In his January 15 remarks at the Mutual Fund Directors Forum Second Annual Directors’ Institute, the Securities and Exchange Commission’s Director of the Division of Investment Management, Andrew J. Donohue,discussed the role of investment company fund directors in fund advisory contracts approvals (known as the 15(c) process). Section 15(c) of the Investment Company Act of 1940 (the 1940 Act) requires independent directors to engage in a detailed and thoroughly documented analysis of the advisory contract.

Mr. Donohue emphasized that the 15(c) process not only benefits the fund and its investors, but directly benefits the adviser and the independent directors. Mr. Donahue noted that an adviser’s potential liability under Section 36(b) of the 1940 Act gives advisers a strong incentive to fully disclose information about its compensation and services. Further, a court is more likely to rely upon the independent directors’ business judgment where their decision and rationale is documented extensively.

Mr. Donohue concluded by stating that the SEC’s staff is currently analyzing Rule 12b-1 fees, soft dollars in the mutual fund context, and delegation of director responsibilities to others (e.g., chief compliance officers) to allow directors more time for substantive issues.