Management Practice Inc. (MPI) are consultants to the Independent Directors of Mutual Funds. The important selection criteria are underlined for convenience.

In the course of a year about 100 new fund directors are appointed by the existing trustees or elected by the fund shareholders. The SEC has made it quite clear that nomination and selection is a matter for the existing independent directors, although the manager, like anyone else, might suggest candidates. In either case, setting the criteria for a candidate is an important part of the process. Our firm, MPI, has helped many Nominating Committees with this process. This Bulletin highlights some of the major findings from our work.

When establishing new director criteria, the most important step is to think clearly about what personal characteristics, skills and expertise is likely to be needed for the next five to ten years. A mutual fund director, like a federal judge, is a long term appointment (perhaps as much as 20 years) and there are precious few ways to undo the appointment if a poor choice is initially made.

The purpose of this MPI Bulletin is to provide mutual fund directors with some practical guidelines as to their responsibilities and authority for strengthening the Audit Committee.

Truth is that Audit Committee members are under increasing scrutiny. The quality of financial reports is at stake. Uniquely in mutual funds, the Fund's financial staff and systems directly determine the price at which investors buy and sell their mutual fund shares, the net asset value or NAV. Mistakes, deliberate or inadvertent, cause some investors to lose money and opens the gates to expensive lawsuits and substantial damages.

Being a mutual fund director is a uniquely influential position and it can be quite rewarding - both monetarily and psychologically. Once someone has become one, especially of a large fund complex, there are few mechanisms by which he or she can be displaced. The purpose of this MPI Bulletin is to explore the advantages and disadvantages of age, term or no limits on the length of service.

There are about 3,000 independent mutual fund trustees in the United States today overseeing about $7 trillion in mutual fund assets. Compare that statistic with 600,000 doctors and 800,000 lawyers and 700,000 CPAs. And of those, about 700 oversee 80% of all fund assets. Undeniably fund trustees are influential and perhaps even pivotal in the savings and investment process in America today.

The compensation of fund directors pales in comparison to the salaries of portfolio managers and investment managers, whom they are paid to oversee. Nonetheless some fund directors meet only four times per year; with the substantial time required to prepare and discuss topics among themselves and with expert advisors prior to the Board or Committee meetings, their compensation can still average over $500 per hour. While this is no more than the rates charged by the top í40 Act lawyers and accountants, it is a tidy sum to receive personally.

Mutual Fund directors often wrestle with what should be the appropriate response to poor investment performance in one of the funds that they govern. Some incorrectly describe the range of tools available to directors as "a feather or a sledgehammer". These critics believe that the directors can only mildly chastise the management company or alternatively lift the advisory contract. Nothing could be further from the truth, particularly as the troublesome fund is usually part of a larger complex where there are a variety of organizational alternatives. Invariably the top executives of the management company are just as anxious to correct poor performance as the independent directors. The purpose of this article is to enumerate some effective alternatives, which generally fall into three categories; organizational, fee-related and structural. Each of these is discussed below.