The SEC shouldn't allow mutual fund directors to dump some of their responsibilities onto others.
The SEC shouldn't allow mutual fund directors to dump some of their responsibilities onto others. As reported in last week's InvestmentNews, some directors have apparently asked the Securities and Exchange Commission for permission to delegate some of their duties to, for example, funds' chief compliance officers to free up more time to deal with substantive issues.
There are several questions here.
First, are directors overworked? Second, has this burden prevented them from protecting fund shareholders? Third, would shareholders be better protected by the third parties to whom the duties are passed?
Directors do have many duties. Among other tasks, they are responsible for approving or renewing contracts with fund advisers. However, there is little evidence that directors are overworked. In fact, many in the investment business regard the position as a desirable source of supplemental income, and there seems to be no shortage of prospective directors.
However, there are relatively few vacancies each year, as turnover among directors is low.
Some may point to the fact that fund advisers aren't often replaced by boards as a sign that boards are overburdened. But academic research suggests that there is a correlation between how quickly poorly performing advisers are replaced and how much of their own money directors have in the shares of the poorly performing funds.
It isn't a matter of time; it is a matter of self-interest.
No one claimed in the wake of the market-timing scandals that the directors missed the signals because they were overburdened. They simply weren't paying enough attention or asking the right questions.
And there is a danger that if some responsibilities are lifted off directors' shoulders, telltale warning signs of new problems may be missed in the future.
If directors somehow make the case that they are overburdened, a simpler, safer solution for shareholders would be for directors to sit on fewer mutual fund, and other, boards.
Would mutual fund shareholders be better served if some of the directors' responsibilities were handed over to others such as the chief compliance officers?
That's not likely, as the chief compliance officer would be in a hopelessly conflicted situation. While the compliance officer's nominal responsibility would be to protect fund shareholders by making sure that the fund company were compliant with all laws and regulations, the real clients would be the employers — top management.
They would pay the salary.
While the interests of the shareholders and top management generally coincide, that might not always be the case.
Just as important, the SEC shouldn't allow even the hint of a potential conflict of interest. It should reject the bid by the directors to jettison some of their responsibilities, and simply tell them to work harder.
