who fear lawsuits if their firm gets in trouble with regulators.
"Outfits like Putnam [Investments] have always had independent chairmen and it didn't stop them from getting into trouble," said Richard M. Philips, a former SEC staffer and senior partner with Kirkpatrick & Lockhart in San Francisco. Philips' clients include mutual fund board directors.
In most cases, Philips said, it makes sense for the boards to be led by someone inside the company, who is familiar with day-to-day management.
The Associated Press contributed to this article.