Morningstar Funds Board Weighs in on SEC Disclosure Proposal

The Chair of the Morningstar Funds Trust Board recently submitted a comment letter in response to the SEC’s proposal on modernizing the disclosure framework for open-end funds. The SEC’s proposed rule and form amendments would, among other things, feature concise and visually engaging shareholder reports that would highlight key information that is particularly important for retail investors to assess and monitor their fund investments, the SEC said. Two of the important factors addressed in the Morningstar Funds Board comment letter pertains to fund boards. The comment letter proposes that “all fund shareholder reports include a statement about the role that the board plays in protecting their interests.” In particular, that section should include the number of independent directors or trustees on the fund board, as well as a statement that instructs investors on how to find more information on board and fund governance matters. The letter also suggested that the disclosure requirements make room for board diversity disclosure. “Given the evidence supporting a link between diversity in the boardroom and better decision-making, we believe it is important that funds be permitted to provide information regarding diversity in shareholder reports,” the letter explained. The change would give mutual fund boards the opportunity to participate in a corporate trend, the Morningstar letter said, referencing a survey that found 45% of Fortune 100 companies reported on diversity in their 2019 proxy statements, up from 23% just three years ago. “Transparency is also an essential first step in promoting greater diversity in the asset management industry.” The MFDF also submitted a comment letter on the proposal and asked that the SEC consider requiring that the annual report provide basic information on the identity of fund directors and the structure of the board, noting that it is important for fund investors to have a basic understanding of the role of the board. The Forum’s letter pointed out that this disclosure would not be a novel concept, as the yearly proxy provided to investors in public companies contains significant information about the identity and qualifications of the company’s directors and of the structure of the board and governance system of the company.