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Many boards establish committees to focus on specific subject matters (e.g., audit, governance, investments). The time and effort required of mutual fund directors, especially independent directors, have grown exponentially as the industry has increased in size and complexity and as new regulations have expanded directors’ duties. In this environment, boards frequently use both standing and ad hoc committees to help manage their workloads and to enable greater in-depth review and oversight of particular topics or aspects of the fund’s operations.

Each fund board typically has an audit committee. Other types of committees include nominating/governance, investment/performance, and contract review.

Audit Committees

A mutual fund board audit committee is responsible, among other things, for overseeing the accounting and financial reporting processes of the fund and its internal controls over financial reporting. In this context, the audit committee recommends to the full board (and shareholders, where a shareholder vote is sought) the selection of independent auditors for the investment company. To minimize potential conflicts of interest, audit committees must preapprove any audit or permitted non-audit services provided to the fund, as well as any permitted non-audit services provided to the fund’s investment adviser and certain affiliates of the adviser where the nature of the services provided relates directly to the operations and financial reporting of the fund.


Virtually every mutual fund’s audit committee is composed entirely of independent directors. This has been adopted as a best practice even though funds are not required to do so unless relying on certain SEC rules.

The audit committee meets periodically with the auditors to, among other things, help the committee:

  • review the arrangements for and the scope of the annual audit of the fund’s financial statements, and
  • consider any comments the auditors have in connection with their audit and their audit opinion.

An audit committee also often monitors management’s accounting and internal control systems for the funds.

Audit Committee Financial Experts

Each fund board is required to determine whether any member(s) of the audit committee are “audit committee financial experts” as defined by SEC rule. Although a fund board is not required to have an audit committee financial expert, it is required to disclose whether it has one, and if so, the name of the expert and whether the expert is independent of management. A fund that does not have an audit committee financial expert must disclose this fact and explain why it has no such expert.


Ninety-five percent of fund complexes participating in IDC/ICI’s Directors Practices Study report having a financial expert on the audit committee.