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Funds Benefit-And Suffer From Trustee Oversight


PHILADELPHIA - Boards may have grown in power since the passage of the Sarbanes-Oxley Act of 2002, but mutual fund companies should take care to temper that influence so it doesn't interfere with business.

"Since Sarbanes, boards have flexed their muscles and shown their independence," said Robert Mulhall Jr., a partner with Ernst & Young LLP, at the National Investment Company Service Association's East Coast Regional Meeting here last week at the Union League Club.

Also known as the corporate responsibility act, Sarbanes-Oxley empowers trustees with oversight of accounting regulation, expands the role of chief compliance officers and stiffens penalties for fraud.

The result has been a surge in board oversight and influence, but the increased transparency has also had its drawbacks. In many cases, the board of directors are flooded with more data than they know what to do with, known as "data dumping."

"Trustees don't know what to do with some of these reports," said Joe Malone, treasurer and chief financial officer for Aberdeen Funds.

Inundating trustees with data can cover liability concerns, but more paperwork means more work for everyone.

"The amount of data we're sending to the boards is getting thicker and thicker and thicker at each meeting," said Brenda Lyons, senior vice president and director of operations for State Street Corp. "Boards need to make sure they understand what they're receiving."

"I think there is an opportunity for addition by subtraction," said Peter Poulin, managing director of global funds administration for Brown Brothers Harriman & Co. "Once a piece of paper gets into a report, it's hard to get it out. Periodically you should go through the information page by page and ask, Do you really need this?'"

The growing trend toward appointing independent directors has also increased the workload for managers charged with explaining complex topics to board members who may not necessarily have a financial background.

"Some may not be educated enough to know what a transfer agent is," added Nick D'Angelo, a director at PricewaterhouseCoopers LLP. "If boards aren't asking, you may need to tell them what they're seeing."

"Every time we're talking to the board, they're asking us to educate them on some topic," Poulin added. "Education is key. People are creating new instruments faster than we can understand them. If you don't understand an instrument conceptually, you're not going to be able to account for it."

"Compliance has really ramped up since the Patriot Act," said Jeff Naylor, vice president of Investar*ONE distribution services and regulatory reporting for SunGard.

CCOs are responsible for creating and implementing policies to prevent money laundering, keeping up with the evolution of the redemption fee Rule 22c-2, managing conflicts of interest, using forensic testing and creating comprehensive security policies- among other things (see "Add Forensic Testing to the SEC Exam Checklist," MME 4/28/08).

Boards are charged with understanding the ever-changing gamut of product nuances, keeping up with the compliance requirements and reacting when problems arise.

Instead of meeting quarterly, some boards are meeting twice as often to keep up with the workload.

Special Subcommittees

"Board members want to be involved and educated," Mulhall said. "It is very challenging and time-consuming just to figure out what information you have."

To keep up with these changes, many boards have formed special subcommittees and expanded their reliance on executives like the chief compliance officer.

"Boards are putting tremendous reliance on CCOs," said Jim Volk, chief compliance officer at SEI Investment Manager Services. "So much so, that some things that should be directed at management are being pointed at the CCO. CCOs have to be careful to pull themselves out when appropriate."

Keeping abreast of these changes can be daunting, but there are some enthusiastic board members who seem up to the challenge. They take their job very seriously by reading newspapers, trade journals and attending conferences. Sometimes a board's involvement and influence can exceed its intended range, if not kept in check.

"How do you prevent a board from micromanaging?" Volk asked. "You have to have a strong will, and sometimes you need to push back."

A proactive board can be a blessing and a curse. Trustees can begin to meddle in the daily operations of a fund, especially when they start seeing headlines in the media about the funds they are charged with overseeing.

"You don't want any surprises at the board meeting," said Richard Salus, senior vice president, controller and treasurer for Delaware Investments. "Let them know what you're doing and how you're dealing with it."

Sometimes it helps to meet with individual board members or subcommittees before the meeting and make sure potential questions will be addressed.

"I will pick up the phone and call a committee chair sometimes," Lyons said. "It helps you prepare for the meeting with them and it helps you educate each other. Sometimes they put a perspective on the table that you hadn't considered."

"The board has to serve as the sanity check for managers," Volk agreed.

Boards should always be kept in the loop, but CCOs should make sure they don't burn management before all the answers are in.

"If the CCO uncovers an issue, they should go to management first to give them a chance to fix it before you go to the board," Volk said.

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