Donohue Urges Directors To Focus on Fair Value
Speaking before the Investment Company Directors Conference, Andrew J. Donohue, director of the Securities and Exchange Commission's investment management division, called on directors to be more meticulous about making sure fund investments are properly valued. He pointed to the subprime crisis as evidence of this importance.
"Funds must adopt policies and procedures that monitor for circumstances that may necessitate the use of fair value prices, [such as] when market quotations are no longer reliable for a particular security," Donohue said. If fair valuation is needed, the fund should establish a methodology for determining a proxy price and regularly review the accuracy of this methodology, he said.
Directors should also determine whether the investments in a fund provide adequate liquidity for the manager. "If you are having difficulty pricing a security, or if securities pose liquidity challenges, query whether those securities belong in a mutual fund," Donohue advised.
And should the SEC grant an exemptive relief to a fund, the board must "be actively involved in overseeing the fund's operation," Donohue said.
Finally, he called on directors to ensure that if a fund accepts research through soft dollars, that it is still vigilant about achieving best execution.
Two-Thirds of Directors Say Workload is Higher
Between Sarbanes-Oxley, the late-trading and market-timing scandals of 2003 and other reasons for a tightening in the mutual fund industry's oversight, it's no wonder fund directors are working more and quitting more.
A study by PFPC quantifies these trends and other developments in the professional life of board members at fund companies.
The report says an evolution has occurred around the board table. It draws on the experiences of 154 independent board members, affiliated board members and fund executives to spell out some of these changes.
Two-thirds of all board members surveyed and three-quarters of independent board members believe it is more difficult to be a mutual fund director today. The amount of time that board members have been serving affected the results. The more experienced directors, those serving 16 or more years, are more inclined than those with five years or less to feel the role today is more difficult.
One-third of directors surveyed said they spend more than 50 hours per quarter on board responsibilities. The polled board members also said turnover was high.
One in four respondents noted at least one member of their board has resigned as a result of the additional time spent working on board matters due to increased regulatory burdens and personal liability concerns.
Although 65% of directors surveyed believe the job is more difficult today, an overwhelming majority, 96%, report enjoying their time as directors and plan to continue to serve.
Four out of 10 board members said that their boards have increased the number of directors because of increased demands for particular types of professional expertise or due to the burden of new regulations.
"Fund boards are getting larger out of necessity in response to the reforms introduced by Sarbanes-Oxley-greater transparency and accountability-and the increased compliance and controls that came out of SEC Rule 38a-1. Both have significantly increased the workload for fund directors," said Linda Hoard, senior vice president and senior counsel at PFPC. "For example, Sarbanes-Oxley requires funds to disclose whether or not their audit committee has a financial expert. Rather than disclose that they did not have a current member who met the criteria of a financial expert, many boards went out and recruited from a limited talent pool."
But this outreach hasn't been easy. Fifty-eight percent of directors surveyed said recruiting qualified candidates to serve as audit committee financial experts has been difficult or very difficult. Almost as hard, the report states, is the recruitment of independent board members, which 51% of respondents said was difficult or very difficult.
One concern for directors and would-be directors is personal liability. One in four board members polled said they do not have adequate personal liability insurance. One-third of interested board members and 16% of independent directors surveyed have obtained additional personal liability coverage.
Independent Fund Chairs Called an Investor's Right
MarketWatch columnist Chuck Jaffe has a bone to pick with the Investment Company Institute and the Independent Directors Council, which have just issued a report showing that three-quarters of 88% of fund boards were comprised of independent directors at the end of last year (see related story, page one). The organizations also found that 75% of fund companies either have an independent chairman or a lead independent director. In the mid-1990s, less than 25% of funds had an independent chairman.
The report also found that whereas 66% of fund companies had separate legal counsel for their independent board members in 2000, more than 90% do so now, and a "vast majority" had a financial expert on the audit committee.
"Fund boards have always taken their duties to shareholders very seriously," said Robert W. Uek, chairman of the Independent Directors Council. "Clearly, fund boards have increased the depth of their oversight as the industry has grown and the issues affecting funds have continued to become more complex. This report indicates that shareholders should be confident that directors are keeping a close watch on their funds."
Fact is, Jaffe said, because the Securities and Exchange Commission had passed the independent chairman rule that would have required 75% of funds, including the chairman, to be independent, only to be turned down by a federal appeals court, most fund boards switched to 75% independent "figuring that they would just beat the regulators to the punch. There's no cause for glad-handling here."
Jaffe goes so far as to call independent oversight of fund boards "the bare minimum for what the public should have expected or demanded from a board of directors.
"What you haven't seen in the last decade is those boards standing up regularly to management practices that are bad for investors. Plenty of boards retain mediocre or lousy managers year after year, push through fee increases or fail to push management to close a fund to new investors after assets surpass the ideal size for the strategy they employ," Jaffe maintains.
BoA Latest Firm to Bail Out Money Market Fund
Bank of America's Columbia Funds unit joins the growing ranks of mutual fund companies that are coming to their money market funds' aid due to subprime exposure in structured investment vehicles (SIV). BoA said it might spend up to $600 million to support its funds.
Credit Suisse's SIV exposure in its money market funds has cost it $125 million. Wachovia has bought $40 million of distressed debt from its Evergreen money market fund, and Legg Mason invested $100 million in one of its money market funds last month and recently procured $238 million in credit to support two others. Likewise, SEI Investments and Sun Trust Banks have secured credit in the event they need to support their money market funds.
"It's a no-brainer to spend a few million dollars on troubled securities or lose their entire mutual fund franchise that is making them billions of dollars," Peter Crane, principal of Crane Data and publisher of the Money Fund Intelligence Newsletter, told The New York Times. "Anyone who is running a big mutual fund has more than their money fund-they have their reputation on the line."
According to industry insiders, other fund companies have approached the Securities and Exchange Commission to ask how to handle SIV exposure in their money market funds.
BoA Analyst Michael Hecht estimates that 5% of money market fund assets are in SIV securities. Still, few industry experts believe that money market funds will break the buck.
China Again Giving Green Light to New Mutual Funds
China regulators put new mutual fund offerings on the back burner over the past two months in an attempt to cool down what appears to be an overheated market, but have just allowed ICBC Credit Suisse Asset Management's Core Value Funds to open to investors, Shanghai Daily reports. Likewise, Golden Eagle Asset Management's Component Stocks Preferred Funds will hit the market later this month.
The China Securities Regulatory Commission had suspended the issuance of new mutual funds in September. As of that date, China's mutual funds had $441.6 billion in assets under management, four times the assets in the beginning of the year.
The reason China regulators decided to permit new fund sales to resume is due to "the recent tumbles on the stock market, [which] have boosted the need to resume the sales of new fund products and give the market a lift," said Dai Ming, an analyst with Kingsun Investment Management.
Hedge Funds Expected to Increase Asian Investments
Hedge fund executives expect to increase their investments in Asia significantly over the next several years, the Thai News Service reports.
"Going forward, Asia ex-Japan will see tremendous growth in investments by hedge funds," said Jeffrey Tucker, a partner with $15 billion hedge fund FairfieldGreenwich Group.
Although assets invested in Asia in the $1.8 trillion hedge fund industry account for only 9%, that will grow "quintessentially" over the next two to three years, Tucker said. By comparison, hedge funds have 45% of their assets currently tied up in U.S. securities.
BoA Launches $35 Million Retirement Ad Campaign
Bank of America has just launched a $35 million advertising campaign that will continue into the second quarter of next year, highlighting its retirement programs and ability to provide clear, understandable individual retirement account (IRA) solutions.
It is BoA's first campaign to focus on its retirement capabilities and will be followed by a second campaign next year to highlight other capabilities at the bank.
"Americans' retirement needs are continuing to intensify due to longer life expectancy, rising healthcare costs and the lack of comprehensive, readily accessible guidance," said Jeff Carney, president of BoA's Retirement and Global Wealth and Investment Management Client Solutions. "This initial campaign is intended to demystify for customers one key solution area-the world of IRAs-and help create a better understanding of retirement solutions overall, which Bank of America is extremely well equipped to provide."
Carney added: "When you look at the size of the mass market, they are facing tremendous complexity in solving their life needs. We want to help them define the problems and address them."
Financial services companies haven't done a good job of tapping the Boomer market, Adam Broun, a principal with Deloitte Consulting, told the Associated Press. "Banks must create new and innovative products. There's more to serving the retirement market than offering a 401(k)," he said.
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