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Familiarizing Yourself with a Particular Board and Fund Complex

Once a candidate has made the decision to join the board, he or she may want to ask questions in order to become more familiar with the board and fund complex. Some of those questions are below.

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.

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.

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).

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