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Fund Governance: Legal Duties of Investment Company Directors

Robert A. Robertson

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Fund Governance: Legal Duties of Investment Company Directors is a comprehensive, authoritative and practical treatment of the legal obligations of mutual fund and closed-end fund directors, the special duties of independent directors, and fund governance best practices.

This treatise provides detailed coverage of a fund board's legal duties under the federal securities laws and state corporate and trust law. It examines the impact of statutes and regulations, SEC guidance, court cases, and best practices in the context of fiduciary duty requirements, board structure and operations, audit committees, advisory and distribution arrangements, affiliated transactions, and other aspects of fund management. It also addresses the special requirements for closed-end fund and money market fund directors, as well as director indemnification and insurance issues. Filled with insight, and featuring more than 30 forms and charts, Fund Governance: Legal Duties of Investment Company Directors looks closely at challenging questions that often arise.

Book #00663; looseleaf, one volume, 980 pages; published in 2001, updated as needed; no additional charge for updates during your subscription. Looseleaf print subscribers receive supplements. The online edition is updated automatically. ISBN: 978-1-58852-102-6

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  • Availability: Available
  • Brand: Law Journal Press
  • Product Type: Books
  • Edition: 0
  • Page Count: 980
  • ISBN: 978-1-58852-102-6
  • Pub#/SKU#: 663
  • Volume(s): 1

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  • Robert A. Robertson
Robert A. Robertson is a partner with the Financial Services Practice Group of Dechert LLP, an international law firm. He regularly counsels investment advisers, mutual funds, closed-end funds, fund boards of directors, private funds and institutional investors. Mr. Robertson is Chair of the American Bar Association's Subcommittee on Investment Companies and Investment Advisers. He is also an Advisory Board Member of the Mutual Fund Directors Forum. He served as an attorney with the Securities and Exchange Commission from 1990 through 1997, where his most recent position was counselor to Commissioner Isaac C. Hunt, Jr.

Mr. Robertson is a frequent lecturer and has written numerous articles on securities law topics. His articles have appeared in such publications as the Business Lawyer, the Investment Lawyer, the Stanford Journal of Law, Business & Finance, the Review of Securities & Commodities Regulation, The National Law Journal, and the Washington Post. Mr. Robertson is a graduate of Claremont McKenna College (B.A.), Loyola Marymount University (M.B.A.), and UCLA Law School (J.D.).


CHAPTER 1
Background

§1.01 Early History of Fund Governance
[1] Introduction
[2] Sporadic Growth Pre-1920
[3] The Roaring Twenties and Closed-End Funds
[4] The Crash and Fixed Trusts
[5] The Great Depression and Mutual Funds
§1.02 1939 SEC Report on Investment Trusts
[1] Management Abuses and Deficiencies
[2] Detailed Illustrations of Abuses
[3] Remedial Legislation Enacted

CHAPTER 2
Duties of Fund Directors Under State Law

§2.01 Overview
§2.02 Board Duties and Organizational Structure
[1] Corporations
[2] Business Trusts
§2.03 Guiding Principles
[1] “Fiduciary” Duties
[2] Business Judgment
§2.04 Duty of Care
[1] Oversight and Supervision
[2] Board Decision-Making and the Business Judgment Rule
§2.05 Duty of Loyalty
[1] General Standard Under State Law
[2] “Fairness” Standards
[3] “Interested Director” Statutes
[4] Importance of Independent Director and Non-Interested Director Status
§2.06 Other Responsibilities of Fund Boards Under State Law
[1] Amending Bylaws
[2] Electing Officers
[3] Authorizing Additional Shares or Other Units of Beneficial Interest
[4] Declaring Dividends and Other Distributions
[5] Calling Special Meetings of Shareholders
[6] Approving Mergers
§2.07 Chart: Comparison of Business Forms

CHAPTER 3
“Independent” Director Requirements

§3.01 Overview
§3.02 1970 Amendments
§3.03 Board Composition Requirements
[1] Independent of Fund Insiders
[2] Independent of Other Conflicts
[3] “No-Load” Fund Exception
[4] Interested Persons
§3.04 Independent Director Questionnaires
§3.05 Form: Independent Director Questionnaire

CHAPTER 4
Board Structure and Operation

§4.01 Introduction
§4.02 Board Membership
[1] Ineligible Persons
[2] Shareholder Election
§4.03 Basic Board Structure
[1] Board Size
[2] “Unitary”/“Pooled” Boards
[3] “Cluster” Boards
§4.04 Board Leadership and Committees
[1] Board Leadership
[2] Principal Committees
§4.04A Board Diversity
[1] Proxy Disclosure
[2] Diversity Representation
§4.05 Board Meetings
[1] Scheduling
[2] Agendas
[3] Pre-Meeting Preparation
[4] Independent Director-Only Sessions: Rule 0-1(a)(7)
[5] Board Minutes
§4.06 Director Compensation
§4.06A  Deferred Compensation Plans
§4.06B Director Fund Share Ownership
§4.07 Board Performance Evaluations
[1] Background
[2] Rule 0-1(a)(7)
§4.08 Retirement Policy and Term Limits
§4.09 Independent Legal Counsel
[1] General Requirements
[2] “Sufficiently Limited” Management Representation
[3] Fund Representation Permissible
[4] Independent Directors May Rely on Management/Fund Counsel
§4.09A Related SEC Exams
§4.10 Form: Drafting Guide and Audit Committee Charter
§4.11 Form: Nominating and Administration Committee Charter
§4.12 Form: Director and Officer Questionnaire
§4.13 Form: Board Self-Evaluation
§4.14 Form: Audit Committee Self-Evaluation
§4.15 Form: Board Meetings Calendar
§4.16 Form: Trust Formation Written Consents
[1] Initial Sole Trustee Organizational Matters
[2] Initial Sole Trustee Appointment of Full Board
§4.17 Form: Board Meetings Calendar
[1] Governance
[2] Fund Registration
[3] Portfolio Management
[4] Administration and Custody
[5] Distribution
[6] Ethics and Bonding
[7] Certain Transactions with Affiliates
[8] Other Matters
§4.18 Form: Audit Committee Resolutions
[1] Audit Engagement (Approval)
[2] Audit Pre-Approval Procedures (Approval)
[3] Non-Audit Services (Approval)
§4.19 Form: Independent Trustee Resolutions
[1] Lead Independent Trustee (Appointment)
[2] Independent Trustee Counsel (Selection)
§4.20 Form: Written Consent of Sole Shareholder

CHAPTER 5
Director Liability Indemnification and Insurance

§5.01 Overview
§5.01 ADirector Litigation Risk
[1] Prospectus Liability
[2] Fiduciary Obligations
[3] Fee Litigation
[4] Closed-End Fund Governance
[5] Defense Costs
§5.02 Indemnification
[1] Introduction
[2] State Corporate Authority
[3] State Trust Authority
[4] Federal Preemption
[5] Advancement of Attorney Fees and Other Expenses
§5.03 Insurance
[1] Introduction
[2] State Corporate Authority
[3] State Trust Authority
[4] Federal Preemption
[5] Typical Policy Structure
[6] Analysis of Basic Policy Provisions
[7] Defending Claims
§5.04  Form: Indemnification Agreement (Sample 1)
§5.04A  Form: Indemnification Agreement (Sample 2)
§5.05 Form: D&O Insurance Policy

CHAPTER 6
Board Approval of Advisory Agreement

§6.01 Overview
§6.02 The Advisory Agreement
[1] Services Provided
[2] Fee Structure
[3] Expense Allocation
[4] Required Operational Terms
§6.03 Approval of “Written Contract”
[1] Sections 15(a), 15(c) and 36(b)
[2] Standard of Care
[3] Factors to Consider
[4] Disclosure Requirements
[5] Directors Forum Guidance
§6.04 A Sub-Advisory Agreement
[1] Primary Adviser Due Diligence
[2] The “Written Contract”
[3] Board Consideration of Sub-Advisory Services
[4] Multi-Manager Structures
[5] Initial Board Approval
[6] Ongoing Board Oversight
§6.05 Timing of Annual Approval
[1] First Renewal
[2] Second and Subsequent Renewals
§6.06 Terminating an Advisory Agreement
[1] Board or Shareholder Action
[2] Contract “Assignment”
[3] Intra-Corporate Reorganization
[4] Non-Material Contract Changes
§6.07 Continued Operations Post-Contract Termination
[1] Director Due Diligence
[2] Timing of Shareholder Vote
§6.08 Form: Section 15(c) Request Letter
§6.09 Form: Fund Business Profitability by Fund(s) and Investment Discipline
§6.10 Form: Fund Business Profitability by Business Function
§6.11 Form: Section 15(c) Board Memorandum

CHAPTER 7
Board Approval of Mutual Fund Distribution Arrangements

§7.01 Overview
§7.02 The Distribution Agreement
[1] Services Provided
[2] Fee Structure
[3] Required Operational Terms
§7.03 Approval of Distribution Agreement
[1] Sections 15(b) and 15(c)
[2] Reasonable Business Judgment
§7.04 A 12b-1 Distribution Plan
[1] Background
[2] Required Operational Terms
[3] Types of 12b-1 Plans
[4] Approval of 12b-1 Plan
[5] Other Requirements
§7.05 Multiple-Class Share Arrangements
[1] Types of Multi-Class Plans
[2] Approval of Multi-Class Plan
§7.06 Special Distribution Channel Oversight
[1] Fund Supermarkets
[2] Bank Sales
§7.07 Prohibited Distribution Payments with Brokerage
[1] Background
[2] Rule 12b-1(h)

CHAPTER 8
Monitoring Transactions with Affiliates

§8.01 Overview
§8.02 Purchases from Affiliated Syndicate
[1] Background
[2] Rule 10f-3
§8.03 Cross-Trades Between Affiliated Funds
[1] Background
[2] Rule 17a-7
§8.04 Mergers of Affiliated Funds
[1] Background
[2] Rule 17a-8
§8.05 Brokerage Transactions with Affiliates
[1] Background
[2] Rule 17e-1
§8.06 Service Agreements with Affiliates
[1] Background
[2] SEC Staff Guidelines
[3] Additional Practical Guidance
§8.07 De Minimus Purchases and Sales with Affiliates

CHAPTER 9
Other Board Duties Under the Investment Company Act

§9.01 General Fiduciary Duty
[1] Section 36(a)
[2] Court Proceedings
§9.02 Selecting Independent Accountants
[1] Accountants
[2] Principal Accounting Officer
§9.03 Valuing Portfolio Securities and Monitoring Liquidity
[1] Fair Value
[2] Liquidity Requirements
§9.04 Approving Time for Calculating Mutual Fund NAVs
§9.05 Approving and Monitoring Custodial Arrangements
[1] Introduction
[2] Domestic Custody
[3] Foreign Custody
§9.06 Approving Fidelity Bonds
[1] Background
[2] Rule 17g-1
[3] Deductible Requirements
§9.07 Approving and Administering Codes of Ethics
[1] Background
[2] Rule 17j-1
§9.08  Monitoring the Compliance Program
[1] Background
[2] Rule 38a-1
[3] Common Law
[4] Federal Sentencing Guidelines
§9.09  Deterring Market Timing
[1]  Background
[2]  Rule 22c-2

CHAPTER 10
General Fund Board Responsibilities

§10.01 Overview
§10.02 Disclosure Document Oversight
[1] Registration Statements/Prospectuses
[2] Proxy Statements and Periodic Reports
§10.03 Best Execution and Soft Dollars Oversight
[1] Background
[2] Best Execution Oversight
[3] Soft Dollar Oversight
§10.04 Considering Proxy Voting Guidelines
[1] Background
[2] Proxy Voting Rules
[3] DOL“s Approach
§10.05 Financial Privacy Oversight
[1] Background
[2] Approving Policies and Oversight
§10.06 Anti-Money Laundering Oversight
[1] Background
[2] 31 C.F.R. Section 103.13 0
§10.07 Revenue Sharing and Shelf Space
[1] Background
[2] Directed Brokerage for Revenue Sharing Prohibited
[3] Enforcement Actions
[4] Procedures and Oversight
§10.08 Pricing Error Corrections and Legal Settlement Distribution Methodologies
[1] Background
[2] Legal Standards
[3] Accepted Industry Standards

CHAPTER 11
Special Duties of Money Market Fund Directors

§11.01 Background
§11.02 Rule 2a-7 in Operation
[1] Risk Limiting Conditions
[2] Liquidity Requirements
[3] Suspension of Fund Redemptions
§11.03 Rule 2a-7 Procedures and Oversight
[1] Delegated Procedures
[2] Oversight of Delegated Procedures
[3] Non-Delegable Procedures

CHAPTER 12
Special Duties of Closed-End Fund Directors

§12.01 Overview
§12.02 Rights Offerings
[1] Background
[2] Board Determinations
[3]  Shareholder Approval Requirements
[4] Disclosure Requirements
[5] Shareholder Challenges
§12.03 Addressing the Discount
[1] “Lifeboat” Provisions
[2] Open Market Repurchases
[3] Tender Offers
[4] Managed Distribution Policies
[5] Open-Ending Vote
§12.04 Activist Shareholders
[1] Shareholder Proposals
[2] Proxy Contests
§12.05 National Securities Exchange Requirements
[1] Listing Requirements
[2] Annual Meeting Requirement
[3] Audit Committee Requirements

APPENDIX
SELECTED BIBLIOGRAPHY
INDEX