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Thoughts from
the Boardroom
PwC Mutual Fund
Directors Roundtable
2012 Highlights

October 2012

Thoughts from the Boardroom
PwC Mutual Fund Directors Roundtable 2012 | Highlights

Contents
Introduction 1
Risk management 2
Regulatory change 6
Valuation 11
Contract review process 13
Board effectiveness 15
Concluding thoughts 18
Contact information 19




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Introduction
PwC invited independent directors from the boards of some of the nation’s leading
mutual fund complexes to participate in an informal discussion of current issues
facing the industry. The exchanges, facilitated by members of PwC’s asset
management practice, generated important insights into what directors are thinking
about in today’s evolving marketplace.
Directors shared their views on matters including compliance with new regulatory
initiatives, risk management and valuation, questions surrounding the review of
management contracts and the effectiveness of boards themselves. The perspectives
provide a summary of leading practices in mutual fund oversight, explain how
directors are meeting the challenges they face and provide insights into the evolving
role of directors and boards in the funds industry.

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Risk management
Background
The recent financial crisis has raised questions about the effectiveness of current risk
management practices. Today, nearly four years after the beginning of the financial
crisis, the mutual fund industry continues to explore how to identify, manage and
mitigate risks and develop a more consistent, proactive and adaptive approach to risk
management.
Because of their fiduciary responsibilities, mutual fund directors have a keen interest
in facilitating effective management of the risks undertaken by the adviser in the
funds they oversee.
Within the scope of their responsibilities, there is significant room for directors to
exercise their oversight function. How they are doing so in a period of market
volatility and uncertainty, and the concerns they and their peers are seeing, was the
opening subject of this year’s PwC Mutual Fund Directors Roundtable.

Directors’ comments
How directors oversee the management of risk in their funds is among the most
topical items on the agendas of many boards. Directors expressed their belief that
they need to understand the key risks that affect their funds and strategies as well as
the steps that management is taking to control and mitigate the risks; understand
how the risk framework processes work, especially with regard to escalation of issues
to the board; and set and reinforce the tone and culture around sound risk
management.
The role of the adviser in risk management, in contrast, is much more tangible: To
implement the board’s risk management policies and support the board in its
oversight role. Advisers should have processes in place, manage them and keep the
board apprised as to their effectiveness. All of this should be done in ways that are
digestible by the directors and useful in their oversight capacity.
While some directors question whether they are doing enough to fulfill their risk
management oversight and influence responsibilities, others are concerned over
whether they may cross a line and become too involved in fund management
decisions. Often, this tension is exacerbated by lack of clarity around roles and
responsibilities between the board and the adviser.

Other times, the board may feel that advisers also may not be proactive around what
the board needs in its oversight role. If the board does not receive the information it
believes it needs, it often feels compelled to become more directly engaged. In order
to avoid this situation, the board and the adviser need a robust dialogue about
expectations in which the board communicates what it wants to know, and the
adviser provides the information to address any information gaps.
The right amount of information is also important. In some cases, boards receive so
much information that they cannot effectively put it into context. Similarly, some
directors are concerned that advisers are taking a legalistic approach to risk
management, with their efforts focused more on regulatory compliance and less on

whether the adviser has the right people and processes in place for oversight.
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Further driving the need for board oversight is that investor due diligence
increasingly focuses on the risk management aspect of a fund’s operations. Beyond
the implications for a fund’s ability to gather assets, the efficacy of risk controls has
an enormous impact on reputational risk. This risk directly affects the brand, with
implications across the platform for companies with multiple lines of business.
The directors think that boards generally need simple, clear views into risk processes
and better guidance about tested risk management processes that actually work,
especially in times of stress. Part of the problem is that many senior people in
advisory firms lack the requisite background in risk and often have not thought
through the implications of risk management decisions.
Ultimately, directors need relevant information that is provided in ways that are
comprehensible and actionable. Having people in management trained and
motivated goes a long way towards reducing the risks to which the fund is exposed.
Tone at the top is crucial.
Other risk management-related observations by directors:
 Risk management should not be a siloed function but instead operate across the
organization. However, enterprise risk management processes and frameworks
may appear to provide greater oversight than really exists. Enterprise risk
management is only as effective insofar as it is able to produce a “risk radar” that
is meaningful and forward-looking.
 Risk dashboards, a popular way of presenting risk information, can demand
considerable resources and may not highlight underlying issues. Many current
models of dashboards either have too many metrics to be comprehensible or, at
the other extreme, do not have much data backing them. The well-designed risk
dashboards synthesize key qualitative and quantitative data and generate
meaningful and actionable information for the board.

 Because of regulations, banks have traditionally been forced to have more
structure and scrutiny around risk management than investment advisers.
However, regulatory changes such as those included in Dodd-Frank (including the
Volcker Rule) will result in at least some areas of asset management, such as
money-market funds, facing heightened risk oversight and some risk
requirements similar to those which govern banks. A key distinction between
banks and asset managers, however, is that traditional measures of banking risk
including capital and balance sheets are not applicable to asset management firms
which are typically funded by client assets.
 While the focus of risk management oversight is primarily on the adviser and the
investment management process, directors recognize they also need to devote
time to other potential sources of risk. For instance, information and data
security, operational processes and client service are key risk areas to monitor. In
addition, the role of third-party providers such as transfer agents, custodians and
pricing services sometimes receives too little attention.
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Risk management roles for directors and fund
advisers
 Director responsibilities should include maintaining awareness of the most
significant risks to the fund (including risks of the adviser or its affiliates that may
affect the fund) and the steps being taken to manage those risks.
 Directors should understand the current risk management processes, ask
questions where appropriate and obtain assurances that the processes are
reasonably designed to manage and control the fund’s material risks.
 Perhaps most importantly, boards should encourage and reinforce a strong “tone
at the top” at the adviser by, among other things, sustaining an appropriate focus
on risk management.
 In addition, directors should be reassessing their tax functions, which are being

asked to address new compliance requirements, more complex processes, smaller
tolerances for error and expectations that they be a part of risk management.
 Advisers should support the board in its oversight role, providing educational
sessions on risk management generally or on specific topics, providing regular,
periodic reports on the fund’s investment risks. They also should identify and
report on the most significant business operational risks and escalate material
risk-related issues and events to the board when appropriate.
 The adviser also should demonstrate to the board the effectiveness of its risk
management processes to identify, measure, control and monitor the most
significant risks to the fund.
PwC’s view
The conditions that have led to a greater focus on risk management, such as
economic uncertainty, volatile markets and new regulatory regimes, are likely to
continue. In response, mutual fund advisers are seeking to enhance their risk
management programs, especially to focus on newer, emerging risks or those that
might be considered less probable – so-called “black swan” events. In order to do
this, they are trying to identify emerging trends, understand interconnections
between risks and develop relevant risk mitigation strategies.
Advisers and boards will probably continue trying to take an enterprise-wide
approach to risk management that would bolster the linkages between risk,
regulation, investment performance and business strategy. As part of this, advisers
should acquire a more nuanced approach to risk, distinguishing among operational
risk, compliance risk, tax risk, et cetera, and developing more targeted mitigation
initiatives.
Although there are still significant differences in how advisers implement risk
management, leading practices are gradually becoming accepted across the industry.
Given the history of the past several years, when risks and correlations arose
unexpectedly, more attention will be devoted to managing currently unknown risks.
While the likelihood of many risks may have been deemed low, their impact can be
significant, and potentially franchise-destroying. For example, many risk managers

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focus on vulnerabilities such as the European debt crisis and its implications, but
only on the primary exposure, and not the downstream implications and exposures.
In addition to economic risks, managers are recognizing that tax risks need to be a
part of the overall risk management function. No longer is tax simply an adjunct to a
firm’s day-to-day operations; instead, it is becoming a fully integrated part of the
firm’s risk management function. This requires some asset managers and their tax
departments to approach the tax function differently.
More focus also will be placed on continuously monitoring the environment to spot
developing trends, understand interconnectedness with other risks and plan
responses. The focus will be on identifying the vulnerabilities rather than on trying to
predict risk events. Once vulnerabilities are identified, worst outcomes can be
developed, risk assumptions detailed and scenarios for external events projected. A
particularly effective way to understand such “unknown” risks is through reverse
stress-testing. Unlike scenario analysis, which starts with a risk event, reverse stress-
testing begins with the outcome and identifies circumstances that may cause it.
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Regulatory change
Background
One of the most important debates arising from the financial crisis was over how to
enhance the safety of the financial system. One answer was the new regulatory
initiatives that were adopted in the US, Europe and elsewhere around the world. The
Dodd-Frank Wall Street Reform and Consumer Protection Act, the Basel Accords and
the Solvency II Directive, among others, are having enormous impacts on the
financial services industry. The impacts of these initiatives have been more
significant in some sectors, such as banking, than on others. Yet most areas,

including mutual funds, are seeing the effects of the most ambitious regulatory
initiatives in decades.
While Dodd-Frank and other major legislative packages have received the greatest
attention, less visible measures, such as the Foreign Account Tax Compliance Act of
2009 (FATCA) and the US Securities and Exchange Commission’s proposed changes
to 12b-1 fees, are likely to have a greater direct impact on mutual fund governance
and operations. The following table identifies key issues.
The new regulatory and compliance reality for mutual funds
New regulatory
obligations and
accelerated rulemaking
 The Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010
 New rules for money-market funds, pay-to-play,
short-selling, proxy disclosure, asset-backed
securities, REITs, Form ADV, large trader reporting
and CDS clearing
 Concept release on use of leverage and derivatives
by mutual funds; potential new rules
 Incentive-based compensation rules for certain
large advisers
 More to come: Proposed rules on target date funds,
distribution expenses (i.e. 12b-1 plans) and dark
pools
 Systemic risk reporting
 Monthly reporting requirements to Treasury on
Form SLT
 Foreign jurisdiction laws and rules
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The new regulatory and compliance reality for mutual funds
Increased
client/prospective client
demands
 Prospective institutional shareholders due diligence
and requests for proposals include questions
concerning compliance programs and breaches
 Clients/shareholders request information about
contacts from enforcement investigators and
examination results, including copies of deficiency
letters
 Sub-advisers are seeing more vigorous due
diligence and ongoing monitoring and reporting
requests from primary advisers; diligence is moving
beyond certification process
Increased regulatory
expectations
 Regulators may expect a comprehensive
compliance program: no gaps
 Examiners may look for senior management
support for and knowledge of the compliance
program – and may interview management about it
during an exam
 Examiners may expect robust testing that identifies
potential problems, annual reporting and use of
available technological tools
 Examiners may expect a governance process that
assures reporting up and timely action to resolve
problems and address their root cause; information

flow to and from the fund board is key
More examinations
 Increase in staffing and budget
 Risk-driven examinations, cause exams, sweeps
Consequences of non-
compliance
 Enforcement investigations are more likely now –
the SEC is targeting firms with a special unit of
investigators focused solely on the asset
management industry in coming years.
 Joint investigations by the SEC and the Department
of Justice
 Cooperation among regulators: SEC, CFTC,
FinCEN, IRS, FBI, Department of Labor, state
AGs/securities divisions
 More cooperation agreements between SEC and
foreign counterparts (FSA, SFC, CSRC)
 Cooperation and non-prosecution agreements
between SEC and witnesses
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The new regulatory and compliance reality for mutual funds
Investigative techniques
have changed
 New whistleblower program with bounties will
encourage tipsters
 Revitalized bounty program for those who provide
tips concerning insider trading
 Wiretaps

 Use of data analysis
 Ability to analyze hundreds of millions of electronic
trading records to identify groups of traders who
repeatedly made similar well-timed bets
 Trained, experienced investigators and examiners
(industry experience, Chartered Alternative
Investment Analysts, Certified Fraud Examiners)
Directors’ comments
The participants in the Mutual Fund Directors’ Roundtable believe that FATCA is
currently one of the top regulatory issues from a compliance standpoint. While the
banking sector has been focused on FATCA for a long time, asset managers had been
less certain about both its final adoption and its applicability to them; now that the
regulations were issued in February 2012, boards and advisers are focusing on
building a path to compliance.
One of the first and most relevant questions directors are considering is: Who owns
FATCA? While it is a tax matter, other staff beyond the tax function – operations,
data, compliance and information technology – should be closely involved in
implementation of FATCA programs. Banks and insurers have come to this
conclusion and focus on implementing FATCA across their business lines. The
directors in attendance at the roundtable understand that both boards and
management need to be engaged on FATCA compliance and know what the
framework will be. There is a window in which they can focus on this, but it closes
with the 2013 deadline for companies to enter into foreign financial institution
agreements.
With proposed SEC regulations on money-market funds expected shortly, the
management and future of these funds is also an issue of growing importance.
Federal officials think there is risk in the money-market arena that has not been
mitigated by previous reforms. In turn, the directors see less certainty about the
direction of the proposed reforms and significant potential impacts on the economic
viability of these investments.

Among the proposals under consideration are floating net asset values, increased
capital requirements or buffers or shareholder redemption holdbacks. Each of these
proposals brings with it sizeable implementation, programming and accounting
issues that could affect the viability of these funds. Funds are looking closely at
whether and how they could manage each of these sets of requirements.

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If the impacts are as great as has been anticipated by some, certain money-market
funds could need to close or exit the US market. There also could be a sizeable
downstream effect in terms of corporate financing, especially on the trillion-dollar
short-term commercial paper market.
While only the SEC has the statutory authority to impose regulations on money-
market mutual funds, the Federal Reserve could assume certain oversight
responsibilities in the case of funds receiving systemically important financial
institution (SIFI) designation under Dodd-Frank. Regardless of which entities are
involved, regulators are not likely to walk away completely from money-market funds
and their oversight.
While 12b-1 reform had been on the front burner for a long time, the issue has lost
some focus lately with the SEC concentrating on other matters, including money-
market fund reform. However, the question of who pays for what remains
unanswered. The lack of transparency and documentation by some funds in
allocating expenses remains a hot button issue for the SEC. In advance of 12b-1
reform, transparency is on the list of issues in SEC exams, along with insider trading
and material nonpublic information.
Expert firms and networks are another issue that continues to attract attention. SEC
examiners have identified a number of such firms and are looking to see whether
advisers have a relationship with them. If the advisers do have such relationships,
then the SEC may make further inquiries about the relationship and the information

that is provided. This is not simply an issue affecting hedge funds; it also can have an
impact on other asset managers.
Some advisers are already recording conversations with expert firms and having
counsel present during calls. Despite the added scrutiny, advisers see these
interactions as useful and an important part of their analytical process. Yet this is
something that boards should understand and inquire into, to attempt to avoid
potential issues. Ultimately, expert firms are part of a much broader question of what
is considered material nonpublic information and what the adviser’s controls are
surrounding it.
Although their focus has been on Dodd-Frank and other US-originated regulation,
the participating directors recognize the increasing importance of understanding and
being able to comply with global regulation. Some of these regulatory initiatives do
not appear to be coordinated globally; others go beyond what is contemplated in the
US, such as the separation of manufacturing and distribution that could result from
European regulatory initiatives, including the possible ramifications of UCITS IV.
Facing such challenges, directors say they need to step back and think about their
advisers’ processes for evaluating and understanding prospective regulatory change.
The directors then should evaluate whether the adviser has the right processes in
place to manage this change.
PwC’s view
Two years after passage of Dodd-Frank, the pace of regulatory releases has increased
significantly, creating enormous challenges for mutual fund managers and directors
who should understand the impacts of these new rules and regulations on the adviser
and its affiliates and then develop and implement compliance initiatives.
Simultaneously with these accelerated rulemakings come higher expectations by
investors and stakeholders and enhanced regulatory oversight and enforcement.
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Beyond Dodd-Frank, advisers may see new regulations in such areas as money-

market funds, target-date funds, the use of derivatives and distribution expenses.
Fund managers operating outside of the US may have to comply with new
requirements including the Basel Accords and the European Union’s Alternative
Investment Fund Managers (AIFM) Directive.
As they seek to understand and adapt to new regulations, advisers will want to
examine closely their compliance programs, especially those centered on key
regulatory risks. The effectiveness of these programs and their ability to
accommodate new regulations will be critical to asset management firms, and firm
executives may want to consider independent analyses of the strengths and
weaknesses of their compliance programs. The following table identifies key
compliance risk areas.
Top compliance risk areas for mutual funds and their advisers
Compliance program
(under Rules 38a-1
and 206(4)-7)
Has your fund/adviser recently assessed the particular risks
and conflicts of its business model and operations? Is your
compliance program effectively geared towards these risks
and conflicts, as well as designed to prevent and detect
compliance problems? Does the program address current
and emerging regulatory focus areas?
Fund governance/
information flow
Has the fund board created an effective relationship with
the fund CCO? Do the fund CCO and other service
providers report sufficiently detailed information to enable
the board to properly oversee the fund?
Valuation
Is your fund able to price and value securities
appropriately? Is the fund’s NAV susceptible to market

timing? Do you have confidence in sources of valuations?
Institutional conflicts

Has your fund/adviser identified and addressed potential
conflicts arising from the selection of service providers and
counterparties (affiliated and unaffiliated), the allocation of
expenses and investments and opportunities among all
clients (including the registered funds), and other affiliated
dealings? Are disclosures adequate?
Personal conflicts
Does the fund/adviser have an appropriate code of ethics
and adequate controls over director and employee trading,
gifts and entertainment, political contributions and other
potential conflicts of interest?
Insider trading
Has the fund’s adviser identified the sources of material
non-public information it receives or maintains? Has it
instituted adequate controls to prevent and detect possible
insider trading at the personal or fund level?
Investment guidelines
and restrictions
Does the fund’s adviser maintain adequate controls on fund
investments and holdings consistent with disclosures made
to shareholders and applicable restrictions? How is this
compliance reported to the board?

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Valuation

Background
The Investment Company Act of 1940 requires that securities for which market
quotations are readily available be valued at current market value, and that other
securities be valued at fair value as determined in good faith by the board. While
boards can delegate the day-to-day responsibility for valuation to advisers, they still
retain final accountability for establishing policies related to the valuation of portfolio
securities. They also are responsible for reviewing the adequacy of valuation
procedures and the accuracy of the results they generate in order for the adviser to
identify valuation risks and create controls to mitigate and manage those risks.
The role of mutual fund boards in valuation has grown in recent years, with the
emergence of complex investments that do not routinely trade on exchanges or in
other established markets. In order for directors to exercise oversight of the
valuations employed by advisers, they need information including clear
documentation summarizing the investment valuation approach applied and key
assumptions; the results of independent price verification; and discussion of fair
values and difficult-to-price securities, including external fair value disclosures.
Directors’ comments
Valuation of securities held in mutual fund portfolios is not a new issue but rather
one that has been on the minds of directors for years. What is new, in the minds of
some, is there now are higher expectations in terms of management, discipline and
governance as well as what questions the board should be asking the adviser about
the valuation process.
The SEC’s interest in how fund advisers are handling these risks has affected
auditors’ expectations of management and what some directors are asking their
advisers. Similarly, the expectations of the Public Company Accounting Oversight
Board (PCAOB) have complicated matters in this area. In particular, the PCAOB is
expecting auditors to do more with regard to valuation issues.
Overall, directors are upbeat about valuation. Valuation challenges typically are the
result of stale pricing, or fair-valued securities that are poorly valued. Far more
important than mistakes or one-off problems are systemic issues that are germane to

the pricing process itself. For instance, many valuation issues involve poor or
inadequate documentation.
These views are consistent with those from a PwC survey of valuation practices at
asset management firms
1
, which found that only 50 percent of advisers provide their
boards a summary of the number of management overrides on pricing and the
reasons why, e.g., stale prices. (In contrast, nearly all advisers provided
documentation of fair value listings.)


1
PwC's "Asset Management Valuation Survey" (November 2010)
/>valuation-survey.jhtml
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Among other findings of the survey was that the valuation risks most frequently cited
by advisers as being the most problematic are market volatility and changing
liquidity and the reliability of data provided by pricing sources.
New product education for directors can be a helpful way to familiarize them with
complex underlying investments and with issues that could arise. Yet better
understanding of investments may not yield better pricing, if only because of
continued innovation by advisers. Newer and more complex investments, such as
absolute return and volatility funds, are raising concerns about how well their risks
can be identified and understood. Moreover, even simpler investments may be used
in ways that make them more complicated. For instance, options and arbitrage
strategies being used in more complicated and more opaque ways, including
correlations, embedded leverage and complex hedges.
Because of constant innovation and the different uses to which investments are put,

there has been little movement towards product-focused risk identification, or
categories that could be problematic from a valuation standpoint.
One concern cited by directors is that board valuation committees often lack audit
committee members. Sometimes responsibility for valuation and oversight of pricing
services is delegated to other board committees, or to management’s valuation
committee. In such cases, it is important for the directors to have conversations with
management about pricing issues. Ultimately, boards should be careful about mixing
up their oversight with management responsibilities for valuation.
PwC’s view
Since the financial crisis, investors, counterparties and other stakeholders have
increased their expectations for transparency and disclosure about valuation
practices and governance controls at mutual funds. The quality and depth of a fund
complex’s valuation practices, in fact, can be seen as something of a surrogate for its
approach to broader risk management responsibilities. Funds Valuation processes
should be independent and credible and pursue continued improvement.
While funds may encounter unique valuation challenges and issues, a number of
leading practices are becoming generally accepted across the industry. Advisers
should have the processing staff and systems in place to value the securities in which
they trade, including complex investments. The process should be fully documented
and understandable. They should also be validated by someone other than the
portfolio manager or other staff involved with making the valuation decisions. All
parties involved with valuation should share their views on an ongoing basis, and
directors in particular should be able to exercise their oversight responsibilities
effectively.
Although valuation approaches and governance structures continue to evolve, many,
if not most, fund companies have the people and systems in place to meet current
expectations for transparency and accountability. They should continue evaluating
their performance and upgrade their capabilities as needed to accurately value the
securities in their portfolios.

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Contract review process
Background
Section 15(c) of the Investment Company Act requires that a fund’s independent
directors approve the investment advisory contract by an in-person vote at a meeting
called for that purpose.
The 15(c) contract review process considers a number of areas, including investment
performance, the competitiveness of mutual fund costs, institutional pricing,
economies of scale and adviser profitability. Within each of these areas, there are a
number of factors to consider.
Directors’ comments
The 15(c) contract review process is an umbrella that covers several different roles of
the board. The board is constantly focused on issues related to the 15(c) process
including investment performance, quality of services, competitiveness of the pricing
and profitability.
At some fund complex boards, the reviews conducted as part of the 15(c) process
have evolved into a year-round exercise that entails reviewing different components
throughout the year. Other boards do not see it as their job to do such an intensive
investigation.
Those directors who are closely involved spend significant amounts of time seeking to
understand each fund, its investment style and strategy and how it is doing its job
day in and day out. In a divide-and-conquer approach, the investment committee at
one fund complex assigns each director a group of funds to review. Directors are
expected to understand the portfolio managers’ philosophies and perspectives, how
they make decisions and how they are performing.
The directors also evaluate the capabilities of the advisory team to determine whether
it has sufficient expertise in the types of securities in which it is investing. A team
which is investing in an asset class or sector in which it has no discernable experience

or expertise raises a red flag.
In concert with this, boards need to understand the adviser’s rewards and
compensation structure and to what extent they incentivize behavior. Is the purpose
of the fund to gather assets or to provide superior performance? Some funds are asset
gatherers, which can tend to blunt performance. Understanding these drivers, and
determining whether they are aligned with the shareholders’ interests, is a leading
practice.
Another area to which directors increasingly are paying attention is how different
strategies are implemented. During the dot-com boom, for example, one fund
company had its managers enter into technology investments, and so had similar
kinds of exposure across the entire organization, rather than just individual sector
funds.

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Sub-advised funds pose a different challenge. Many fund boards have a hiring
process which identifies good candidates, but leave it to the management team to
monitor the sub-advisers going forward. One advantage of using sub-advisers is that
they are easier to dismiss for performance reasons than in-house portfolio managers.
There are fewer personal considerations and less alignment of interest, since it is not
the adviser’s own employee.
With greater volatility and a flattening of performance during the past dozen years,
some directors believe that the nature and purpose of oversight programs has
changed significantly. With outperformance less easily achievable, directors are
asking themselves questions such as: How should they measure performance? Is it
relative or absolute performance?
Directors have serious questions about how well relative performance to an index
really serves shareholders, since some fund groups have seen lagging performance in
recent years despite the economic rebound. Is a fund that sees only relative

performance worth keeping open? How should they measure “growth at a reasonable
price”?
One possible answer is through the use of performance trend lines and moving
averages, with three years seeming to be an especially favored target since analyses of
individual quarters in isolation yields little useful information. This is an increasing
trend among fund complexes since it can provide a more visible and conclusive view
of performance, particularly against benchmarks, peers and other metrics. Even so, it
is difficult to prove some things, such as momentum bets.
As one director noted, the 15(c) process is a requirement, but, whatever you do, the
shareholders will vote with their feet if they are unhappy.
PwC’s view
The combination of court decisions such as Jones v. Harris Associates, greater
regulatory scrutiny and the increasing complexity of products, investment strategies
and business models have fundamentally changed the mutual fund industry.
Governance oversight, epitomized by the 15(c) process, has become more central to
the operation of a fund complex. Directors have more challenges and greater
responsibilities than in the past, and should respond to the demands being placed
upon them.
While the 15(c) process deals primarily with the management contract, other
contracts, including the fund’s underwriter, are also subject to annual review.
However, there may be other service providers the board should examine, including
custodians, fund administrators and transfer agents, to encourage them to be
efficient, effective and acting in accordance with the board’s directives.




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Board effectiveness
Background
In addition to the operating issues that should be addressed, mutual fund directors
are increasingly confronted with a number of new considerations regarding their
composition, succession and effectiveness.
Because of mounting regulator, media and stakeholder scrutiny of the role of asset
management boards play in fund oversight, greater attention is being paid to director
effectiveness in meeting growing demands and expectations.
Directors’ comments
The composition of mutual fund boards is a subject of growing interest among
industry leaders, with factors such as diversity, investment expertise and director
effectiveness and performance all playing roles.
Given evolving product sets and investment strategies, directors are asking
themselves what the relevant skill set is for succession planning on the board. How
can boards identify those skills and recruit new members who possess them?
Equally importantly, how can poorly-performing directors be identified? Terminating
under-performers is difficult in any environment; yet there is a perception that
mutual fund boards can be easier than others to manage for director performance.
Annual re-evaluations of board composition, perhaps with the assistance of
consultants or counsel, is an approach that is under consideration.
Diversity is a subject under increasing consideration by boards. Although regulators
have pushed other industries in the direction of greater diversity, diversity is driven
more by social concern than by regulatory directives in asset management. Many
directors concerned about the succession process believe that it is not about
perpetuating themselves but about attracting capable directors regardless of their
demographic characteristics.
Diversity as an end in and of itself also received support, making a focused search to
promote diversity increasingly desirable. Yet directors acknowledge the difficulty of
achieving diversity goals. PwC’s annual survey of corporate directors
2

found that 65
percent of them indicated it is difficult to increase racial diversity on the board and
55 percent indicated that it is difficult to add gender diversity. In fact, the US – with
12.3 percent of corporate board positions held by women – lags in the lower half of
the pack, far behind the Scandinavian nations which have a quarter or more of their
positions held by women.
Complicating efforts in this area, directors are increasingly aware that the skill sets
required for an operating company board versus a mutual fund company board are
very different. Generally, operating companies boards need significant industry
expertise and experiences, whereas asset management directors do not necessarily
need funds expertise across the entire board.


2
PwC's "Annual Corporate Director Survey" (2011) />governance/publications/annual-corporate-directors-survey.jhtml
Thoughts from the Boardroom
PwC Mutual Fund Directors Roundtable 2012 | Highlights Page 16

There is considerable debate on boards over the various options for finding suitable
candidates, including retaining executive search firms, soliciting the adviser for
suggestions and having current directors identify possible nominees.
Once new members have been identified, nominated and elected, the on-boarding
process presents a new set of challenges. Even directors familiar with asset
management may lack the requisite knowledge of the funds, the adviser and even the
sectors or strategies that are employed. Considerable attention should be given to
educating new directors and helping them get up to speed.
With more complex products and strategies, more volatile markets and new
regulatory constraints, directors need to be more effective than ever before to fulfill
their responsibilities. With the amounts of information increasing and the types of
information needing to be evaluated changing, this is harder than ever. Board size

plays a role in efficiency: Some boards are seen as being too large, especially after
mergers that leave them with a dozen or more members.
Some board meetings tend to be composed of ineffective “show-and-tell” sessions,
with presentations in front of large groups of advisory executives and staff rather
than dialogue among the directors and a few executives. The directors expressed a
preference for having at least part of their meetings consist of conversations in
executive session with just a few key staff people in the room.
Partly because of this, boards need a well-placed point person – perhaps a CFO or
chief compliance officer – who can drive the agenda. Ideally, it is a very senior person
with not only credibility but also a mindset and personality that is proactive and
challenging regarding investment activities.
Internal dynamics are crucial to the board’s success. What works best in terms of the
effectiveness of the board and its members? How can effectiveness best be evaluated?
How can teamwork be fostered to strengthen the board vis-à-vis management, as
opposed to functioning simply as a collection of individuals? How can a healthy
tension be maintained between the board and management, together with an
awareness of any potential conflicts of interest?
PwC’s view
A mutual fund board should determine which skills and experience it requires, both
in terms of current operations and in anticipation of future challenges. In concert
with this, boards also should consider a formal process to evaluate the skills and
competencies of directors as part of succession planning and recruiting process.
The relevant factors vary, but can include such quantifiable features as financial
expertise, industry expertise and operational expertise; personal qualities such as
integrity, intuition effective decision-making styles; and attributes such as gender or
ethnic diversity.
New directors generally face a steep learning curve; a meaningful on-
boarding/orientation program will help them to contribute effectively. Three-
quarters of companies provide such programs for new directors, according to a
Conference Board report. Certainly, such programs enable incoming directors to

become more effective sooner than they otherwise might.
Such efforts need not be limited to new directors. Effective boards understand that
continuing education is vital especially after the rapidly shifting business
Thoughts from the Boardroom
PwC Mutual Fund Directors Roundtable 2012 | Highlights Page 17

environment and governance requirements. The board’s point person, whether the
CFO, counsel, compliance officer or another designees, should take responsibility for
regular educational modules, both during meetings and designed for the directors to
learn at their own pace. These could focus on everything from new regulations to new
products to surveys of industry developments.
Meetings remain the central structuring framework of any board. The frequency of
corporate board meetings has increased over the past decade. According to the
Spencer Stuart 2011 Board Index, US boards are meeting 8.2 times per year, and the
National
Association of Corporate Directors’ 2011 Public Company Governance
Survey
3
found that in-person board meetings lasted, on average, seven hours. The
following list outlines some of the most important attributes of effective meetings:
Elements of effective meetings
Directors who know and respect one another
Open discussion of issues
Limited formal presentations
Use of good judgment in delivering feedback
Being held in person
No-surprises approach
Limited observers
Periodic use of board retreats

3
National Association of Corporate Directors' "2011 Public Company Governance Survey"

Thoughts from the Boardroom
PwC Mutual Fund Directors Roundtable 2012 | Highlights Page 18

Concluding thoughts
The discussions at this year’s Mutual Fund Directors Roundtable covered a wide
range of issues of interest to board members. From the discussions, it is clear that
directors remain concerned about the rapid pace of change in the industry and the
ability of fund companies to successfully navigate stormy seas while retaining
profitability.
The challenges discussed – the wide range of new and forthcoming regulations,
adopting leading-edge practices in risk management and valuation, conducting
effective contract review processes and improving the effectiveness of boards – are all
vital, yet challenging, subjects that go to the heart of board operations.
While these challenges pose significant obstacles to boards and advisers alike, they

are not insurmountable. The dedication to serving shareholders that the directors
participating in these discussions displayed demonstrated their focused commitment
to meeting these challenges – and, not incidentally, validated the importance of open
discussions among directors, fund executives, regulators and other stakeholders and
industry participants. Through such discussions, leading practices can evolve and
barriers can be overcome.


Thoughts from the Boardroom
PwC Mutual Fund Directors Roundtable 2012 | Highlights Page 19

Contact information
If you have any questions or comments, please feel free to contact your local PwC
partner or one of the following partners:

Barry Benjamin
US & Global Asset Management Phone: 410 659 3400
Leader Email:
Gary Meltzer
US Asset Management Phone: 646 471 8763
Advisory Leader Email:
Will Taggart
US & Global Asest Management Phone: 646 471 2780
Tax Leader Email:
John Griffin
Asset Management Phone: 617 530 7308
Governance Leader Email:
Kevin Barry
US Asset Management Phone: 646-471-4711
Risk Management C0-leader Email:

David Trerice
US Asset Management Phone: 617-530-7450
Partner Email:


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