Transparency and fund governance efficacy: The effect of the SEC'S disclosure rule on advisory contracts

In June 2004, the SEC required mutual fund boards to disclose additional information about the inputs and processes involved in advisory contract approvals to help investors make more informed decisions and to encourage independent directors to act more independently when negotiating advisory fees. We find that CEF advisory fees are more likely to decrease after the 2004 SEC amendments, especially for those CEFs with high advisory fees and low investment performances. After the 2004 SEC amendments, CEF advisory rates decrease on average and the magnitudes of their decreases increase. We find that more board meetings and the likelihood of a decrease in advisory fees after the amendments increases with the number of board meetings. Our results are not only supported by textual analysis and type of filing downloads but are also robust to time-series placebo tests, changes in the ratios of independent directors, and funds belonging to “scandal” families. Overall, our results are consistent with the notion that the 2004 SEC amendments successfully encouraged independent fund directors to exert more effort and to act more independently in negotiating advisory fees with fund advisors.