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Familiarizing Yourself with a Particular Board and Fund Complex

Once a candidate for membership on a fund board has made the decision to join the board, he or she may want to ask the following questions in order to become more familiar with the board and fund complex.

What is the investment advisory firm that will manage the funds?

Of fundamental importance to any new director will be the company managing the fund. Some of the questions to be considered are listed below.

  • What types of funds are being offered and who manages them?
  • What are the management company’s mission, culture, and reputation?
  • Who are the management company’s key personnel?
  • What are the management company’s other lines of business?
  • How do the funds fit into the management company’s overall product line?

Who are the other directors on the board?

It may be helpful to have biographies for the directors on the board, as well as for the directors on any other boards in the fund complex.

What is the leadership structure of the board?

Does the board have an independent chair? Lead independent director? If so, what is the lead independent director’s role? The SEC has noted that “different leadership structures may be suitable for different companies depending on factors such as the size of a company, the nature of a company’s business, or internal control considerations, among other things.”

What is the committee structure of the board?

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.

What is the overall structure of the board?

Most funds are part of complexes comprising multiple funds managed by the same investment adviser. Boards of these funds generally 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 cluster boards consisting of two or more separate boards of directors for groups of funds within the complex. Clusters typically are organized according to investment objective, investment sector, or distribution channel—or result from a merger of complexes that were initially organized under separate management.

How frequently does the board meet?

The frequency of regularly scheduled board meetings is not dictated by statute or rule. Approval of the advisory contract, among other duties, must occur annually at an in-person meeting, but the timing, length, and nature (e.g., in-person, telephonic) of the other meetings are matters to be determined by each board. The frequency of board meetings may be influenced by several factors, including the size of the board and the number of funds the board oversees. A board also may elect to meet less frequently but for more days each time. In actuality, fund boards quite often meet more frequently than called for by a regular schedule because additional in-person or telephonic meetings are held to address specific issues.

What are the board’s compensation practices?

Independent directors of mutual funds are compensated for their time and service by the funds they oversee. The adviser typically pays the compensation of directors who also are officers or employees of the adviser. Compensation varies within the industry and may depend on a number of factors. Some factors include: differences in the complexity and size of funds and fund groups overseen by a director, the time commitment required for meetings and other duties, the number of meetings, and the compensation levels necessary to attract highly qualified people.

Director compensation may be structured in different ways and can include an annual retainer, meeting attendance fees, a deferred compensation plan, a retirement program, or other benefits. Independent chairs, lead independent directors, and committee chairs may receive additional compensation for their added responsibilities. Unlike corporate directors, fund independent directors do not receive shares or options in the fund.

Does the board have a policy requiring or encouraging directors to invest in the funds they oversee?

While many directors choose to own shares of the funds they oversee, not all boards have adopted formal policies requiring or encouraging them to do so. The issue attracts some attention because SEC rules require disclosure of fund share ownership by directors and some investors and industry reporting services consider it to be a noteworthy topic. In 1999, ICI published a Report of the Advisory Group on Best Practices for Fund Directors, which recommended that directors invest in the funds of the boards they serve.

To what extent do the independent directors have directors’ and officers’/errors and omissions (D&O/E&O) insurance coverage and/or indemnification from the fund that is adequate to ensure their independence and effectiveness?

In determining whether the coverage is adequate, there are a variety of factors you may wish to consider. One factor is the exact nature of what constitutes a claim that can be made on the policy and what events may be excluded from coverage. Other factors include whether the fund insurance policies and/or indemnification provisions in fund charters or bylaws provide continuing coverage for claims arising in connection with your service as a director after you cease to serve on the board, and whether the insurance policy provides coverage if the fund’s independent directors and its investment adviser are opposing parties in litigation.

Does the board have legal counsel independent from the fund and/or the fund’s investment adviser?

Fund boards employ a variety of arrangements in retaining counsel. Some independent directors have their own dedicated counsel, others formally retain counsel with the fund, and still others have no dedicated counsel but instead rely on counsel to the fund (or retain other counsel) as needed. 

How is the board’s annual assessment administered? Who is involved? How is it formulated? 

Virtually all fund boards are required by SEC rule to conduct self-assessments annually. In the self-assessment, the board must consider the effectiveness of its committee structure, and the number of funds overseen by directors. Beyond those requirements, a board's self-assessment does not need to follow any specific process or contain any specific content. Self-assessments may vary from board to board.

Does the board require or encourage directors to seek out continuing education?

The fund industry is extremely complex and, as such, directors may need to seek opportunities to keep abreast of industry and regulatory developments. This can be done in many ways, including by regularly reviewing written materials that address industry and regulatory topics (such as reports prepared by fund counsel), holding special sessions of the board that focus on particular topics, or attendance at conferences and educational seminars.

Does the board have a mandatory retirement policy?

No regulatory requirement relating to retirement policies exists for fund directors, but the topic may be addressed in a board’s annual self-assessment. ICI’s Report of the Advisory Group on Best Practices for Fund Directors recommends that fund boards adopt policies on the retirement of directors, but does not specify the type of policy (e.g., retirement age, term limits) or a recommended retirement age.

What other policies and/or practices does the board follow?

Boards may encourage practices or adopt formal or informal policies on a number of subjects other than those required by law or regulation. Examples include media policies that indicate whether board members may speak with the press and conference attendance policies (e.g., whether directors must get prior approval for attending a conference, whether directors are limited in the number of conferences that they can attend each year).