The SEC has issued an interpretive letter on the duties of mutual fund directors under the Investment Company Act that should help fund boards reduce the volume of quarterly review materials for their directors by relying on summary quarterly reports prepared by the fund's chief compliance officer or other designated persons.

The letter addresses the responsibilities of mutual fund directors in reviewing certain conflict-of-interest transactions under Rule 17a-7 (allows certain purchases from and sales to affiliated funds), Rule 17e-1 (provides guidance for the use of affiliated brokers for portfolio transactions), and Rule 10f-3 (allows certain purchases from affiliated underwriting syndicates). Each of these rules requires a fund board to make a determination, no less frequently than quarterly, that each transaction made during the preceding quarter was effected in compliance with procedures reasonably designed to provide that the transactions comply with the requirements of the relevant rule. While the letter makes it clear that a fund board cannot delegate its responsibility to make the required determinations, it expressly states that directors do not have to review each transaction in order to make the required determinations.

Instead, mutual fund boards may make these determinations based on summary quarterly reports (prepared by the fund's chief compliance officer or other designated persons) of the transactions effected in reliance on the applicable rule. Of course, even if a fund board relies on summary quarterly reports to help reduce the volume of quarterly review materials, directors remain responsible for ensuring that they properly discharge their fiduciary duties.

Specifically, one of the basic fiduciary duties that the law imposes on mutual fund directors is a duty of care. In the context of conflict-of-interest transactions, the duty of care requires that directors fully understand the issues raised by these conflict-of-interest transactions. Therefore, directors need to remain vigilant even if they do rely on summary quarterly reports, and they need to ensure that they have a process in place that is reasonably designed to ensure that conflict-of-interest transactions are effected in a manner that is consistent with the board-approved procedures and the relevant rules.