As the SEC winds up its debate about whether to impose new regulations requiring independent directors for mutual funds, questions remain. In 2004, the Commission passed a rule requiring an independent chairman and a board that consisted of at least 75% independent directors. According to the Wall Street Journal, Morningstar -- the fund expert's fund expert -- had this to say: "The effectiveness of many boards is compromised ... as long as those conflicts exist, shareholders are not being served as well as possible."
But from an investor's perspective, I wonder if the lack of independence in the directors of funds is really a problem. Does this lead to poor performance? Or is that caused by excessive trading, high expense ratios, and increasingly efficient markets making superior stock selection more difficult. I don't have an opinion on whether new rules should be written about this issue, but I will make one prediction: the SEC can require 100% independent boards and letters of recommendation from the Pope, Johnny Damon and Burt Reynolds for chairmen; but passively managed index funds will still be the best mutual funds for investors.
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