SEC Chair White Outlines Responsibilities of Mutual Fund Independent Directors
Commentary by Steven Lofchie
In her keynote address at the Mutual Fund Directors Forum 2016 Policy Conference, SEC Chair Mary Jo White examined the "evolving role" of independent mutual fund directors and posed questions for them to ask about risk, oversight and enforcement.
Chair White offered two examples of current-day risks for the industry that reveal "critical" areas of concern for fund directors: the recent operational and oversight failures of (i) August 2015, when a major service provider failed to produce timely, system-generated Net Asset Values, and (ii) December 2015, when a mutual fund focused on high-yield and distressed debt-suspended redemptions. She suggested that the two events served as warnings to directors to review the materials that they receive carefully and ask questions instead of rubber-stamping management recommendations. Chair White cautioned directors to investigate potential inaccuracies and follow up on unfulfilled requests. In addition, she identified a number of areas on which directors should focus: liquidity risk, service provider monitoring, business continuity, valuation methods, determining whether board members have the proper mix of skills to oversee given funds, and cybersecurity. However, she also stressed that the oversight responsibility of fund directors is not intended to "cross the line into day-to-day management."
Commentary
The big, bad question for directors (and compliance officers) is this: Are you at risk for personal liability? Chair White cited the case of Commonwealth Capital Management (IC-31678) as an example of directors' negligence that warranted personal liability. Whether or not that case illustrates her point, directors should be mindful that their role now entails meaningful risks of personal liability if they are unable to document their oversight. Accordingly, directors also should keep records of documents that they have reviewed, questions they have asked, and any requisite follow-ups. Although Chair White did not intend to discourage individuals from being mutual fund directors, she also indicated the lack of any assured roadmap for future directors to follow.