The Mutual Fund Directors Forum (“MFDF”) issued a report providing practical guidance to mutual fund directors whose funds engage sub-advisers. In broad terms, the report examines the different ways sub-advisers are used and provides advice on overseeing all phases of a fund’s relationship with a sub-adviser. The report initially focuses on how a fund board works with a fund’s adviser, including how a board should familiarize itself with the adviser’s sub-adviser search/selection process, evaluate the adviser’s ability to monitor a sub-adviser on an ongoing basis and analyze the adviser’s fee in light of the allocation of duties between it and the sub-adviser. The report devotes considerable attention to board evaluation of sub-advisers including: dealing with situations where certain kinds of information about a sub-adviser are not available; understanding a sub-adviser’s investment expertise; evaluating a sub-adviser’s organizational and compliance structure; comparing proposed sub-advisers to the sub-advisers they will replace; evaluating the appropriateness of a sub-advisory fee, including differing considerations for affiliated and unaffiliated sub‑advisers; and special considerations for the multi-sub-adviser and affiliated sub‑adviser arrangements. The report emphasizes that independent directors must exercise appropriate care, both when engaging a sub-adviser and on an ongoing basis, to ensure that their investment activities and those of their immediate family members do not undermine their independent status. In terms of overseeing sub-adviser relationships on an ongoing basis, the report discusses ways to use a fund’s chief compliance officer and examines different issues relating to ongoing communication between a fund board and a sub-adviser, including the frequency and type of meetings. The report singles out the following areas of sub-adviser activity for board oversight: soft dollar procedures, trade allocation, complex instruments, proxy voting and valuation. The report concludes with a discussion of issues relating to sub-adviser termination and the transition from a terminated sub-adviser to a successor sub-adviser.
Alert May 05, 2009