Newswise — A recommendation that mutual fund boards should not permit fund advisers to participate in soft dollar arrangements in trades for funds is among 32 recommendations to mutual fund directors presented in a new report by the Mutual Fund Directors Forum to the United States Securities and Exchange Commission today (July 28).
The report, "Best Practices and Practical Guidance for Mutual Fund Directors," was requested by William H. Donaldson, SEC chairman, to guide mutual fund directors in areas where their oversight and decision making is critical for the protection of fund shareholders. "The report is a fine combination of recommendations, practical advice and scholarship for fund directors supervising mutual funds on behalf of fund shareholders," said David S. Ruder, chairman of the Mutual Fund Directors Forum, SEC chairman from 1987 to 1989 and William W. Gurley Memorial Professor of Law at Northwestern University School of Law. Responding to a request from the commission, Ruder helped organize the Mutual Fund Directors Forum five years ago. The Securities and Exchange Commission and Northwestern University School of Law have cooperated to support the forum's annual and periodic policy conferences and regional seminars. Allan S. Mostoff, president of the forum, calls the more than 60 pages of recommendations, explanation and guidance "must reading" for independent mutual fund directors. "Mutual fund directors who follow the recommendations in the forum's report will be greatly aided in monitoring areas where conflicts exist between the interests of fund shareholders and the advisers who manage their funds," Mostoff said. The report makes significant recommendations in four key areas.
Soft Dollars, Directed Brokerage and Revenue SharingThe report endorses the guiding principle that brokerage commissions paid by a fund for effecting portfolio transactions are an asset of the fund and should be used in the interest of the fund, not the adviser. It recommends that independent directors not permit their fund's adviser to participate in soft dollar arrangements in trades for the fund.
Director Independence and Review of Conflicts of InterestThe report endorses SEC determinations that the chairman of a fund's board and 75 percent of the board's members should be independent of the fund adviser. It contains recommendations regarding review of conflicts of interest, board self-evaluation and independent director education.
Review of Management Agreements and Management FeesThe report recommends that independent directors form a contract review committee to establish a structured process for making recommendations to the board regarding adoption or continuation of the investment advisory agreement. Practical guidance is provided regarding information to seek and matters to be considered in connection with negotiation of the agreement.Valuation and Pricing The report urges fund boards to establish a standing valuation and pricing committee to assure objective valuation and pricing of fund shares. Practical guidance includes a list of sources to consider in reaching pricing and valuation decisions and suggestions regarding ways to oversee fund valuation and pricing. The Mutual Fund Directors Forum seeks to promote independent and well-informed independent directors and to serve as their voice regarding important policy matters. The Best Practices report was approved by a steering committee composed of independent directors. Not all of the committee members agree with all of the report's recommendations. Chairman Donaldson has been advised that the forum will consider issues relating to Rule 12b-1 payment arrangements later this year.
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