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SEC Chair to Fund Directors: Much is Expected of You in your Oversight

In remarks at the Mutual Fund Directors Forum’s annual Policy Conference, SEC Chair Mary Jo White emphasized the importance of fund directors to the millions of investors who own mutual funds.  In particular, she highlighted the role of fund directors in risk oversight.  Using last year’s system failure that prevented a number of funds from calculating “system-generated NAVs” and the suspension of redemptions at another fund, she outlined some considerations for boards that can facilitate proactive risk oversight, including:

  • [H]ow will my fund’s and its service providers’ compliance policies and procedures, business continuity plans and back-up-systems address these situations?
  • [W]hether these events could happen at your fund, how to prevent them from happening, and how to respond promptly and effectively if they do occur.

With respect to liquidity:

  • With respect to liquidity, the quality of the information that management provides to the board, the frequency with which management reports to the board, and how management of the funds monitors and manages liquidity risk.
  • [W]hether they understand any links that may exist between liquidity and valuation with respect to the funds they oversee and whether directors are appropriately focused on funds with strategies that may be more likely to face liquidity challenges.
  • [W]hether an open-end fund’s investments and investment strategy are appropriate for a fund offering daily redemptions.

With respect to service provider issues:

  • [W]hether the funds and their service providers have back-up plans
  • Has fund management considered the back-up systems and redundancies of the critical service providers that value the fund, keep track of fund holdings and transactions, and strike NAVs?
  • Has fund management also considered specific alternate systems or work-arounds that may be necessary to continue operations or manage through potential business disruptions?

Chair White emphasized the difficulty in balancing the vital role that fund directors play for fund shareholders with the fact that fund boards provide oversight and not day-to-day management.  She stated “it also is incumbent on regulators to avoid completely overloading directors with additional responsibilities, or confusing strong oversight with the management of a fund.”  Chair White assured the audience “[t]he board’s oversight function and how directors can best serve as gatekeepers in protecting shareholder interests will remain a key focus for us at the SEC, as we move forward to address current risks in the asset management industry.”  She also encouraged the industry to continue to provide input to help the SEC “strike an appropriate balance for the board’s oversight role and ensuring that the board is optimally protecting investors’ interests.”