The Mutual Fund Directors Forum recently sent a letter to the Director of the Division of Investment Management recommending that the SEC and its staff give fund directors clear authority to delegate routine board functions. The letter contends that uncertainty regarding the SEC’s and staff’s views of delegation “may limit the ability and willingness of boards to take steps that they otherwise believe would benefit their funds and shareholders.” The MFDF believes that having the SEC and staff clarify their view would “provide directors with more leeway to delegate oversight activities to appropriate persons” and thus enable them to use their time as productively as possible.
The letter suggests that the following points should guide directors in analyzing the extent to which delegation is appropriate:
- Require registered investment companies, advisers, and broker-dealers subject to the safeguards rule to develop, implement, and maintain a comprehensive “information security program,” including “written policies and procedures that provide administrative, technical, and physical safeguards for protecting personal information, and for responding to unauthorized access to or use of personal information.”
- Directors should be more reluctant to delegate “core” responsibilities, such as approval of investment advisory contracts.
- Responsibilities that are delegated should be given to persons who are sufficiently independent, free of conflicts, and will be both responsible only to the board and report to the board regularly.
- When delegating activities, boards should determine that they are sufficiently familiar with the delegated activity and that the delegation would not jeopardize shareholder interests.
The letter cites numerous specific board obligations in which the level of detail involved, it is argued, risks distracting directors from their central responsibility of ensuring that funds are managed in the best interest of shareholders. The MFDF believes that clarification of the SEC’s and staff’s views on delegation would address the potential detrimental effects of the level oversight required by these obligations without the need for regulatory change.