This summer, PricewaterhouseCoopers hosted directors of major mutual fund boards for a roundtable discussion of their perspectives on current issues in the industry with respect to mutual fund board duties and responsibilities. The open discussion presented a candid view into the board-level thinking, particularly in light of the existing market conditions. PWC has published a document, "Thoughts from the Boardroom: A Frank Discussion" summarizing the issues directors at the roundtable brought up, and providing some advice and observations from PWC on each.
Not surprisingly, the discussions of what directors are concerned about focused on three broad, but vital and substantive issues weighing on the minds of fund directors.
More than any other subject at the roundtable, board oversight of risk has directors seeking guidance and resources. In particular, understanding who "owns" risk at a fund complex, and gaining an understanding of new investment products are the main challenges. PWC offers the following observations:
PwC believes the following points should be considered by directors as they fulfill their fiduciary roles surrounding risk management oversight:
- Whether all material risks related to the funds are fully understood;
- The extent to which service providers impact those risks;
- The process to periodically validate risk management practices and oversight;
- The tone at the top and expectations for fund risk management practices;
- The process to identify emerging risks and trends;
- The quality of the data underlying risk management and oversight reporting;
- Whether all risk management and oversight resources have been utilized and considered;
- Whether conflicts of interests have been assessed in risk management and oversight practices;
- The level and detail of documentation supporting risk management and oversight matters; and
- The extent and utility of self assessment reviews.
The general approach the board should consider is to understand and evaluate management’s approach to (1) risk identification and prioritization, (2) assessment of business practices and related controls to manage risk, and (3) understand and evaluate management’s monitoring, escalation and reporting practices. Finally, consideration of these factors should help the board in their own self assessment of monitoring compliance with the new SEC disclosure requirements regarding how the board is fulfilling their fiduciary duty to shareholders in overseeing risk.
15(c) contract review considerations including investment performance
The annual contract renewal process remains an area of concern to fund directors. In particular, directors are concerned with the increasing difficulty of measuring performance in a time when factors like long-term risk profile and fee structure have become more important considerations in judging a fund’s performance. In addition, directors are still trying to address how the Jones v. Harris decision affects their funds' 15(c) process.
PWC's take on the evolving 15(c) process included these observations:
The Supreme Court’s upholding of the prevailing Gartenberg standard means that the mutual fund industry can continue to build upon the standard, which will be helpful to both advisers and independent boards in their annual contract review process. With respect to the boards evaluation of the fund’s investment performance, business judgment is necessary to evaluate overall service quality on both a short-term relative basis as well as a longer term view. Boards have been questioning whether they have been doing enough to ensure that economies of scale are fully and appropriately reflected in the costs borne by shareholders. Boards should reassess their funds’ fee schedules and ensure they are consistent with what the board sees as a cohesive pricing philosophy. Some points toconsider include the use of appropriate breakpoint pricing, either at a fund or group level, the use of voluntary expense waivers and caps, and the use of qualitative and quantitative analysis to explore the relationships between changes in assets under management over a period of time, and the advisor’s functional costs, and profitability trends. Boards should also consider the fund’s pricing and related service model to other similar managed accounts (e.g. separate accounts, pension assets).
Industry consolidation resulting in expanded responsibilities of the board
Consolidation in the fund industry is presenting some directors with issues related to approving mergers of fund families, or acquisitions at the advisor or parent company level. These events present a number of challenges for directors to consider, including increases in the number of funds a board may be responsible for overseeing. PWC offers these observations:
Boards should use this opportunity to assess the overall operational structure of the organization, including revisiting decisions on outsourcing and insourcing. Of course, any considerations of resource reductions or operational changes must assume that the fund continues to operate in full compliance with fiduciary standards, legal requirements, and consistent with shareholder expectations. Consolidation also impacts boards, which means that boards should use a consolidation as an opportunity to assess some of the key issues of board’s composition and operation, including board compensation, succession planning, and on-boarding.
PWC's document provides a succinct, but revealing, look at the issues fund directors are concerned about. It also provides a quick, plain language overview of PWC's advice and observations.
The full PWC report is available at: http://www.pwc.com/us/en/asset-management/investment-management/publications/assets/directors-roundtable.pdf