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Commissioner Paredes Discusses Board Roles

In a November 13 speech at the Independent Directors Council Investment Company Directors Conference, SEC Commission Troy Paredes discussed the role of mutual fund boards in three areas.

Governance and the Deliberative Process

Commissioner Paredes emphasized that, in addition to their specific statutory responsibilities, directors “can help improve fund operations and performance more generally.”  He stated that when evaluating their performance, boards often consider board composition and meeting structure when “what matters most is how directors act.”  Commissioner Paredes encouraged directors to engage in spirited discussions that draw on each director’s unique strengths.  To ensure that boards reach optimal decisions, he asked boards to “consider designating one or two directors whose express charge is to be skeptical and to press when needed.”  Commissioner Paredes cautioned that as directors cast a critical eye on proposed decisions, that they not allow their discussions to cross the line into hostility.

Jones v. Harris

Commissioner Paredes also discussed the oral arguments in the Jones v. Harris Associates case, noting that neither side in the case embraced the Seventh Circuit’s decision.  He noted that instead the parties’ arguments focused on the appropriate application of the standard articulated in Gartenberg.  Commissioner Paredes observed that competition in the mutual fund industry has increased since section 36(b) was adopted in 1970 and Gartenberg was decided in 1982.  In his view, such changes “may obviate the need for more demanding judicial scrutiny of advisory fees.”  Commissioner Paredes noted that courts should defer to the business judgments of boards and others in business because “[j]udges may exercise expert legal judgment, but not expert business judgment.”  With respect to the comparison of retail fees with the fees charged to institutional clients that some have advocated, he stated that “If the Court were to require a comparison of fees, judges still should not second-guess the substance of the independent directors’ good faith evaluation of the fees charged different funds and the reasons justifying any fee differences.”

Investor Choice

Commissioner Paredes applauded the fund industry’s success at providing investors with investment choices that allow them “to meet their individual investment goals, time horizons, risk tolerances, economic forecasts, and strategies.”  He added that such investor choice is a key component of the SEC’s investor protection mission, stating “Investor protection is about serving the broad interests of investors; it is not limited to shielding investors from fraud and manipulation.”  Commissioner Paredes told directors that they play a key role in offering investors choices that help meet their goals “by influencing the innovation that occurs.”  He added that the marketplace is the best judge of new financial products, and the philosophy of the federal securities laws is to provide adequate information to allow investors to evaluate particular investments.  He gave two recent examples of ways in which the SEC has tried to empower investors to make informed investment decisions: the summary prospectus and the alert issued by the SEC staff and FINRA regarding leverage and inverse ETFs.

The full text Commissioner Paredes’s speech is available at: