Publications

Introduction

In May 2005, a Task Force formed by the Independent Directors Council issued a report entitled Director Oversight of Multiple Funds.¹ The report examines the issue of independent director oversight of numerous funds within a single mutual fund complex.² The report was motivated by a variety of factors, including recent calls to limit the number of funds a director may oversee, as well as the Securities and Exchange Commission’s identification of the issue as a matter that should be included in a board’s annual self-assessment.³ The report is designed to promote better public understanding of the role of the board of directors in fund governance and to assist fund boards in their annual self-assessment process. The report notes that the Task Force believes that the burdens on fund directors do not increase significantly as the number of funds they oversee increases. As a result, the report’s discussion of board oversight responsibilities, and the strategies developed to meet those responsibilities, is applicable to all boards regard-less of the number of funds that they oversee.

The Report's Findings

Board oversight of multiple funds and series is a prevalent practice in the mutual fund industry. The report cites several reasons for this practice, which the Task Force finds to be very efficient. First, the Investment Company Act of 1940 is a comprehensive regulatory scheme. Legal and compliance requirements under the Act generally are applicable to all the funds overseen by a board. For example, the standards that govern directors’ determina- tions regarding soft dollars, trade allocation procedures and codes of ethics apply equally to all funds in a complex.

Second, all funds in a complex generally use common personnel and service providers. Because of this, policies and procedures within a complex, as well as contractual arrangements, tend to be fairly uniform. As a result, the Task Force found that it is more efficient and cost-effective to have a single board review policies, procedures and contractual arrangements on a fund-wide, as opposed to fund-by-fund, basis.

Third, the mechanisms that boards use to oversee funds and fund service providers generally apply on a complex- wide basis. For instance, all funds in a complex usually will have a common Chief Compliance Officer ("CCO") and auditor. The Task Force concluded that having the CCO and auditor report to a single board promotes better monitoring of the compliance and audit functions.

Third, the mechanisms that boards use to oversee funds and fund service providers generally apply on a complex- wide basis. For instance, all funds in a complex usually will have a common Chief Compliance Officer ("CCO") and auditor. The Task Force concluded that having the CCO and auditor report to a single board promotes better monitoring of the compliance and audit functions.

Finally, the practice of having a single board oversee all of the funds within a complex enhances the board’s knowledge and expertise, as well as its authority and influence. The Task Force reported that a single board has a greater ability to negotiate with management over matters such as fund fees and expenses; the level of resources devoted to the technology, compliance and audit functions; and contingency planning. A board overseeing multiple funds also is more likely to have extensive contact with senior management, and to develop an ongoing and productive dialogue with them.

The report concludes that the practice of director over- sight of multiple funds within a single fund complex is optimal, provides efficiencies and advantages to fund directors in fulfilling their oversight responsibilities, and serves fund shareholders well.

Lessons for All Boards

The report outlines strategies and techniques adopted by boards that address the challenges inherent in the oversight of multiple funds and that enable directors to meet their responsibilities to shareholders. While the report focuses on multiple funds within a complex, any board, regardless of the number of funds that it oversees, can adopt the strategies outlined in the report. These strategies include the following:

Organization and Composition of the Board

A board should regularly evaluate its structure, as well as its composition, to ensure that it is adequately staffed to undertake the responsibilities assigned to it. The size of a board and the expertise of its directors are important. A board may find that it is necessary to add members with particular expertise, such as a financial expert.

Frequency of Meetings

Taking into consideration size, complexity and the number of funds that it oversees, a board should determine whether it meets with adequate frequency. Generally, boards meet at least four times a year, but can increase the frequency of meetings or extend the length of meetings if necessary. In addition, adequate time should be reserved at each meeting for a thorough review of complex-wide, as well as fund-specific, matters.

Board Meeting Organization

A board should examine the structure of board meetings to ensure that the meetings are productive and efficient and that the materials are easily understood and accessed. This can be accomplished through:

• Pre-board meetings by the Chairman or lead director with legal counsel, the CCO, the adviser and the administrator. Issues, presentations and timing can be reviewed and the Chairman or lead director can request supplemental materials or additional time for discussion.
• Assembly and distribution of materials well in advance of meetings. Adequate advance preparation will assure that the independent directors have the necessary information in a useful format and have adequate time to prepare for the meeting.
• Creation and distribution of an annual calendar of required board actions. This will enable directors to see the full scope of these requirements and plan accordingly.
• Staggering contract renewals so that a discrete number of contracts are reviewed at each meeting.
• Grouping contract renewals by fund type to enable board members to more easily consider renewal data such as expenses and fees charged by comparable funds.

Use of Committees

Boards that oversee multiple funds may make use of committees to manage the workload. Committees can perform some of the background or detail-oriented work, thus preserving board time for reports and discussion.

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Professional Assistance for the Board

Boards should consider the professional assistance that they may need to effectively carry out their responsibilities. These professionals include fund management personnel, consultants and independent legal counsel. Independent counsel’s expertise may be critical to ensuring that all regulatory requirements are met.

Information Exchanges

Boards should explore alternative methods of receiving information, such as web-based systems or CD-ROMs. These alternative delivery methods allow directors to receive information at any time during the year and substantially in advance of a meeting, thus providing directors sufficient time to review materials and assuring that board meetings are productive.

The Task Force report focuses on the responsibilities and practices of boards that oversee multiple funds. However, the report notes that the Task Force believes that the burdens on fund directors do not increase significantly as the number of funds they oversee increases. Thus, many of the fund governance strategies recommended in the report can be adopted as best practices by boards overseeing a single fund.

Footnotes

1. The Independent Directors Council is part of the Investment Company Institute. The Council is designed as a forum to facilitate independent director involvement in public policy, best practices, and educational development. Return to Top
   
   
2. The term "fund" is used to refer to a registered investment company. A fund may have numerous series, which frequently are referred to a "portfolios." A mutual fund "complex" may consist of numerous registered investment companies and their series/portfolios. Return to Top
   
   
3. Fund boards relying on a number of specific exemptive rules are required to begin annual self-assessments in 2006. Return to Top
   

For More Information

Please contact Donald S. Mendelsohn, JoAnn M. Strasser, or Michael V. Wible or any member of our Corporate Transactions & Securities practice group for more information.

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This advisory may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgement of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel. This document may be considered attorney advertising in some jurisdictions. Some of the design images and photographs in this document may be of actors depicting fictional scenes.