New Guidelines Under Microscope

The Securities and Exchange Commission’s prescription for what ails mutual fund board members when it comes to evaluating their advisers’ trading practices got an endorsement by the association in Washington that represents the boards.

The Mutual Fund Directors Forum hasn’t formally responded to the SEC’s recently proposed guidelines covering the duties and responsibilities of boards with respect to adviser trading, but says it sees it as a positive step by the Commission.

“The most notable aspect about this is that it really recognizes in a helpful and affirmative way the key role that directors play in overseeing both best execution and soft dollars usage,” David Smith, MFDF executive vice president and general council. “The release was important in reaffirming this and the central role of directors in this area.”

The guidelines offer a laundry list of questions fund boards should ask their advisers and information they need to get. At the top of the list is information about the adviser’s use of soft dollars. That’s the component of commissions that goes towards the acquisition of research and brokerage services other than executions.

The SEC, concerned about the conflicts of interest inherent in soft dollar usage, hopes fund boards will use the guidelines to decide whether or not their advisers’ use of soft dollars is appropriate.

“It is critical that fund investors understand how a fund adviser uses soft dollars,” SEC Chairman Christopher Cox said in a prepared statement at an open meeting in July, “and whether soft dollars are being spent in the best interests of fund investors who ultimately pay for them.”

In its proposal, the SEC noted fund boards have an obligation to monitor their advisers’ trading, but many told the regulator they were unsure as to how to do so. The boards requested the guidelines, the SEC stated.

The regulator added that its goal was to help the fund boards and was not imposing new requirements on them.

“Evaluating an adviser’s trading practices can sometimes seem an overwhelming task,” Cox said. “Our goal is to help directors focus their review efforts and evaluate an adviser’s trading activities in the most efficient and effective way possible.”

Smith tells Traders Magazine that all fund boards take an active role in monitoring best execution and the use of soft dollars. The problem, of late, has been a deluge of data and information that advisers must sift through, he says.

“Fund boards are, for the most part, using that information pretty effectively,” he said. “I think the SEC recognizes this.”

There is a wide variety of factors that go into determining whether a fund is getting best execution and in determining whether or not a fund ought to be using soft dollars, Smith adds, and the SEC recognizes this.

Among the questions the SEC recommends fund boards ask are those related to how advisers determine how much to spend on soft dollars and how much to spend on proprietary versus third-party research.

Analysts estimate there are about 3,000 fund board managers in the U.S. The average board employs between five and 10 people. Each mutual fund complex has at least one board. Most have a single board overseeing all their funds although some of the bigger ones have two or three boards.

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