Understanding the Role of Mutual Fund Directors

Under the Investment Company Act of 1940, the board of directors of a mutual fund is charged with looking after how the fund operates and overseeing matters where the interests of the fund and its shareholders differ from the interests of its investment adviser or management company. In order to enhance this system, at least 40 percent of the board must consist of independent, or outside, directors. Together, these requirements make the concept of investor protection central to the way mutual funds function.

Making a Strong System Stronger

To make this strong system of governance even stronger, the Investment Company Institute’s Board of Governors has endorsed a series of best practices recommended by an Advisory Group of investment company independent directors and senior industry executives.

Advisory Group members John J. Brennan, Dawn-Marie Driscoll, and Paul G. Haaga, Jr. brief the media on the recommendations in the report.

Among the 15 practices cited in the Advisory Group's report is a call for independent directors to represent a "super-majority" (or at least two-thirds on all fund boards) rather than the current 40 percent generally required by law. The report also recommends that former officers or directors of a fund’s investment adviser, principal underwriter or certain affiliates may never serve as independent directors of the fund; that fund independent directors have access to separate counsel; and that a fund’s independent directors meet separately from management.

The Institute has long supported the critical role of mutual fund directors in safeguarding the interests of fund shareholders. For a listing of legislative and regulatory developments concerning directors, see the Fund Governance index page.