Board of Trustees (Fund)

A fund's board of trustees is the governing body that oversees an investment fund on behalf of its shareholders. In the United States, a mutual fund organised as a business trust or statutory trust has trustees, while one organised as a corporation has directors; the role is the same. The board does not pick investments. It hires and supervises the firms that run the fund and polices the conflicts of interest between those firms and the fund's investors.

Fund boards exist because a typical US fund has no employees of its own. It is run by an external investment adviser that usually created the fund and earns fees from it. The Investment Company Act of 1940 relies on the board, and especially its independent members, to stand between that adviser and the shareholders. In Europe, a similar oversight role is split between the fund's board or management company and an independent depositary.

Picture a block of flats where the owners hire a management company to run the building. The management company also built the block and sets its own fee. To stop it overcharging or cutting corners, the owners elect a committee, mostly of people with no link to the company, who check the bills, renew or refuse the contract each year and step in when something goes wrong.

A fund board is that committee. It does not fix the lifts itself, just as it does not buy and sell shares, but it decides whether the people who do are doing a good job at a fair price.

The 1940 Act divides trustees into "interested persons", such as employees of the adviser or principal underwriter, and independent trustees, who have no such ties. Section 10(a) says no more than 60% of a fund's board may be interested persons, so at least 40% must be independent. In practice almost every fund board has a large independent majority, because several commonly used SEC exemptive rules, including those for 12b-1 fee plans and multiple share classes, require a majority of independent trustees and independent nomination of new ones. A 2004 SEC rule that would have required 75% independence and an independent chair was struck down by a federal appeals court in 2005, although many boards adopted those practices voluntarily.

Many fund families use a single "unitary" board that oversees dozens or even hundreds of funds, which gives trustees a broad view but a heavy workload.

The board's responsibilities come from state trust or corporate law, the 1940 Act and SEC rules. The core duties include:

• Approving the advisory contract. Under Section 15(c), a majority of independent trustees must approve the adviser's contract, at an in-person meeting, initially and then every year. They must request the information needed to judge it, including fees, expenses, performance against a benchmark and the adviser's profitability.
• Monitoring fees. Section 36(b) gives the adviser a fiduciary duty regarding its pay; in Jones v. Harris Associates (2010), the US Supreme Court held that a fee breaches that duty if it is so large it bears no reasonable relationship to the services rendered.
• Overseeing service providers. Approving the principal underwriter, the fund custodian, the transfer agent and the auditor.
• Valuation. Overseeing how holdings are priced for the daily net asset value (NAV); Rule 2a-5 (compliance from September 2022) lets the board assign day-to-day fair valuation to the adviser under its oversight.
• Compliance and risk. Approving the fund's compliance programme and its chief compliance officer under Rule 38a-1, and overseeing the liquidity risk and derivatives risk programmes required by later SEC rules.
• Shareholder matters. Calling meetings, approving the fund's proxy voting policies and setting dividend and capital gains distribution policy.

Trustees' names, independence, pay and fund holdings are disclosed in the Statement of Additional Information (SAI), and the reasons for approving the advisory contract appear in shareholder reports or Form N-CSR.

Structures vary. A Luxembourg or Irish UCITS fund set up as a company (a SICAV or ICAV) has its own board, while a contractual fund is run by a management company with its own board. Either way, an independent depositary must oversee cash, assets and compliance with the fund rules, and the national regulator, such as Luxembourg's CSSF, must approve directors. UK authorised unit trusts have a trustee that holds the assets and supervises the manager, and authorised fund managers must carry out an annual "assessment of value" and have at least two independent directors under rules from the Financial Conduct Authority (FCA).

Fund boards are often described as weak. Critics note that the adviser usually proposes the trustees, sets the meeting agenda and provides most of the information on which the board decides, and that boards almost never replace an adviser for poor performance or high fees. Defenders reply that boards negotiate fee waivers, breakpoints and service changes in private, and that competition and falling fees owe something to that pressure. Trustee pay on large unitary boards, which can exceed several hundred thousand dollars a year, also draws questions about independence.

• Investor.gov (SEC): Board of Directors