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Forum Issues Practical Guidance for Fund Directors on Effective Risk Governance

Today, the Mutual Fund Directors Forum issued a special report titled "Risk Principles for Fund Directors," which provides practical guidance for mutual fund directors in their role in risk oversight.  The guidance is timely and vital because of the recent interest in risk by regulators and policymakers, the market turbulence of the past two years, and the issuance and marketing of increasingly complex investment securities have resulted in fund directors seeking to better understand the appropriate role of fund boards in risk governance.

The paper, is intended to help fund directors understand their responsibilities with regard to the risks undertaken by their funds, and to provide tools and references useful to assist them in determining the best means to oversee their fund's risks effectively.

The Forum's report notes that fund directors are not responsible for designing and implementing the systems and procedures that management companies use to identify, analyze and track risk. Instead, boards typically oversee the risk management activities of fund advisers by reviewing and approving investment and risk management policies and procedures; evaluating the performance of the fund's adviser, any sub-advisers and other service providers; and periodically reviewing the policies and procedures for material departures.

The question of what constitutes effective "risk management" and how board's oversee risk has recently become a key focus for regulators, legislators and academics. In a recent Securities and Exchange Commission (SEC) rule release requiring companies, including mutual funds, to disclose the extent of the board's role in risk oversight in proxy and registration statements filed on or after February 28, 2010, the Commission called risk oversight a "key competence of the board." In addition, as we noted in our April 9 News Feed post, the SEC's Division of Investment Management Director Andrew J. Donohue recently noted that as the Division moves ahead with its overall review of fund use of derivatives, "effective Board oversight in this area, in the meantime, is critically important."

The full text of the Forum's risk guidance is available at: