“A bit of a learning experience”: How fund boards wrote their swing pricing comment letters

Piggybacking on more detailed letters allowed fund boards to overcome inexperience in commenting

No sooner had the SEC proposed its sweeping, controversial swing pricing rule last November than fund boards became aware that they would have a fight on their hands.

The resulting outcry saw more than 32 boards submit comment letters last month bashing the proposal and demanding the SEC withdraw it, an unprecedented level of board response that demonstrated the uniformity of the industry’s frustration with recent SEC rulemaking.

When it came to actually writing the letters that would be read by the SEC, however, the process varied by board and involved crucial collaborations with lawyers and industry groups.

Due to the rarity of board comments and the sophisticated analysis involved, addressing the entire scope of the proposal could prove a daunting task for a board.

“A lot of us, you know, we’re not attorneys,” said one unnamed independent chair whose board submitted a letter. “We’re not used to doing these types of drafting, so it’s a little bit of a learning experience in terms of going through the process, whereas the companies, the advisers, or industry has a team of lawyers and they can all do that.”

Some fund boards, including those at Neuberger Berman, William Blair, and U.S. Bank‘s Professionally Managed Portfolios, had their counsel write the first draft, which the trustees then edited and signed.

Other trustees, such as those of the Morningstar Funds, drafted the letter themselves with input from counsel.

“This was a product from the directors, although there were a lot of people who reviewed it and contributed to it,” said Morningstar Funds chair Theresa Hamacher.

Most board commenters were able to keep their letters to an economical length by relying on citations of longer, more detailed comment letters from investment advisers, law firms, and industry groups that circulated drafts of their letters in advance.

The letter from the Independent Directors Council (IDC), for instance, received 16 citations by board commenters, and the letter from the Mutual Fund Directors Forum (MFDF) received six.

In another example, a 10-page comment letter co-authored by Vedder Price fund lawyers Maureen Miller, Nathaniel Segal and Jacob Tiedt was subsequently endorsed by the William Blair Funds and Homestead Funds boards in one-page letters.

“We certainly had engaged with a number of organizations’ funds and boards to get views on how they saw this proposal, the dangers that they saw from specifically the hard close and the detriment it would have on the shareholder experience,” Tiedt said. “To the extent that a board client endorsed our letter, they certainly did know what we were saying and had a preview of our letter.”

Boards that boosted larger organizations’ letters were effectively urging the SEC to heed the feedback from the industry’s designated advocates, according to MFDF president Carolyn McPhillips.

“It’s just to highlight that this is not a single board issue with this rule, [that] it’s pretty universally shared across the industry, and that they’re looking to the Forum and other organizations to sort of carry on the conversation,” she said. “This is our job, to stand up for the views of fund directors.”