For the second year in a row, the increase in fund director compensation was
driven more by the number of meetings than by the retainer. After a robust increase of
8% in the first half of 2004, the pace of pay raises for independent mutual fund
trustees/directors slackened slightly in the second half but still wound up the year with an
annual increase of approximately 13%. This second full year of Sarbanes-Oxley impact,
along with continued fund regulatory reform, saw a continued increase in the
responsibilities of evermore influential fund directors, resulting in a two-year (’03-’04)
compensation gain of 27%.
Directors are finding the job requires more and more time to stay on top of
governance issues. The increase in total compensation is 72% attributable to additional
meetings and more paid committee work. Only 28% of the increase is attributable to
increased board retainer. The median number of board meetings has risen from just under
5 in 2003 to nearly 6 in 2004 reflecting the increased complexity and time consuming
nature of board work. The typical board meeting lasts 6 or more hours, with many board
meetings spanning 2 days.

Guidance to trustees about how to comply with the SEC's new requirement that Mutual Fund directors annually evaluate the board's performance. This SEC requirement follows an earlier ICI recommended “best practice”.

Pay for the independent trustees/directors has risen sharply in the last six months as governance reforms force funds to hold longer and more frequent meetings. In the just completed half yearly update, MPI found that the annual compensation of fund trustees rose 8% in the six months between January and June 2004; or an annual growth rate of 16%. If this holds for the year as a whole it will represent the fastest growth MPI has seen in its ten years of tracking mutual fund director compensation.

In addition, the premium paid to the Chairman, who will shortly be required to be drawn from the independent Board members, has also risen sharply over the premium which used to be paid to the lead independent director. Furthermore, the premium paid to the Audit Committee Financial Expert, a new designation of trustee mandated by the Sarbanes Oxley legislation is also increased.

The purpose of this Bulletin is help mutual fund directors wrestle with the difficulty problem of measuring bestexecution of share trades. Best execution is major topic during routine SEC examinations and, in many cases, a difficult topic for mutual fund boards.

Directors often ask each other "why are we paying as much as 6 cents a share to make a trade when everyday I am bombarded with offers to effect a whole transaction for $19.95". Well of course, there are some good, and some not so good, reasons. This Bulletin presents a framework for mutual fund directors to analyze this issue.