Boards are focusing on a fair amount of regulatory uncertainty in the current economic environment, according to Lea Anne Copenhefer, partner at Bingham McCutchen. "The shape of the financial services industry going forward is unclear at this point about how it will impact the fund industry [and directors more specifically] in a variety of ways," Copenhefer said.
As the regulatory landscape changes, funds could get swept up in more and more regulation. So far, boards are waiting for more regulations to come down on usage of derivatives, money market funds and 12b-1 fees. "We've sort of gotten accustomed to a lot of regulation and we recognize that the mutual fund business and the investment company business is one of the most regulated in the country," said one independent director. "I think you could probably be a brain surgeon with less regulation."
Also on the horizon are uncertainties related to the financial services reform bill, which is slated to be passed this month. "The single largest challenge for fund boards is to stay abreast of the new regulations," said Dan Crowley, partner at K&L Gates. Crowley said if the bill stays as it stands now, the Securities and Exchange Commission will retain exclusive responsibility for protecting investors. The board will have to be mindful of a whole series of regulations, including those involving disclosures on point of sale and short provisions, Crowley said. The bill's proposed requirements on the oversight of credit rating agencies will create the need for more rigorous due diligence as the rating itself will not be sufficient. "The directors will want to be certain that there are adequate compliance procedures in place," said Crowley.
Some boards are relying more heavily on legal counsel to walk directors through changes and potential changes, said one fund chair. "Once changes in the financial industry are clear, regulations for funds will probably change in light of that and we will have to keep up," the chair said. "It is always something in the back of the mind even if not in the forefront."
Earl Weiner, of counsel at Sullivan & Cromwell and an independent director, said some boards are asking investment managers about how they are factoring in these uncertainties or systemic risks to protect against an adverse outcome. "The problems have increased now and are affecting the European market so to what extent can you imagine these things in advance or at least recognize that they can happen," Weiner said. Some investment managers are now factoring in these concerns and considerations into the risk management process, added Weiner.