Practical guidance for fund directors on effective oversight of risk management.

The recent interest in risk by regulators and policymakers, the market turbulence of the past two years, and the issuance and marketing of increasingly complex investment securities have resulted in fund directors seeking to better understand the appropriate role of fund boards in risk governance.

The report notes that fund directors are not responsible for designing and implementing the systems and procedures that management companies use to identify, analyze and track risk. Instead, boards typically oversee the risk management activities of fund advisers by reviewing and approving investment and risk management policies and procedures; evaluating the performance of the fund's adviser, any sub-advisers and other service providers; and periodically reviewing the policies and procedures for material departures.

As the report observes, the question of what constitutes effective “risk management” and the board’s oversight of risk has recently become a key focus for regulators, legislators and academics. In a recent Securities and Exchange Commission (SEC) rule release requiring companies, including mutual funds, to disclose the extent of the board’s role in risk oversight in proxy and registration statements filed on or after February 28, 2010, the Commission called risk oversight a “key competence of the board.”