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Forum Staff on Risk Governance by Fund Directors

In the May-June 2011 issue of "Practical Compliance & Risk Managment for the Securities Industry," Forum Senior Counsel, David Schwartz, and Forum Vice President and General Cousel, David Smith, published an article entitled "Risk Governance and Mutual Fund Directors."  This article encapsulates the key themes of the Forum's more comprehensive April 2010 publication on the topic of risk management oversight by fund directors, "Risk Principles for Fund Directors."  In particular, the article reinforces the notion that risk governance is not a new or novel duty of fund directors, but rather something that is embedded in the duties they already perform, and merely requires the proper focus and mindset among fund directors.  

Ideally, risk governance does not create new responsibilities for a board, but is rather already embedded in the board’s other oversight activities. For example, for most boards, understanding various types of risk is already a part of its annual advisory contract renewal process, its annual internal control review, and its approval of new products and its valuation practices. In addition, the board will also often consider risk as part of its oversight of shareholder disclosures. Viewed in this manner, risk governance by fund directors is not a new responsibility, nor does it necessarily require new service providers, new committees or new board practices. Rather, in the current environment, risk governance requires that boards focus more rigorously on whether they understand the concept of risk and whether they are providing adequate oversight of the adviser’s risk management processes as part of their other duties and activities.

The article also gives credit where credit is due to fund directors for their role in the resiliance of the fund industry, and their willingness to reexamine their role in light of changes in the market environment.

Despite the market turbulence and regulatory uncertainty of recent years, the mutual fund industry remains viable, robust and attractive to investors. The sound oversight that independent fund directors and trustees have historically provided to their funds on behalf of those funds’ shareholders has contributed greatly to the industry’s resilience.  At the same time, the recent financial crisis and the resulting market turbulence and dislocations have led directors to reflect on the role they play (and should play) in the risk management process.

As fund directors think about their role in oversight of their funds' risk management processes, this article outlines in brief the areas of focus for fund boards:

Today, fund boards generally seek to provide informed and diligent oversight of the fund’s and adviser’s risk management policies, procedures and culture.  

. . . 

Effective risk governance does not require that boards design and implement risk management structures and policies, but rather that boards (1) be satisfied that fund management has implemented an appropriate risk management system and controls; (2) understand the basics of how the risk management system operates; and (3) have confidence that management (and, if necessary, the board) will become aware of and act on any warnings or “red flags” the risk management system may raise.

The article provides an excellent introduction and overview of risk governance by mutual fund directors, and may be read in its entirety at:

For a more comprehensive discussion of risk oversight, including practical guidance as well as questions boards may pose to management, the Forum's "Risk Principles for Fund Directors" is available at: