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Unitary or Cluster

The boards of most funds are organized according to one of two models—a unitary board consisting of one group of directors who serve on the board of every fund in the complex, or a cluster board, consisting of two or more separate boards of directors within the complex, each of which oversees a different group of funds. There may be overlapping directors in cluster board models. Some of the many advantages of the unitary and cluster board models (as opposed to a model in which every fund in a complex has its own board) follow.

Common Regulatory Structure

The detailed regulatory scheme under the 1940 Act creates a common set of issues for fund directors to consider and duties to discharge for all the funds they oversee. For example, fund directors are required to establish standards for valuation of portfolio securities; oversee fund brokerage, soft-dollar, and trade allocation procedures; review and approve codes of ethics; review and approve plans for allocating common expenses among funds in the same complex; review and approve fidelity bonds and joint liability insurance policies; monitor certain types of custody arrangements; review and approve anti-money laundering procedures; and approve procedures governing certain types of affiliated transactions. The standards that govern directors’ determinations in these areas apply to all funds in a complex.

Common Personnel and Service Providers

All funds within the same complex generally are served by common personnel and service providers, enter into consistent contractual arrangements, and adopt fairly uniform policies and practices. It is efficient to have a single board, or a few cluster boards, review these common policies and procedures and oversee common arrangements. It also is easier to implement any changes on a complex-wide basis.

Complex-Wide Oversight Mechanisms

The mechanisms that boards use to assist in their oversight of funds and fund service providers generally apply on a complex-wide basis. These include board oversight of compliance, risk, and the audit function.

Enhanced Board Influence

The practice of having a single board oversee all the funds within a complex—or within a cluster of funds in the complex—enhances the board’s knowledge and expertise, as well as its authority and influence in the fund complex. As a result, the board’s effectiveness in serving the interests of fund shareholders is enhanced.

did you know
As of 2012, 82 percent of fund complexes participating in IDC/ICI’s Directors Practices Study have a unitary board structure. Generally about 16 percent of fund complexes participating in IDC/ICI’s Directors Practices Study have cluster boards.