More on mutual funds as products

Paula Tkac writes in today's WSJ that the follies with the SEC's mutual fund independent director rule (discussed here) make this a good time to recognize that open-end mutual funds don't need such directors anymore than do "service-providers such as lawyers or automotive technicians."

Tkac notes that, since customers can withdraw funds at current net asset value, "mutual fund advisers have fewer opportunities to harm fund investors, and investors can do much more to protect themselves and discipline management than in a typical corporation." Also, mutual fund investors easily can "compare the services they receive, net of the fee paid, with those offered by other funds or alternative investment vehicles."

Nor are individual investors unsophisticated. After all, they promptly sold the funds like Putnam, Janus and Invesco that were involved in the mutual fund scandals and bought funds in families that had clean records." Tkac concludes that "there is reason to consider removing board oversight of fees. We might even contemplate eliminating the legal mandate to have mutual fund boards at all."

Henry Manne made a similar argument in What Mutual Fund Scandal?, Wall St. J., Jan. 8, 2004, at A22.  

Don Langevoort would go completely the opposite way. He says we not only need independent mutual fund directors, but that the fact that these directors buy into the "product" analogy means that we can't rely on them to protect investors.

I discuss Langevoort's article here. I'm sympathetic with the Manne-Tkac approach. But even if Langevoort's right, I don't think the federal government should be regulating mutual fund governance under federal law anymore than it should regulate standard corporations. Donaldson's recent independent director gambit illustrates not only the general failings of the Donaldson era, but why federal law is hardly a panacea for whatever might ail mutual fund governance.

Of course one might fear that if the SEC leaves the scene, this will open it to the likes of Eliot Spitzer. That's another can of worms. We can expect regulators to glom onto mutual funds because, as Willie Sutton may or may not have said, 'that's where the money is'." Why shouldn't the trillions of dollars that slosh around in mutual funds be used for lobbying?

For now, let's just hope Cox lets the misbegotten independence rule die. Then we can turn to the more basic question of whether he or his successors should even be dealing with this issue.

Comments

[Robert Schwartz]

When the 40 Act was writen it wa writen around the paradigm of the closed end company, which did have a board of directors. The board does nothing for the open end company, if the shareholders are notified of changes (i.e. investment manager, fees, investment policies) and can redeem without penalty.

Let's save the money.