Week in Review
November 19, 2007
Donohue Urges Directors To Focus on Fair Value
Speaking before the Investment Company Directors Conference, Andrew J. Donohue, director of the Securities and Exchange Commission's investment management division, called on directors to be more meticulous about making sure fund investments are properly valued. He pointed to the subprime crisis as evidence of this importance.
"Funds must adopt policies and procedures that monitor for circumstances that may necessitate the use of fair value prices, [such as] when market quotations are no longer reliable for a particular security," Donohue said. If fair valuation is needed, the fund should establish a methodology for determining a proxy price and regularly review the accuracy of this methodology, he said.
Directors should also determine whether the investments in a fund provide adequate liquidity for the manager. "If you are having difficulty pricing a security, or if securities pose liquidity challenges, query whether those securities belong in a mutual fund," Donohue advised.
And should the SEC grant an exemptive relief to a fund, the board must "be actively involved in overseeing the fund's operation," Donohue said.
Finally, he called on directors to ensure that if a fund accepts research through soft dollars, that it is still vigilant about achieving best execution.
Two-Thirds of Directors Say Workload is Higher
Between Sarbanes-Oxley, the late-trading and market-timing scandals of 2003 and other reasons for a tightening in the mutual fund industry's oversight, it's no wonder fund directors are working more and quitting more.
A study by PFPC quantifies these trends and other developments in the professional life of board members at fund companies.
The report says an evolution has occurred around the board table. It draws on the experiences of 154 independent board members, affiliated board members and fund executives to spell out some of these changes.
Two-thirds of all board members surveyed and three-quarters of independent board members believe it is more difficult to be a mutual fund director today. The amount of time that board members have been serving affected the results. The more experienced directors, those serving 16 or more years, are more inclined than those with five years or less to feel the role today is more difficult.
One-third of directors surveyed said they spend more than 50 hours per quarter on board responsibilities. The polled board members also said turnover was high.
One in four respondents noted at least one member of their board has resigned as a result of the additional time spent working on board matters due to increased regulatory burdens and personal liability concerns.
Although 65% of directors surveyed believe the job is more difficult today, an overwhelming majority, 96%, report enjoying their time as directors and plan to continue to serve.
Four out of 10 board members said that their boards have increased the number of directors because of increased demands for particular types of professional expertise or due to the burden of new regulations.
"Fund boards are getting larger out of necessity in response to the reforms introduced by Sarbanes-Oxley-greater transparency and accountability-and the increased compliance and controls that came out of SEC Rule 38a-1. Both have significantly increased the workload for fund directors," said Linda Hoard, senior vice president and senior counsel at PFPC. "For example, Sarbanes-Oxley requires funds to disclose whether or not their audit committee has a financial expert. Rather than disclose that they did not have a current member who met the criteria of a financial expert, many boards went out and recruited from a limited talent pool."
But this outreach hasn't been easy. Fifty-eight percent of directors surveyed said recruiting qualified candidates to serve as audit committee financial experts has been difficult or very difficult. Almost as hard, the report states, is the recruitment of independent board members, which 51% of respondents said was difficult or very difficult.
One concern for directors and would-be directors is personal liability. One in four board members polled said they do not have adequate personal liability insurance. One-third of interested board members and 16% of independent directors surveyed have obtained additional personal liability coverage.
Independent Fund Chairs Called an Investor's Right
MarketWatch columnist Chuck Jaffe has a bone to pick with the Investment Company Institute and the Independent Directors Council, which have just issued a report showing that three-quarters of 88% of fund boards were comprised of independent directors at the end of last year (see related story, page one). The organizations also found that 75% of fund companies either have an independent chairman or a lead independent director. In the mid-1990s, less than 25% of funds had an independent chairman.
The report also found that whereas 66% of fund companies had separate legal counsel for their independent board members in 2000, more than 90% do so now, and a "vast majority" had a financial expert on the audit committee.