Category: Conferences and Events, Industry Trends

The Regulatory Squeeze on Boards Tightens with New Proposals


The role of a fund board has evolved since 1940, but the primary mandate of oversight and protecting shareholders has not changed. In today’s hypersensitive risk environment though, where the waves of new regulations seem endless, board members are increasingly being pulled into the operational components of funds.

New regulations and proposals, such as liquidity risk management (LRM) and distribution-in-guise guidance introduce responsibilities for board members that mirror day-to-day management. Mary Jo White, in her keynote address at the Mutual Fund Directors Forum 2016 policy conference, acknowledged the operations creep when she said, “Determining an appropriate dividing line is a challenge, one that the SEC is grappling with as we consider proposed reforms designed to address the increasingly complex portfolios and operations of mutual funds and ETFs”.

Finding the balance between enforcement and accountability was front and center at last month’s ICI Mutual Funds and Investment Management Conference in Orlando.

Rock and a hard place - iStock_000074505495_Large

In his keynote, David W. Grim, a Director in the Division of Investment Management for the SEC, poignantly discussed the requirement for open end funds to implement robust LRM programs. He noted these programs are intended to limit market risks and protect shareholders. This may be the case, but what is the impact to boards? I’ve outlined some of the considerations below, as well as the impact of other proposals and key industry topics.

  • Liquidity Risk Management Rule Proposal – funds will be required to categorize their portfolios into six categories based on the liquidity of their securities and approve the written program; the board will be responsible for continually analyzing the program’s effectiveness. Craig Hollis highlighted this further in his State Street Talks conversation with Liz Strouse on February 10 of this year.
  • Derivatives Rule Proposal – boards will be required to review a quarterly report from the advisor on the adequacy and effectiveness of the derivatives oversight program, and be responsible for approving how much leverage a fund can obtain through derivatives.
  • Oversight of Distribution Payments – the board is responsible for determining what portion of sub-TA fees directly or indirectly pay for distribution. The advisor and other parties are required to provide the board with “sufficient information” to conduct its analysis – the board should focus on understanding the distribution process as a whole.
  • Cybersecurity – boards must pay substantial attention to the controls and safeguards internally and of its service providers in order to help them prepare for potential cyberattacks. This includes understanding the full ecosystem in which their fund’s data moves, including the TA and sub-TA’s environments. Thus boards must pay substantial attention to the controls and safeguards internally and of its service providers.

In my conversations with fund officers and trustees at the ICI conference, they also pointed to their growing reliance on operations and third-party service providers to provide relevant information and alleviate operational burdens.

One of the ways Boston Financial supports our clients in this area is by hosting due diligence meetings for their fund board of directors. In addition, our Chief Technology Officer, Chief Compliance Officer, and relationship managers routinely attend our fund board meetings to discuss and review operations, information security, and key regulatory topics.

In addition, our enterprise compliance team analyzes the impact to funds of any significant regulation, interprets the operational impact, and advocates on their behalf to the industry as appropriate. Our enterprise approach also helps ensure that, as an extension of our clients’ operational systems, our systems and processes remain well-positioned to implement new regulations.

Enforcement actions levied by the SEC against independent directors are also leaving many boards feeling targeted. Board positions certainly aren’t the rubber stamp role they may have once been. Mary Jo White has acknowledged that board directors must “strike a balance (with) oversight,” but proposed regulatory activity has board members’ responsibilities increasing in volume and scope. And, as presented at the ICI conference in March 2016, a board’s list of duties and the complex requirements related to it aren’t diminishing.

Nick Darsch

Nick Darsch

Nick currently serves as a Senior Sales Executive for Boston Financial’s suite of Asset Manager solutions. Nick is focused on building relationships, aligning with enterprise partners and expanding the footprint of the firms core transfer agency, shareholder servicing, distribution enablement and compliance services. He joined Boston Financial in 2012, spending 2 years as the Manager of the firm’s Global Relationship Management program, directing strategy and business development efforts with the firms largest and most complex mutual fund relationships – along with State Street, DST and international sister firm, IFDS. Prior to Boston Financial, he served as an Enterprise Business Systems Consultant with Deltek, where he primarily consulted for public accounting firms and global advertising agencies. Nick holds both an MBA and B.S. in Economics and Finance from Bentley University. Nick currently serves as the Fundraising Chair for the United Way LINC Executive Council and Business Development Chair of the Young Professional’s Expect Miracle’s Leadership Team.

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