SEC: Don't Bog Directors Down
April 9, 2007
PALM DESERT, Calif.-Fund boards have a duty to shareholders to act as fiduciaries, but how much responsibility should fund directors have, and are they overloaded?
Experts raised the question at the Investment Company Institute's "Mutual Funds and Investment Management Conference" here last month.
"It is clear that directors are fiduciaries and are supposed to oversee management, but not become management," said Karrie McMillian, a partner with Willkie Farr & Gallagher of New York.
"The fund industry has prospered, and fund investors have benefited, under a mutual fund governance regime that relies on fund directors to exercise judgment and oversee conflicts of interest," said Andrew "Buddy" Donohue, director of the division of investment management at the Securities and Exchange Commission.
"Oversight of conflicts is a basic and fundamental function for fund directors, and I want to make sure that we have not overloaded fund boards so it is difficult for them to effectively perform their oversight role," Donohue added.
Thus, Donohue plans on reaching out to directors this year to figure out what the SEC can do to help them be more effective. The SEC staff is going to look at smaller issues, where simple changes can be made and also tackle bigger issues that may take longer to fix, he said.
Donohue noted he is interested in whether there are areas where fund directors could benefit from additional guidance in regards to fair valuation and soft dollars.
"A lot of issues need to be addressed by the Commission in regards to rulemaking," said Alan Dynner, vice president and chief legal officer at Eaton Vance Management of Boston. Some responsibilities are pinned on directors that are unnecessary, he said, but they are not necessarily overloaded with responsibility.
"It really boils down to the quality of the board," he said, adding that boards are increasingly becoming more sophisticated.
Over the years, more documents have piled up, making the fund director's role more complex. It changes the nature of the director's role and what they should do and focus on, said Kathryn Quirk, vice president and corporate counsel at Prudential Investments of Newark, N.J..
"We need to get to a place where directors know how to get information and how deep down they have to dig," she said. It's not clear at what level they can stop asking questions.
Panelists then raised the question of how much information should be provided to the board.
"We've overloaded directors with information on all different topics and need to streamline their responsibilities and make their job easier," said Paul Goucher, managing director and associate general counsel at J&W Seligman of New York.
There is a tremendous amount of information that companies have, and they need to figure out what the boards want to know, he said. More guidance from the staff on what should be revealed to directors will be helpful, Goucher said.
Communication between fund management and directors has become more frequent. "Companies welcome a lot more intermediary meetings from management and are more proactive about getting information to fund directors," said Steven Paggioli, a trustee for Professionally Managed Portfolios.
Each person on the board serves as a point person to the chairman on different issues, Paggioli explained. The chairman can tell a member to look into an issue and then decide after the point person has researched it if the issue should be raised to everyone's attention.
More and more boards are breaking off into committees, since that improves communication, McMillian added.
Additionally, Paggioli explained that the day before a formal meeting, many boards hold strategy meetings to discuss budget and overall business plans. "This is invaluable, as you're less likely to be surprised in the future," he said.
Informal communications between fund directors and management has also increased. Independent directors arrive before the meetings, walk around the halls and talk to people regarding the company, Goucher said. "We feel comfortable allowing our directors to wander the halls because there is nothing that we wouldn't tell our board," he said.
A package is put together for the board and information is provided that directors may-or may not-find useful. "We provide more information than what may be needed because we don't want people to say, Well, you didn't inform the board,'" Goucher said.
Michael Scofield chairman of Evergreen Management's board, said he receives monthly reports from the firm's management team and is kept up-to-date on products and projects still in the development stage, along with performance, distribution and shareholder communications.
However, it is not all management's responsibility to know what to tell directors. Fund directors also have a responsibility to tell management the pertinent information they want to know and hear, Paggioli said.
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