The recent economic crisis has caused some mutual fund directors to ask for guidance regarding how much, if any, capital is needed to manage a mutual fund advisory business. This is an unusual question as most fund industry observers have always assumed that mutual fund management was more a function of capability than capital. Nevertheless with the report of the Financial Crisis Inquiry Commission, hot off the press, perhaps it is time to explore whether mutual funds are part of the shadow banking system and thus subject to systemic strain. Furthermore the demise in September 2008 of the Primary Reserve Money Market Fund was, in part, the result of the manager, the Reserve Group, not being well enough capitalized to sustain $1 per share net asset value, such that when its Lehman Bonds became impaired, it “broke the buck”. And it was the first to do so in over fourteen years.

Turbulent times bring out the best and worst in every aspect of financial investing. Once again, mutual funds are proving to be an appropriate investment for individuals, families and small organizations. Mutual funds are safer and less volatile in turbulent times because of their professional management, diversification, transparency, and governance structure.

In recent years the topic of securities lending has become an important issue for mutual fund directors, in large part due to advances in technology, which have made the lending process more streamlined and allowed significant profits to be earned. These, in turn, mean higher returns for fund shareholders.  In fact the total profits earned by US mutual funds from securities lending in 2006 was $760 million, up from $510 million in 2005.  Whether a fund is currently lending its shareholdings or not, it is important for fund directors to stay current with this rapidly changing element of the fund industry.

As someone with little financial experience, making the leap from saving to investing can be more than a little daunting, especially when banks pay consistent interest and guarantee deposits. However, interest rates paid by banks are typically much lower than rates available to investors, and could even result in financial loss if they are less than inflation. In order to make the switch from saving to investing, it is important to understand how the market works, the types of investments available, and the best way in which to meet your goals through investing.

Throughout the course of the long debate over the SEC’s proposed rule to require 75% independent board members and an independent chair on a mutual fund board, many observers have come to appreciate that the change is relatively small and quite subtle. After all the Audit, Nominating and Contracts committees are all chaired by independents and most fund groups already have a lead independent director. The real difference is in the explicit control of the board’s agenda. 

Make no mistake, the current debate in the mutual fund industry is about how powerful Mutual Fund Directors need to be to protect America’s savers from potential misdeeds of those who control the $8.5 trillion dollars of mutual fund money. Generally speaking fund directors have been becoming more powerful for many years, particularly since a leader of the governance process has been identified. This MPI Bulletin looks at the substantive arguments on both sides.