SEC mulls letting directors delegate some responsibilities

The Securities and Exchange Commission is considering allowing mutual fund directors to delegate some of their duties, but critics say such a move will weaken the ability of directors to act as investor watchdogs. The proposed change is something directors are asking for "in order to free up their time to devote more attention to substantive issues," Andrew J. "Buddy" Donohue, director of the division of investment management at the SEC, said last month in Florida at a meeting of the Washington-based Mutual Fund Directors Forum. Directors have specifically suggested delegating more of their responsibilities to the chief compliance officer, he said.
It is a suggestion that Mr. Donohue said he has asked his staff to explore. But if directors were allowed to delegate even minor tasks, it could prove disastrous, observers say.

MISSING 'A RED FLAG'

Directors might "inadvertently" miss a "red flag" if they were allowed to delegate too many of their responsibilities, said C. Meyrick Payne, a senior partner at Management Practice Inc., a Stamford, Conn., consulting firm for independent fund directors. Red flags would be issues such as unusual trading activity, he said. If fund boards had been vigilant about such activity, they might have been able to prevent much of the illegal market timing and late trading within funds that came to light in 2003, Mr. Payne said. Most fund boards are now paying closer attention to trading, industry experts agree, but that doesn't mean boards are fully engaged. Even though many fund boards instituted reforms after the trading scandals to strengthen their role as watchdogs, they still aren't doing everything they can to protect investors, said Laura Pavlenko Lutton, a senior fund analyst at Morningstar Inc. of Chicago. At many funds, fees are too high and performance is lackluster, she said. Those are issues an engaged, independent board would be expected to address, she said. But if funds were allowed to delegate even some of their responsibilities, "my concern is ... we're getting away from independence," Ms. Lutton said. That would be the case especially if responsibilities were delegated to the chief compliance officer, she added. "I think there could be some potential problems if you have a chief compliance officer who has the same kind of profit-sharing arrangement as senior management," Ms. Lutton said. "They may be less willing to blow the whistle." If directors are truly overworked, a better solution would be to prevent them from overseeing multiple funds, said Barbara Roper, the Pueblo, Colo.-based director of investor protection at the Washington-based Consumer Federation of America. "That is a far better approach than having fund directors walk away from their oversight responsibility," she said. At the end of 2006, 81% of fund complexes had a unitary board structure, meaning that a single board oversees all funds in the complex, according to the Independent Directors Council, part of the Washington-based Investment Company Institute, the mutual fund industry's trade group. But that isn't necessarily a bad thing, said Bruce L. Crockett, chairman of the board that oversees the AIM Funds, offered by Houston's AIM Investments, a subsidiary of Invesco Ltd. of Atlanta. When there is enough "commonality" between funds "there are huge efficiencies" directors can achieve by serving on multiple boards, he said. If the SEC is truly interested in helping directors focus more on substantive issues, Mr. Donohue is on the right track in potentially allowing them to delegate some of their workload, he said. "It makes common sense," Mr. Crockett said. Apart from limiting the number of boards a director could sit on, however, there are other things that could be done to make them more effective, short of allowing them to delegate their responsibilities, Ms. Lutton said. "If the question is how do we make the board more efficient, I'd come back to who's sitting on the board, and what's their background," she said. "I'd look at, 'Could we get the board a little muscle by recruiting folks who understand the issues?'" Making boards more efficient, however, may not be the only intent of the proposal before the SEC, Ms. Roper said. "We've been seeing a very strong pushback against investor protection and regulatory responsibilities," she said. That the SEC would consider allowing directors to delegate some of their responsibilities may be a symptom of that, Ms. Roper said. Some observers say that it's not clear that directors are actually overtaxed. There are many mundane tasks the Investment Company Act of 1940 requires of directors, but it seems as though boards are able to "deal with it quickly," Mr. Payne said.

MAKING IT WORK

Even Mr. Crockett, who supports the proposal before the SEC, admitted his board has found a way to work efficiently within the current regulatory framework. Many of the minor tasks are handled between meetings via e-mail, he said. But that's not to say things wouldn't go even smoother if the SEC allowed directors to delegate some of their responsibilities to someone like the chief compliance officer, Mr. Crockett said. "I think it's needed," he said. "I view the chief compliance officer and others at the management company as being facilitators, doing a lot of the legwork ... for us," Mr. Crockett said. If directors were able to delegate some of their responsibilities to the chief compliance officer, directors could spend more of their time on big-picture items such as fund performance, he said. Critics, however, weren't convinced. "Last I checked, most of these people were being pretty well-compensated," Ms. Roper said about directors. "They should be willing to do the job." David Hoffman can be reached at dhoffman@crain.com.