2023 Outlook: Potential recession magnifies board focus on 15(c) season

Streamlining info requests could allow management time to keep up with SEC rulemaking

As an eventful 2022 came to a close, Fund Directions spoke with several trustees and counsel about what they expected 2023 to bring. For nearly everyone, three topics stood out as the most important on the agenda: regulation, hybrid meetings, and the economy.

This month, FD takes a look at how each of those storylines could affect boards and what trustees are expecting. Last up: the economy.

Fears of a coming recession have prompted boards to keep a close eye on the economy and think about what a market downturn could mean for fund oversight.

“I think everyone’s looking at it, and particularly going into a new season of 15(c), that’s absolutely going to be top of everyone’s mind,” according to Dorri McWhorter, an independent director of the William Blair Funds.

Combined with the SEC’s recent signals that it is scrutinizing fund fees, trustees may have more big-picture, non compliance-related issues to think about in 2023 than in previous years.

The SEC’s examinations of 15(c) reviews may prompt boards to re-evaluate what kinds of information they request from managers, according to Sullivan & Worcester partner Nicole Crum.

“It may be useful with the comments that have come out of the SEC, both formally and informally, for boards to really reflect on the information that they’re getting during 15(c),” she said. “I think you need to request the right information as opposed to more information.”

A long list of wide-ranging questions may be less useful to a board than a focused list, because it may cause fund management to spend unnecessary time preparing for their board meetings, she added.

In a year when asset managers will dedicate more time and resources to reacting to the SEC’s prolific agenda, streamlining the 15(c) process could be one way for boards to free up management resources that could enhance shareholder interests.

“Management teams are very weighed down across the industry by the rulemaking, just the volume of rulemaking,“ Crum said. “So if you don’t take the time to really think about what information you’re getting and do a refresh, people can be bogged down with just trying to get everything done.

A key discussion trustees and management should be having will be about what plans are in place for managing and operating funds through certain economic scenarios, according to Crum.

“I would say the keyword here is preparedness,” Crum said. “Somebody may have a sense that they’re prepared and that they’ve thought this through, but when you have to answer a question, it really does change the way you think about it.”

Trustees may also need to think about how fund assets falling across the industry may affect service providers like fund administrators, which often earn fees as a percentage of the assets they service, according to Dechert partner Julien Bourgeois.

“If revenue goes down you ask yourself: are service providers going to be able to maintain the same level of support services for the funds, or would investments in personnel and systems be reduced?” Bourgeois said. “Are they going to have the resources to implement and support all those new rules that being implemented?”