Facing the fund board

Over years of working with private fund managers first entering the registered fund space, when it comes to the Investment Company Act of 1940, I have often made the point that you can’t manage the ’40 Act – instead, it’s going to manage you. And one of the clearest and most underestimated examples of this reality is the role of the fund’s board.

Private fund managers interested in launching a registered product like an interval fund or tender-offer fund often do so because they have achieved significant investment and business success managing unregistered funds. They thrive in the context they know. These managers may also turn their eye to registered funds as a way to expand their investor base. So, now, when they enter the ’40 Act space, managers must face a new context that includes interactions with a group of people who literally have the power to hire and fire the investment manager: the fund’s board.

The legal structure, in which the fund’s board has fiduciary responsibilities and are charged with responsibility to do what is best for the shareholders, emphasizes how vital it is for investment managers to take those interactions seriously. For most managers new to the ’40 Act space, that starts with an initial presentation to the board.

Understanding board roles and risk management

As with all board interactions, we help managers prepare for this first presentation. Occasionally, managers are reluctant to put in the time needed – after all, they aren’t used to the context and have many competing demands on their time. But at some point, they recognize the importance and turn their focus to it.

Because boards take their responsibilities seriously, managers necessarily come to realize they must be prepared to engage seriously with an experienced and knowledgeable board.

Remember, boards have oversight responsibilities they must attend to. Consider these comments from a 2024 SEC staff risk alert‡ illustrating past exams:

  • “Fund boards did not receive certain information to effectively oversee fund practices, including illiquid investments.”
  • “Fund board minutes did not fully document board actions (e.g., memorialize the approval of funds’ liquidity risk management programs or accurately capture the board’s process in approving the advisory agreement).”

To avoid problems like those outlined in the risk alert, both investment managers and boards must fulfill their specific responsibilities. These responsibilities are subject to regulations that have evolved over the years, but the basic framework governing registered funds has existed for more than eight decades. The Investment Company Act of 1940 and the Securities Act of 1933 and the rules adopted for these acts, among others, must be understood and followed.

Preparation is key

Ultimately, this is why we—both UMB staff and the board’s compliance team—spend so much time helping managers carefully prepare for that first presentation to a board. I often refer to this presentation as the managers’ “final exam,” with respect to attaining their first 15(c) approval. This is where preparation, transparency, and credibility are tested all at once.

Before this “exam,” we make sure managers understand the full scope of questions the board may ask, including helping them prepare the specific points they need to make. It’s a process of training, vetting and practice so everyone is ready. It is our goal for their first interaction with the board to be a positive experience for both the advisor and the board to start this important relationship on the right foot and setting everyone up for success.

This advance work helps avoid delays. In our experience, it’s much more likely that a board with unresolved questions will say, “Please come back to us with more information” (ex: about infrastructure, valuations or operations) rather than simply saying, “No, thank you.”

Still, delays are costly. It’s far better to put in the time up front to ensure you have the full scope of information that may be asked of you.

A good board does its job

Remember: The board does not belong to the investment manager, and a good board will perform its role well. Making that mindset shift early isn’t just prudent, it’s essential to thriving in the ’40 Act space.

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