Dear Board Doc: What is on the Horizon for Fund Boards in 2021?

The MFDF’s Board Doc is an occasional feature of the Daily News Feed that features questions from our readers. The answers and commentary provided in our responses do not constitute legal advice and should not be treated as such. Please consult with your independent counsel on questions of compliance with the securities laws and director fiduciary duties. If you would like the Board Doc to consider your questions, please e-mail BoardDoc@mfdf.org.

Q: As a year of unprecedent challenges comes to a close what do you see as the top challenges and trends for fund boards in 2021?

A: The upcoming year will no doubt present challenges, opportunities, and likely even more surprises, for the industry and fund boards. However, based on the current industry and regulatory climate, here are five areas that should grab fund directors’ attention in 2021.

1. Industry Consolidation. Morgan Stanley’s acquisition of Eaton Vance was among several high-profile mergers in the industry in the last couple of years. The pandemic has not slowed, and probably increased, the pace of asset managers being bought and sold, according to several media reports. Fund directors should expect to see even fewer board seats up for grabs and possibly fewer funds to oversee as a result of these M&A deals.
2. Digesting 2020 Regulation. This year was an active one for the SEC’s Division of Investment Management. The recently adopted valuation rule and derivatives rule will have direct impact on director duties while the fund of funds rule and auditor independence rule will have considerations for fund boards, as discussed by lawyers from Ropes & Gray in their latest Investment Management update.
3. Changes in the White House. The incoming Biden Administration is likely to bring some changes to the industry. Already, lawmakers are proposing amendments to the Investment Advisers Act with a bill stipulating that investment advisers and retirement plan fiduciaries must establish a sustainable investing policy that considers corporate governance practices, labor and human rights compliance and environmental risks, according to a report in Pensions & Investments.
4. More ETF Conversions as Passive Investing Continues Surge. An increasing number of asset managers are converting mutual funds into ETFs, and the trend is likely to continue into the new year, according to an article in the Financial Times.
5. Pandemic and its Aftereffects. Boards are likely to continue meeting virtually, although the IM Division has not yet formally extended its in-person relief. Some boards, even after the health crisis is over, may retain a hybrid of in person and virtual meetings some industry observers say. With respect to board oversight at the adviser, directors might be asking more questions on long-term resiliency planning, employee collaboration and satisfaction amid challenges of remote work, and asking more pointed questions to the CCO on compliance issues in the work from home environment. Casey Quirk’s report on what is ahead in 2021 includes a range of issues the industry may face in 2021, including how firms may think of safely returning employees to the office.