In a letter dated October 16, 2017, the Investment Company Institute’s Independent Directors Council (IDC) asked new SEC Division of Investment Management Director Dalia Blass to conduct a “long-overdue,” comprehensive review of fund independent directors’ regulatory responsibilities to identify modifications that the staff and SEC should make to “enhance directors’ effectiveness in today’s environment on behalf of fund shareholders.” The IDC’s letter expressed the view that the current regulatory regime should be changed to enable directors to focus their attention and dedicate the majority of their time to the matters that are most important to shareholders’ interests and to which directors can add the greatest value. 

Commenting on the expansion of director responsibilities generally since the enactment of the Investment Company Act of 1940, the IDC stated that it was “troubled by requirements that hold directors accountable (i.e., liable) for functions that are more appropriately within the purview of fund management.” In this regard, the IDC stated that the concern in the director community is not merely with the number of regulatory requirements, but “more importantly, with the nature of some of the requirements, such as those that are outmoded or inconsistent with directors’ oversight role.” 

The IDC called upon the Division of Investment Management to revisit earlier undertakings to review fund director responsibilities, such as the 2008 Director Outreach Initiative under former Director Andrew Donohue, which as a result of the “more pressing regulatory priorities” triggered by the global financial crisis of 2008–09, failed to result in any recommendations to the SEC. 

The IDC asserted that, consistent with the “guiding principles” articulated by SEC Chairman Jay Clayton, “any review of directors’ responsibilities should incorporate and reflect the significant industry, technological and regulatory developments that have occurred” and the opportunities such developments present for “rethinking directors’ responsibilities and board governance requirements.” As an example, the IDC cited the adoption in 2003 of the fund compliance rule, Rule 38a-1 under the 1940 Act, that established a “successful framework for board oversight that is well-accepted across the industry” and, given its success, “should serve as a model for modernizing other regulatory responsibilities of fund directors.” 

In its letter, the IDC summarized key developments in the fund industry and the evolution of directors’ responsibilities and suggested that the SEC staff consider modifying certain areas of board responsibility. These areas included: 

  • Board involvement in fair valuation;
  • Board review of payments under Rule 12b-1 distribution plans;
  • Certain requirements identified by the IDC as “ritualistic,” including board review of repurchase agreements (Rule 5b-3), affiliated transactions (Rules 10f-3, 17a-7 and 17e-1), custody of foreign assets (Rule 17f-5), fidelity bonds (Rule 17g-1), multiple share classes and related expense allocations (Rule 18f- 3) and net asset value computation (Rule 22c-1);
  • Certain fund governance requirements, including requirements to hold in-person meetings to approve advisory and distribution agreements; and
  • Certain aspects of the “interested person” definition, including the prohibition on independent directors owning de minimis amounts of securities issued by unaffiliated sub-advisers or their parent companies.

A copy of the IDC’s letter is available at: