The concerns of independent trustees of investment companies are growing. The number of responsibilities seems to be increasing; the assignment is becoming more complicated.
In 1940 there were only 68 mutual funds, according to The Mutual Fund Fact Book published by the Investment Company Institute. In 1972 there were 361 funds. Thirty years later, at the end of 2002, there were 8,256 funds. Those of us who have been involved in this growth industry over the past three decades now live in a very different world.
Most independent trustees have reason to be defensive and perhaps a bit confused defensive because observers and journalists have been on the attack, claiming that the watchdogs are overpaid and complacent confused because very few well-informed investors really understand the duties of independent trustees.
Those of us who serve on the boards of various families of funds' boards as independent trustees have enormous responsibility. We are accountable for the management of nearly seven trillion dollars in mutual fund assets; we are in a very real sense an extension of the SEC. If you compare the breath of our responsibility it is just a little less than the market capitalization of all the companies listed on the New York Stock Exchange.
Now consider how few of us there are; about 2,800 in total and only 600 oversee 80% of all the mutual fund assets, which form nearly 60% of all the 401(k) savings of 75 million Americans. That is some responsibility! By way of contrast, consider that there are about 600,000 lawyers in this country.
Just a few of our responsibilities are indicative of the full plate that lies in front of us. Consider the following duties:
- Approval of the terms of contracts with the investment manager
- Review of code of ethics and governance
- In-depth study of all audit committee material
- Brokerage allocation, best execution and soft dollar review
- Determining the accuracy of the prospectus, particularly if it accurately describes the investment style of each fund.
- Assuring protection of the shareholders with regard to disaster recovery, determining money laundering, and valuation issues.
- Allocation of fund expenses between the funds and the managers.
. . . and the list does not stop there!
The role and responsibility of individual independent director of a mutual fund is quite different from that of a regular board member of a public-owned company. The fund director is fundamentally concerned with compliance with complex rules and regulations and deciding issues of fairness between the shareholders and the managers. The corporate director is fundamentally concerned with strategy and succession planning of the top executives. Mutual fund directors may serve all the funds in a complex, perhaps as many as 100 separate legal "publicly owned" entities. Corporate directors typically serve the shareholders of one "publicly-owned" company, albeit with many subsidiaries. The material to be reviewed by a fund director is far more expansive and detailed. And the exposure to lawsuits and loss of reputation is greater, precisely because there are so legal entities involved.
The benefit of these duties to shareholders is considerable. Very few scandals or horrors can be identified in the mutual fund industry since its inception well over a half century ago. In general, shareholders have been served well by those protecting them. Savings and loan or corporate scandals have been avoided in the world of mutual funds. The cost of that protection is a small fraction of the dollars spent for the various services composing the expense ratio of each fund. In addition, shareholders should understand that when compared to the hourly rate of lawyers, the compensation of independent trustees is rarely out of line. The typical mutual fund director of a large complex is paid about $1 per year to stand guard over $1 million of America's savings.
In conducting an informal survey of educated professionals, there emerged an interesting variety of responses to the question, "What does an independent trustee of mutual funds do?" Some of the answers: (1) No idea whatsoever, (2) Make sure there are not hidden fees and no kickbacks, (3) Watch each individual fund in the family and make sure shareholders are guided toward funds appropriate to their needs, (4) Make sure there is no "crooking", (5) Manage the money on behalf of each beneficiary, (6) Reviews all kinds of records, (7) Collects fees, (8) Makes rules, (9) In charge of hiring and firing each fund manager, (10) Sets policy and strategy for each fund.
All of the above provides circumstantial proof that thought leaders and professionals and, by extension, the public at least as represented by this limited sample has only a dim idea of the job done by independent trustees. In today's world of fragile credibility in the world of Wall Street and investments, independent trustees of mutual funds have a duty to market ourselves better and to bridge the gap of misunderstanding about our responsibilities and rewards.
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