The five SEC commissioners today proposed three rules that are intended to help "clean up" the fund industry by imposing new governance requirements.

The rules, if they are passed in a final vote of the five commissioners as is after a 45 day comment period, would reform three areas of the fund industry by reforming boards, requiring fund firms to have a code of ethics and increasing point of sale disclosures.

Governance

The proposed rules would require that at least three-quarters of fund boards be made up of independent directors and that each fund have an independent chairman. The commissioners said the requirement is designed to strengthen the presence of independent directors and improve their ability to negotiate lower advisory fees and other important matters on behalf of the fund.

It also would require the boards assess its own effectiveness at least once a year. The assessment would have to include consideration of the board's committee structure and the number of funds on whose boards the directors serve.

They require that the independent directors meet in separate sessions at least once a quarter in order to have the opportunity for candid discussions about management's performance. The commissioner noted that the separate meetings "could help improve collegiality."

The independent directors would also be able to hire their own staff under the proposed regs.

Codes of Ethics

Rule 204A 1 would amend the Forty Act by requiring that fund advisors maintain codes of ethics with certain minimum provisions. Those would include a standards of business conduct expected of the adviser's supervised persons and that reflect the adviser's fiduciary duties. Supervised persons would have to acknowledge, in writing, receipt of a copy of the code of ethics.

The adviser's code of ethics would have to require the adviser's supervised persons to comply with applicable federal securities laws and contain provisions reasonably designed to prevent disclosure of material nonpublic information about the adviser's securities recommendations and clients' securities holdings and transactions to persons without a "need to know."

The codes would also require additional employees to report personal securities holdings and transactions, including transactions in mutual funds advised by the adviser or an affiliate.

Point of Sale Disclosure Requirements

The new regs would create a new form 15D for broker-dealers to provide customers information regarding the costs and conflicts of interest that arise from the distribution of mutual fund shares, VA units and 529 plans both at the point of sale and in transaction confirmations.

Those disclosures would include estimated asset-based sales charges and asset-based service fees paid out of fund assets in the year following the purchase if net asset value remained unchanged and the maximum amount of any deferred sales load that would be associated with the purchase if those shares are sold within one year, along with a statement about how many years a deferred sales load may be in effect.

The broker or dealer would also have to disclose whether it receives revenue sharing or portfolio brokerage commissions from the fund complex, as well as whether it pays differential compensation if the security is either a class B share or a proprietary security.  

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