Board Doc: Lessons Learned on Third-Party Oversight

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: How have fund boards adapted and innovated in their oversight of pricing vendors and other third parties in the heightened risk environment of the last year?

The pandemic and virtual environment have required that fund boards approach their oversight in new ways. While fund boards are not directly responsible for managing risks related to fund service providers, boards do recognize the importance of being aware of key service providers’ risk frameworks, policies, procedures, and having systems in place for identifying, analyzing, and managing risks. For more discussion on how fund boards oversee risk, you can review the MFDF’s whitepaper on the fund board’s role in risk oversight here and materials from a previous webinar on board oversight of third-party vendors.

Even as boards begin to plan their first in-person meetings, many are retaining innovative practices from 2020, for instance adding virtual visits to on-site due diligence of service providers. Boards have found that technology can facilitate quicker and more frequent access to service providers, and some boards, working with counsel and chief compliance officers, have increased communication between board meetings or asked certain service providers to present to the board outside of regular board meeting schedules. These additional meetings with the board or a board committee can be extremely helpful for areas such as valuation and derivatives, particularly in light of recently adopted regulations. Some directors have found that these meetings felt less like a sales pitch, contained more substantive discussions, and directors felt less time-constrained and were therefore able to ask detailed questions. Besides more frequent virtual meetings with vendors, boards may also, with the assistance of independent counsel, improve on due diligence questionnaires and include more specific, detailed questions relevant to a particular service provider. Reimagining how vendor due diligence is conducted can be a way for more directors to become involved in the process. A recent Deloitte survey found that in 2020, about 16 percent of directors surveyed reported that at least one board member had attended every presentation of a pricing vendor, although in 2017 that number was 24 percent, so there is definitely room for using technology to facilitate more interactions with service providers. Deloitte discussed these and other trends pertaining to valuation and related oversight on a recent MFDF webinar which can be accessed here.