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SEC to Ask Tough Questions of Fund Directors

March 20, 2013

On March 18, 2013, Norm Champ, the Director of the SEC’s Division of Investment Management, delivered the keynote address to the 2013 Mutual Funds and Investment Management Conference. His remarks focused on a number of initiatives by which he stated that the Division is seeking to improve its “eyes and ears” and gain a better understanding of the workings of the fund industry. He stated that one way the Division will accomplish this is by meeting with fund directors. Mr. Champ’s speech follows the SEC’s announcement of its examination priorities for 2013 for investment advisers and investment companies, where the staff announced it would be interviewing fund directors.

Mr. Champ stated that given the critical oversight role of fund directors, the Division will “need to ask some tough questions” of them, including:

  • Are fund directors overextended?
  • Are fund directors’ responsibilities appropriately allocated? Do fund directors spend time on the issues where they can provide the most value?
  • Are fund directors asked to oversee too many funds? At some point, does it become too many funds? How many is too many? Is it 4? Is it 14? Is it 140?
  • Are fund directors equipped to ask the tough questions, and make difficult calls? For instance, do fund directors focus appropriately on the fees paid to sub-advisers in comparison with the fees of the advisers that oversee them? Do fund directors examine whether an adviser’s fee is appropriate given the oversight function they perform, as opposed to the day-to-day portfolio management function?
  • Do fund directors focus on fee arrangements of securities lending agents, particularly if they are affiliated? Does that focus include flat fees as well as the so-called “fee-splits” for the return on investment of securities lending collateral?
  • Are fund directors able to focus on these and similarly important issues on a fund-by-fund basis?

Mr. Champ added that the Division is also interested in hearing from directors about “areas where directors believe they are adding value and, in contrast, about areas where they feel that their oversight is more difficult to manage.” He stated that the list of questions for directors is not yet final, and the Division has additional questions in mind.

While in his speech Mr. Champ said that the meetings with fund directors “underscore … the value of dialogue and two-way communication”, his list of questions and the relatively strong language used to ask those questions are worth bearing in mind and may well suggest some real skepticism about the answers the Division expects to hear.

Directors will want to be considering the questions posed by Mr. Champ, and, if the SEC staff seeks an interview, should work closely with counsel to ensure they are well prepared.

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