A recent article by Matt Fink, an Oppenheimer Funds independent director and former president of the ICI, and Jacqueline Edwards, an associate at Kramer Levin, explores the evolution of the responsibilities of fund directors from the 1920s until today. The article outlines the troubles in the fund industry during the 1920s, including the common view of the time that directors represented the views of management. The authors point to this perception as a significant reason that the 1940 Act included very few specific duties for fund directors.
The authors then cite the 1970 amendments to the 1940 Act which turned directors into “rate-makers.” The amendments included adding Section 36(b), which imposed a fiduciary duty on fund advisers with respect to compensation, and a change to Section 15(c) which required directors to request and evaluate information necessary to evaluate the advisory contract. The article states that following those changes to the 1940 Act, “many independent directors appear to believe that their most important responsibility is setting management fees and that their other responsibilities can be reduced or eliminated.”
Then, the article outlines changes in the SEC’s regulatory focus during the late 1970s. The article states that the SEC joined the de-regulatory movement of the time and moved to reduce its day-to-day involvement in the industry. The staff then conducted a thorough review with the goal of a regulatory system which relies primarily on funds and their managers to discharge their duties properly ... but which preserves a strong oversight function for the Commission.” According to the authors, the SEC ultimately adopted a number of rules that codified a number of exemptive orders and staff guidance, replacing the SEC’s day-to-day role with processes overseen by independent directors.
Next, the authors outline the dramatic changes in the industry that took place during the 1980s and 1990s, when the industry experienced significant growth. According to the article, the SEC lacked the resources to oversee funds, and therefore turned to fund directors to complement the SEC’s oversight. During that period, the SEC concentrated on increasing boards’ independence from management – resulting in rules requiring that directors comprise a majority of fund boards, directors nominate other independent directors, and requiring that counsel to fund boards be independent.
In another shift in regulatory philosophy, the authors argue that the SEC recently has moved away from conflict to business issues, including liquidity, cybersecurity, and derivatives. The authors question the shift, stating that it is “too early to tell how successful directors will be in overseeing functions that require highly specialized expertise and that do not involve intrinsic conflicts of interest between funds and advisers.” The authors call for the SEC to convene a roundtable to take a step back and look at director responsibilities as a whole – and see where responsibilities “should be expanded, decreased, eliminated, or modified.”