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. 

The purpose of this bulletin is to explore what this means in practical terms. To illustrate the power of the gavel, this bulletin works through an imaginary agenda and illustrates where an independent chair might place emphasis rather than dwell on the (admittedly important but routine) procedural issues.

1. Approving the Minutes – Counsel has prepared, circulated and received feedback on the minutes of last meeting. Do we have a motion to approve them? Thank you; let’s move on.

2. Reappointment of the Auditors – Thank you, Mr. Audit Chair. Let’s move on.

3. Code of Ethics – This is important because it sets the tone at the top. Let’s all live by it.

4. Process for Contract Renewal – This is where our key authority and responsibility lies. Let’s talk about this and make sure we know what is expected of us. I want to make sure that we are diligent in this effort and that we devote all the resources necessary to do a thorough and complete job in this area.

5. Renewal of the 12b-1 Distribution Fees – Let’s talk about this. First we want to be sure that the 12b-1 money is spent for marketing and distribution. We also want to be sure that other monies are not improperly diverted to distribution functions. We have to be sure that we are not paying for shelf space through some other fee or through the trading process. My concern is that many of our funds have had negative flows. Let’s make sure we know what is happening here.

6. Continuation of the Shareholders Services Agreement – The comparative data shows that our transfer agency fees are high compared to our peer group. The manager has told us that this is because we have many small accounts which cause a disproportionate expense for the fund as a whole. I wonder if we should put in place an annual fee to more fairly distribute expenses to small shareholders. Let’s talk about this.

7. Continuation of the Administration and Fund Accounting Contracts – Thank you for comparing our costs to a comparable per group. You have assured the Board that our costs are reasonable. Shall we move on?

8. Approval of D&O Insurance – The Directors are quite concerned about this but we have been assured that the limits and exclusions from our coverage are within industry norms. I regret that the premiums have increased so substantially but we have no real choice. Shall we move on?

9. Approval of the Stock Lending Agreement – Comparative data shows that the percentage split between the vendor and the funds has moved in our favor over the past few years. The manager has assured us that a 75%/25% split is now within industry norms. Let’s move on.

10. Approval of the Soft Dollar Process – Soft dollars represent the fund equivalent of “off- balance-sheet” financing and they are used to pay for research which would probably have been paid for by the manager out of their own profits. Soft dollars are an area where the Board needs to be fully informed. Let’s do a “deep dive” on this, shall we?

11. Review of Best Execution – There are few things more complicated on the Board’s agenda than “best execution”. The dark art known as Total Cost Analysis allows the fund board to understand the loss of alpha incurred by less than optimal trading. The trend toward greater use of “execution only” trades is something which fund boards need to monitor. Let’s do a “deep dive” here also.

12. Investment Performance Review – Fund shareholders want to be assured that they have the best possible chance of solid investment performance and they certainly don’t want to lose money. Fund directors and the management company share this objective. Fund directors provide accountability for the Chief Investment Officer and his/her portfolio managers and the Board provides a forum in which sub-advisors show off their capabilities. However there is rarely any conflict and, as the subject is intensely interesting, investment reviews are inclined to take up lots of valuable time. Let’s set aside time to really analyze if we have right resources deployed against this all important topic - right now we are out of time.

13. Election of a New Trustee – Over the past year we have been looking for a new trustee. You will remember we went through a process of identifying the kind of person we want and now we have found such a candidate. The Nominating Committee Chair has reached an understanding with Ms. Snooks who will join the Board as of January 1. Shall we move on?

14. Compensation Increase for the Independent Directors – The Nominating Committee has proposed a 10% increase in the retainer, which will bring our total compensation up to the median of our peer group. Shall we move on?

15. Anti-Money Laundering and Privacy Rules – Thank you Ms. CCO. It seems there is nothing to report. Let’s move on.

16. Marketing, Growth and the Distribution Channel – The Funds’ money, in the form of 12b-1 fees, is used for these purposes and the Board has to specifically re-approve them each year. Understanding the effectiveness of these efforts is a crucial step in the re-approval process. The Canary Capital scandal illustrated how little the Independent Directors understood of the economics of fund distribution. Let’s dwell on this for a while.

17. New Business – I know that we have really clicked along during the past two days and now I want to give you all an opportunity to raise any new issues which are concerning you. If any of these are complex or require staff work, please be assured that we will find the necessary resources and devote appropriate agenda time in a subsequent meeting.