A large portion of the mutual fund industry appears willing to accept a rule where the SEC would mandate that fund boards be at least 75% independent, if the chair can be selected by the board itself.

The fund business made itself heard during the second comment period about the SEC’s independent director rule, which has been bouncing between the Commission and the courts for more than a year.

In the wake of the mutual fund investigation into market timing and late trading, the SEC put forth a rule that mandated that 75% of a mutual fund’s board of directors, as well as its chair be independent. It was one of three rules that passed by a narrow 3-2 vote, with former Chairman William Donaldson casting the deciding vote.

Another rule, requiring a larger number of hedge fund advisers to register, was also challenged and shot down by an appeals court. In the case that followed the passage of the independent fund board rule, the court told the SEC to re-examine the rule and then make its decision. In response, Donaldson pushed the exact rule through again. The court then vacated the rule and the regulator decided to re-open the comment period before it made its next move.

The comment period for the rule came to a close last week, with firms voicing their support for having a super-majority of directors be independent, but still arguing that a chair’s independence should not be mandatory.

“With a super-majority, independent directors have overwhelming authority in the selection of the chair and on all other matters before the board,” wrote Evelyn Dilsaver, president of the Schwab Funds.

Mutual Fund Analyst Geoff Bobroff said that given all the contention surrounding the issue, current SEC Chair Christopher Cox will likely want to come up with a compromise.

“If Cox could find a way to get close without upsetting many of the big firms, that would be the most desirable solution,” Bobroff said.

But the US Chamber of Commerce, which originally brought the lawsuit against the SEC over the rule, does not like the compromise.

In its comment letter, the Chamber said both of the provisions would not do anything to help mutual fund shareholders and claimed the rule would impose overly burdensome regulatory costs on firms.

The Chamber might be alone on this, as even Fidelity Investments, which has been one of the more outspoken firms against the proposal, expressed approval of such a compromise in its letter.

“Fund boards, and their independent directors, should be free to exercise their business judgment in selecting the individual who they believe will best serve as board chairman, whether that individual happens to be an independent director or a management director,” wrote Eric Roiter, senior vice president and general counsel at Fidelity.

In its letter, the Chamber went on at length about how the proposal would be costly to firms and could seriously hurt the smaller fund companies. Proponents of the rule said such claims are outrageous and are just being used as an excuse.

“The independent governance requirements for mutual funds may, in fact, be among the least--if not the least--expensive fund rules ever adopted. The view that compliance costs were likely to be minimal was taken into account by the Commission when adopting the rule originally,” wrote Mercer Bullard, founder and president of Fund Democracy, in his letter.

The issue is now in the hands of the Commission. Given the contentiousness of the rule Bobroff said the SEC will have to make some sort of announcement on what it decides to do even if it is to do nothing. If the SEC chooses to go ahead, Cox will have to use diplomacy to get it through.

“Cox is not one to have a split vote,” Bobroff said. “He’ll do everything in his power to come up with a consensus.”

With some turnover on the Commission it is unclear how it will vote, but Bobroff suspected that the SEC will most likely not decide anything until after Thanksgiving.

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