MFDF Series Dear Board Doc: What Factors Should a Board Examine in its Oversight of Distribution?

Q. The 1940 Act doesn’t provide much detail regarding factors boards should consider in the evaluation of a fund’s distribution agreement. What is some information that directors can review to help them understand whether a fund’s distribution strategy has been effective? 

A. Directors may benefit from reviewing a range of data points when evaluating the effectiveness of a fund’s distribution strategy. Factors including a fund’s market demand, flows, AUM level, performance vs. a fund’s benchmark, whether a three-year track record has been obtained, and whether fees are competitive can provide helpful data. Investment advisers should be able to explain their short and long-term distribution strategy and outlook with respect to product placement, including what avenues have already been approved, what avenues are recommended, model inclusion and whether a particular strategy has been included in multiple product wrappers. Boards may ask about the deployment of distribution resources, including field sales coverage and the use of distribution specialists who may be able to explain approaches to segmentation and targeting. In addition, directors may seek to ask about marketing content and delivery and the effectiveness of engagement initiatives.

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.