Tougher ICI Guide for Fund Oversight

The Investment Company Institute, the mutual fund industry’s chief trade association, backed a plan Wednesday to bolster fund oversight by independent directors through changes to the structure and operation of mutual fund boards.

The 45-person board of the ICI unanimously approved a resolution recommending that fund companies adopt 15 practices to strengthen mutual fund governance. All the measures are designed to improve the board’s “culture of independence and effectiveness,” said Matthew Fink, ICI president.

One ICI recommendation is that two-thirds of a fund’s board be independent, rather than the 40% now required by law. Another provision recommends that fund directors invest in the funds on whose boards they serve. Many funds, including those managed by Fidelity Investments, have similar policies already.

Many of the ICI’s recommendations resemble changes that may be included in rule proposals the Securities and Exchange Commission has said it may introduce later this summer. The SEC changes would also be aimed at improving mutual fund governance.

If the SEC rule changes are approved by the full commission, the fund industry would be required to follow them. In contrast, the industry recommendations aren’t binding.

“Our goal is for all funds to adopt all of the recommended practices,” Fink said.

The industry report also recommends that former officials from a fund’s investment advisor be prohibited from being named an independent director of that fund. In addition, the new rules recommend that independent directors meet separately--apart from those who work with the advisory firm that operates the fund--to decide important fund matters such as fund advisors’ salaries.

Independent directors are given responsibility to set pay for all directors under the recommendations.

Fund directors oversee the management of mutual funds by investment advisors, and the industry’s independent directors are supposed to represent the interests of the 77 million investors who own mutual fund shares.