Changing Industry Dynamics

The mutual fund products of today's marketplace are the epitome of a combination of specialized strategies designed to bring the best investment product to the market at the best value. Each function within a mutual fund, from the specific investment style delivered by the investment advisor, to the settlement, accounting, and safekeeping of the securities, to the tracking and reporting of corporate actions, and the preparation and delivery of shareholder statements, is performed by different organizations which specialize in each service.  The early days of the fund industry, where the investment advisor focused on security selection while overseeing the operational, marketing and sales staff to perform virtually all of the services within the fund, are a thing of the past. 

Not only does the traditional structure of the mutual fund product lend itself to this type of specialized outsourcing, but this reliance upon many different professional providers is also a reflection of how business is conducted across many industries. Today, the specialist is everywhere and the generalist is a vanishing breed. Why then, should this increasingly specialized, complex and critical role of the CFO for a mutual fund not be represented by experienced professionals whose focus is to perform these responsibilities?

Defining the Characteristics of the Mutual Fund CFO

Let's begin with defining the CFO qualifications and where these individuals are likely to be found. While the nature and extent of the fund accountant and financial administrator's duties are probably closest aligned to a mutual fund's CFO, most of these service organizations no longer wish to assume the risk and overall responsibility of having their employees serve in this vital officer position for third-party client mutual funds. This reluctance should send a message to the fund industry that the role requires a specific expertise and professional background due to the nature and extent of the personal and corporate liability of the position. 

Should the investment advisor also question whether it should have an employee serve in this role for a fund?  Generally speaking, investment management organizations focus on security selection, through market research and financial analysis of individual markets and companies. While mutual funds are the embodiment of the investment management skill, it is often the case that the investment advisor is also leveraging its resources to support various other investment products.  These may be separately managed accounts, pension and retirement accounts, alternative assets, and others. 

None of these other forms of investment products require the specific skills required of a CFO for a fund and, therefore, cannot be as easily leveraged across product type as can portfolio managers, research analysts and traders.  In addition, with the requirements of SOX and its applicability to investment companies, and the fact that many investment advisory organizations are private companies, this particular CFO skill set is rarely a core expertise available within financial personnel of these organizations. 

The qualifications and background experience of a mutual fund's CFO are clearly available in today's marketplace. Such experience and background should include specific knowledge of mutual fund accounting and financial administration and reporting; applicable rules and regulations governing open-end mutual funds; the interplay and interdependence of multiple organizations involved in the selection, trading, and settlement of securities within a mutual fund; the effect and treatment (tax and otherwise) of dividend declaration and distribution by a mutual fund; the role and responsibilities of the mutual fund Board of Directors/Trustees as it relates to the financial certifications made by a mutual fund; and many other elements of financial reporting including the effect of SOX and its applicability to investment companies registered with the SEC.

The imposition of Sarbanes-Oxley formally imposed significant additional obligations upon the CFO of a mutual fund.  While many of the functional activities of the financial officer of a fund have remained the same, other duties and responsibilities have been mandated and the resultant liability for failure to properly oversee and comply has increased.  The increase in visibility, accountability, and liability associated with the position has been a significant reason the major fund accounting agents serving the mutual fund industry no longer provide employees to serve their third-party clients in this capacity.

While the rationale for the applicability of the provisions of SOX to investment companies can be debated, the fact that they must comply means that the fund should retain a CFO with a detailed knowledge of and experience with the Act and its' applicability to mutual funds. In many investment advisory firms, the financial and accounting personnel may not have the specific familiarity and experience with the applicable standards and requirements that are commensurate for the role, and when they do, they often are challenged with available time to focus on maintaining this knowledge in the dynamic and evolving regulatory landscape. 

An additional aspect of the need for "professionalization" of the mutual fund CFO role is the potential benefit of independence and minimization of the potential for conflicts when the CFO is not an employee of the fund's investment advisor or other service providers. Given the need for relevant oversight, verification and reconciliation of the fund's operational service providers and its' investment advisor, the CFO role has many of the same responsibilities as the fund's legal counsel, independent audit firm and chief compliance officer. It is increasingly recognized within the fund industry that an independent and autonomous CFO can be a benefit to the Board, the shareholders and the investment advisor.   

Every mutual fund strives to provide the greatest degree of expertise and professionalism available. This must be done, however, within the context of a highly regulated product that is extremely transparent and visible to investors and regulators. These are not mutually exclusive goals and requirements. The expertise and independence that each professional service provider brings to an investment company is as essential for success, as is its' investment performance. Therefore, funds should view the role of its CFO as important to its' continued success as is its' investment advisor, distributor, chief compliance officer, legal counsel, auditor and processing agents.