SEC proposes plan to relieve mutual funds of corporate-type boards
Washington — Once a year, if you own shares in a mutual fund, your mail yields a ballot listing nominees for the fund's board of directors. Once a year, if you're like many shareholders, you just throw the ballot away.
Mutual funds have long had a tough time scraping up the votes needed to duly elect a governing board. But under a plan now being shaped by the Securities and Exchange Commission, funds may not need quasi-corporate structures - making the ballots, the elections, and the boards of directors themselves unnecessary.
By this fall the SEC will put out for public comment a proposal to legalize ''unitary investment funds,'' a type of mutual fund long available outside the United States. Instead of being run by a board of directors that hires an investment adviser, unitary funds are operated simply by an adviser, which can be a firm or an individual.
Shareholders might benefit from lower overhead costs. Management would be able to more closely attend to its primary purpose, making investment decisions, say industry sources.
Corporate trappings are ''very cumbersome, very expensive,'' says Matthew Fink, general counsel of the Investment Company Institute, a mutual-fund industry trade association. ''Money-market funds have to mail out a million proxy ballots, and then people throw them out.''
Currently, unitary investment funds are prohibited by the Investment Company Act of 1940, which was enacted to shelter investors from past abuses -- funds being run for the benefit of insiders, for instance. Congress would have to pass legislation approving any change.
The industry has changed drastically since the 1940s. Funds have proliferated like weeds. The closed-end fund, in which a limited number of shares trade like stocks, is being supplanted by the open-end investment company, which stands ready to redeem shares at their asset value.
The pomp and oversight of a corporate-type board is not applicable to modern mutual funds, say industry sources. When buying stock in a corporation, one purchases a bit of factory, a slice of production -- in short, a share of unique assets. When buying shares in a mutual fund, it is management that is purchased, not things.
''There really is no reason for there to be a corporate structure any more,'' says Richard Reilly, chief counsel of the Fidelity Group, a Boston mutual fund.
While there's a need for a change, any reshuffling of the rules, says Bruce Mendelsohn, head of an SEC group studying the Investment Act, would be done carefully to keep existing statutory investor protections. Certain safeguards might be strengthened.
''There would be a notice period for major changes'' in management policy, he says.
Investors who didn't approve of proposed changes would then have time to pull out their money and go elsewhere. In unitary funds investors would ''use the Wall Street rule. You'd vote with your feet,'' Mr. Mendelsohn says.
But such a change in fund regulation raises many tough questions. Will the new rules apply to all funds, or just certain types? Can only new funds qualify, or will existing funds be allowed to follow the new rules. How will unitary funds, once started, make changes in their basic structure?
''We see unitary funds as a possible way to improve the efficiency of delivering mutual-fund products to the public, but there are many issues unresolved as to mechanics,'' says Henry Hopkins, chief counsel of T. Rowe Price Associates Inc., a mutual fund in Baltimore.
The investment adviser's ability to make decisions without notifying shareholders would likely still be circumscribed, for instance. It is not clear which types of funds would qualify for unitary status, although it appears likely any proposal would begin with money-market funds that are open-ended. Closed-end funds are not likely to qualify.
The SEC, rather than present a polished plan, will list options on key points for public comment.