On October 30, 2013, the Mutual Fund Directors Forum released a report entitled Practical Guidance for Mutual Fund Directors: Board Governance and Review of Investment Advisory Agreements. The report provides guidance for independent directors on board governance matters and the review of advisory contracts, updating similar guidance published by the Forum in 2004 for new legal developments and the evolution of board practices.
The report provides recommendations to enhance the effectiveness of independent directors generally and also specifically in the areas of board structure, board communication, board use of third parties, director compensation, board self-assessments and board oversight of valuation. Some of the report’s recommendations include:
- Independent directors should focus on oversight rather than day-to-day management;
- At least 75 percent of a fund’s directors should be independent of the fund’s adviser and its affiliates;
- Standing committees may help boards fulfill their responsibilities to shareholders;
- A board’s structure and processes should facilitate appropriate oversight of an adviser’s management of the investment, operations and other risks associated with a fund;
- Independent directors should be allowed to have input into the board meeting agenda;
- Independent directors should meet in executive session at every board meeting;
- Independent directors should retain knowledgeable counsel to advise and assist them in carrying out their duties;
- Boards should seek to use a fund’s chief compliance officer effectively, especially with respect to identifying and resolving conflicts;
- Boards may wish to encourage or require independent directors to use a portion of their compensation to invest in the funds they oversee; and
- Boards should ensure that every director participates fully in a board’s annual self-assessment and should plan follow-up action based upon the conclusions of the self-assessment.
The report also provides recommendations relating to the review of advisory contracts. Such recommendations include:
- Independent directors should review a fund’s advisory contract in accordance with a defined process;
- Boards may find a contract review committee, consisting of some or all of the independent directors, helpful in overseeing the contract renewal process;
- Independent directors can reach a more informed conclusion in the contract renewal process by generally understanding the adviser’s business and the asset management business;
- Independent directors should submit to the adviser a formal written request seeking all information reasonably necessary to review an advisory contract;
- A fund’s performance track record provides meaningful information necessary in a board’s evaluation of an advisory contract; and
- Before approving an advisory contract, independent directors should meet in executive session without any interested directors or other representatives of the adviser in order to discuss the factors relevant to their decision to approve the advisory contract.
The report is available at: www.mfdf.org/images/uploads/resources_files/MFDF_Practial_Guidance_Oct2013_(web).pdf