Viewpoints

Op-Ed: Does a mutual fund board need a staff?

October 21, 2020

By C. Meyrick Payne and Frank Tarantino

Does a mutual fund board need a staff? The complexity of fund board issues is increasing due to regulation, competition, product offerings, technology, and pricing alternatives. Furthermore, the trend toward large mergers of ever-more-complicated fund groups adds to the responsibilities and difficulties faced by fund boards. All of this calls into question the resources available to boards to exercise their duty of care over the myriad of information presented to them.

 

On the other hand, boards already receive assistance from the chief compliance officer and legal counsel, plus support from logistical staff and the various business units of the management company—all of which are obliged to provide timely and accurate information. Adding another support group may confuse accountability and add duplicative cost.

 

This piece explores the pluses and minuses of a dedicated fund board staff.

 

Consider the Caveats

In the 1980s and 1990s, a few boards of large complexes had a staff to assist in the independent assembly, analysis, and presentation of information. Most of these have been disbanded. Then, in the early 2000s the attorney general of New York required the appointment of independent senior officers (sometimes called independent fee consultants) to work with the boards of complexes where market timing was found to have taken place. These appointments were part of the regulatory remedy for market timing, and the positions have mostly reached their expiry date.

 

The appointment of these dedicated staffs and the underlying logic for independent senior officers occurred before fund CCOs were strongly recommended by the Securities and Exchange Commission in 2004. The SEC's original concept of CCOs was that they reported solely to the fund board. However, over time the CCO role for many funds has evolved into a split position with responsibilities for compliance at both the funds and the adviser, with the compensation split between them as well.

 

Historically, dedicated staff to the board took the form of "Office of Fund Board Services," reporting to the fund board chair. In some cases, but not all, the cost was borne by the funds to maintain independence, but the cost was sometimes split with the management company.

 

There are a few caveats to be considered if a board decides to establish a dedicated staff.

 

First is that such a staff must not lure fund directors into micromanagement from their oversight role. Second, as mentioned above, is that there is already support in place for nearly all boards. The CCO typically monitors compliance with rules and regulations—including the code of ethics, conflicts of interest, and many other activities embedded in the CCO annual plan and subsequent report. The management company typically provides extensive information about investment performance, fees and expenses, customer service measures, investment capability and capacity, profitability of the funds to the advisor, and market achievements, as well logistical support for the board. And the legal team ensures the funds and the board are operating within the 1940 Act and other regulations.

 

The third caveat is that a board staff may inadvertently usurp the oversight responsibilities of fund board committees. Finally, a board staff may start to complete some of the tasks traditionally handled by management; this could be an issue as the fiduciary responsibility, and liability, may shift from fund management to the board itself. 

 

A List of Tasks

The responsibilities of a staff to a fund board may include some or all the following tasks:

 

  • Assistance with contract renewal, particularly the selection of a peer group for each fund in the complex and the metrics to measure the nature and quality of service, comparative fees and expenses to a peer group, an assessment of the cost of providing service, comparison of fees and expenses to other products offered by the management company, and an assessment of reasonable profitability and shared economies of scale.
  • Administrative functions such as document preparation and timely presentation in electronic format, onboarding of new directors, recommendations for new director criteria, as well as logistical arrangements for the board. Travel, scheduling, accommodation, and computer assistance is an involved and time-consuming task.
  • Supplemental assistance with investment analysis, such as performance attribution, economic analysis of new, merged or closed funds, review of consistency with fund prospectus objectives and investment strategy, assessment of best execution, suitability of soft dollar usage for research, assessment of portfolio managers or monitoring of closet indexing, and review of liquidity and derivatives exposure.
  • Coordination with specialist consultant relationships, management company business divisions, privacy, anti-money-laundering, business continuity planning staff, cybersecurity, and internal audit reviews; sometimes also a review of D&O insurance.
  • Supplementary assistance with risk management, particularly investment, operational, regulatory, and liquidity, counterparty, and derivative risks.

 

Many of these tasks may already be accomplished by the CCO, the general counsel's office, management company business divisions, independent counsel, and/or specialized consultants. But the more complicated the product, fee, investment, and distribution strategy of the complex, the more likely there is a need for an independent staff. This may also be the case after an acquisition of formerly independent advisers or where fund boards have merged.

 

A dedicated staff to the fund board is an interesting concept, especially as the fund industry consolidates into mega-complexes, and one that warrants consideration and review. Undoubtedly, many fund groups are already well served by their current support system. In every case, it may be a good idea for fund boards to make a list of the tasks that need to be performed and define who has responsibility for each.


Meyrick Payne (pictured above, left) heads Management Practice Inc.'s mutual fund practice. For 35 years, he has consulted to mutual fund boards on contract renewal and sensitive issues and has served as an expert witness on their behalf. Frank Tarantino (pictured above, right) is the former independent senior officer for MFS Funds. He advised the funds' board with respect to oversight of statutory, regulatory, and fiduciary compliance and the annual renewal of the funds' investment advisory contracts and Rule 12b-1 plans.

 

 

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