By Chris Sullivan, MacMillan Communications
Last summer, the U.S. Securities and Exchange Commission began a “sweep” of firms offering liquid alternative mutual funds and exchange-traded funds. Initially targeting approximately two dozen firms, the sweep has since been expanded and, judging by recent comments from the Commission, is unlikely to slow down anytime soon.
Rather than cast a pall on the fast-growing liquid alternative space, the pace of new product filings and launches has continued practically unabated. With this in mind, we recently spoke with Susan Ferris Wyderko, president and chief executive of The Mutual Fund Directors Forum, the independent membership organization for fund independent directors, to talk about the role that fund directors play in the 40 Act fund space and how alternative managers can build an effective board.
1. Can you tell us why a fund board is such an important component in launching a 40 Act alternative-style fund family?
Your board will act as a fiduciary to both the funds and their shareholders. That places significant responsibilities on your directors’ shoulders. To effectively meet those requirements, your board will need to play an active role every step of the way, from product launch to ongoing oversight. Why do you want this? Because an engaged board with strong processes can be a good defense against regulatory action.
The SEC has gone to great lengths to let the fund industry know that it is paying special attention to the alternative category. Over the past year, we have been seeing more office visits by SEC investigators, more detailed record requests, and tougher questions being asked of boards overseeing alternative funds. Those trends aren’t likely to decelerate anytime soon. Therefore, it is in your best interest to foster a strong relationship with the board – and provide your board the information necessary to make decisions on behalf of shareholders.
2. What kind of relationship should the adviser expect to have with a fund board?
The best relationships have a push / pull component. You don’t want your board to be a rubber stamp, but you want them to be open to your ideas. The board asks tough questions to fulfill their fiduciary duties to a fund and its shareholders – not to impede a fund complex’s product development and growth.
Basically, the strongest adviser/board relationships are built around effective communication that flows both ways, even when one side might not like the other’s answers.
3. What should one look for in fund directors?
For advisers looking to launch 40 Act alternative-style funds, we recommend seeking out candidates with particular skill sets that include:
• a working knowledge of complex alternative strategies;
• an understanding of the regulatory conditions surrounding various strategies and alternatives as a whole, as well as registered funds in general;
• the ability to oversee and judge the effectiveness of numerous key service providers such as accountants, attorneys, auditors and others;
• and a passion for asking tough questions. If a fund’s adviser feels the need to spend days, not hours, prepping for a meeting with their fund board, then you’re likely doing it right.
4. How can an adviser source effective board members?
A great place to start is with our organization. The Mutual Fund Directors Forum is not only a membership organization for current fund independent directors, it acts as a clearinghouse and connector putting fund companies in touch with compelling director candidates, helping both sides understand their roles, needs and goals.
We have a robust pipeline of qualified candidates who are eager to put their skills to use, with backgrounds that include law, accounting, consulting, and more.