Fidelity Investments’ Edward Johnson and Vanguard Group’s John Brennan, two of the most senior executives in the U.S. mutual fund industry, may each lose one of their jobs.

Fidelity, based in Boston, manages more than 300 mutual funds and about $1 trillion of assets, and Vanguard of Valley Forge, Pennsylvania, has 126 with $720 billion. A rule proposal from the Securities and Exchange Commission would force Johnson and Brennan to step down as chairmen of the individual funds. They will remain chairmen and chief executives of their respective firms.

The SEC, led by William Donaldson, 73, is seeking to eliminate conflicts of interest in the $7.5 trillion industry by boosting the independence of fund boards that are responsible for overseeing the assets of 91 million Americans. Johnson, 73, and Brennan, 49, oppose the plan, which is backed by three of the SEC’s five commissioners. The SEC is scheduled to vote tomorrow.

``Having independent chairmen is in the best interests of shareholders,’’ said Harold Williams, who led the SEC from 1977 to 1981, in a telephone interview. Williams and six other former SEC chairmen have sent a letter to the agency supporting the plan.

The rule change is one of dozens that the SEC and Congress are considering after a yearlong probe found alleged trading and sales violations at more than 20 companies. Fidelity and Vanguard haven’t been implicated in the investigation.

Johnson wrote on Feb. 17 that the SEC’s argument that independent chairmen are the ``silver bullet’’ to prevent future wrongdoing isn’t supported by the facts.

Lower Fees?
``Independent chairpersons obviously didn’t prevent past abuses, since a number of mutual fund companies involved in the scandals had independent chairmen,’’ he wrote in a letter posted on the company Web site. Johnson said he’s an investor in the Fidelity funds as well as chairman of the boards and that aligns his financial interests with those of shareholders.

SEC officials and consumer advocates said the ban is necessary to emphasize that shareholders own the funds -- not management companies. Affiliated chairmen may hide improper dealings from the board or fail to get investors the lowest fees, they said.

``You don’t want to give those primary responsibilities to someone who has an interest in the outcome,’’ said Barbara Roper, director of investor protection at the Consumer Federation of America, in an interview. The SEC’s plan probably would lead to lower management fees, she said.

Alternative Proposal
Fund boards approve contracts setting out how much shareholders pay for a management company’s services. They also can adopt policies on trading and sales, and police possible conflicts of interest. That oversight broke down in cases uncovered by regulators where fund managers allowed favored investors to make improper trades that diluted the returns of other shareholders.

Fidelity has offered the SEC an alternative proposal requiring that independent directors head all fund board committees. Boards could only act on proposals approved by a committee and independent directors would set the agendas for meetings. ``We can achieve the SEC’s objectives through other means,’’ said Eric Roiter, Fidelity general counsel, in an interview.

Vanguard declined to comment on the SEC proposal, spokesman John Demming said.

Fund companies contend that forcing Johnson, Brennan and other affiliated people to step down as heads of boards won’t have much impact on how funds are run, according to Kathryn McGrath, former head of the SEC’s fund division.

`Whose Fund Is It’
``It’s not going to change things that much because we already have independent directors in control of the boards,’’ said McGrath, who’s a partner at Crowell & Moring in Washington, citing an SEC rule that independents must be a majority of directors.

Forcing the election of independent chairmen would be expensive, said James Riepe, vice chairman of T. Rowe Price Group Inc., the seventh-largest fund company, in an interview yesterday. Riepe is chairman of T. Rowe Price’s fund boards from Baltimore.

``We would have to have 90 separate boards and 90 separate chairs for every one of the mutual funds,’’ he said. ``You can imagine what the cost to investors would be.’’

Riepe said fund boards should be allowed to elect their own chairmen.

Less than 20 percent of fund companies surveyed by the fund industry trade group, the Investment Company Institute, have independent chairmen, spokesman John Collins said.

Richard Strong ran Strong Capital Management and served as chairman of its funds when he made improper frequent trades in the funds that lowered returns for other shareholders. He agreed to pay $60 million on May 20 and was banned from the industry for his actions.

Paul Roye, head of the SEC investment management division, told the industry at its annual meeting last month that they should support the proposal. ``Just whose fund is it: the management company’s or the fund’s investors?’’ he asked.

(Bloomberg)