Recently, the Wall Street Journal published an article titled, "The Unseen Figures of Your Funds." The article states that critics are asking how "effectively fund directors are fulfilling their duties, given their frequently close ties to the management companies, the dozens of funds—hundreds, in a few cases—that each board oversees, and the fact that fund boards rarely replace their fund managers when performances don't measure up." Also, the piece asserts that the the Supreme Court's recent decision in Jones v. Harris Associates "may shine a spotlight on fund directors as never before."
While the Forum agrees that the Court's opinion in Jones v. Harris Associates may bring more attention to the role of fund directors, the case also confirms the central role of independent directors in the governance of mutual funds and gives deference to the conclusions of informed, engaged boards.
In our view, the piece erroneously states that the decision in Jones v. Harris Associates adds a “new wrinkle,” requiring fund management to “justify” the difference between fees charged to institutional and retail customers. In fact, boards have long looked to relevant information when considering the renewal of a fund’s investment advisory contract. Indeed, in our 2004 publication “Best Practices and Practical Guidance for Mutual Fund Directors,” the Forum suggested that boards ask for “meaningful information on the adviser’s fee structures for any other comparable investment vehicles, both public and private, and an explanation of any differences from the fees charged to the fund.” Furthermore, the Supreme Court observed that these comparisons should receive “the weight that they merit in light of the similarities and differences between the services that the clients in question require.” Put simply, the large diffuse group of small investors who make up the typical mutual fund both need and demand a different set of services than the single, large institutional client to whom their fee is being compared. The Supreme Court rightfully leaves the decision about how to compare differing fee structures to a particular fund’s board that is informed about relevant facts and circumstances rather than presuming a particular result.
In a May 4, 2010 letter, the Forum's Executive Director, Susan Ferris Wyderko, voiced the Forum's concern about the issues raised in this article. That letter is available at the link below.