Section 15(c) of the Investment Company Act of 1940 (’40 Act) specifies that each fund’s board of directors must conduct an annual review and approval of their investment advisory contracts. To assess the quality of these advisory services, industry best practice has become based on the use of fund benchmarks. One of the primary concerns for fund boards and management in fulfilling their 15(c) oversight responsibilities, though, is to make sure the peer groups being used as benchmarks provide the most relevant, apples-to-apples comparison possible. The starting point for this comparison is the use of refined, accurate and up-to-date classifications, to ensure funds are placed in the most appropriate categories so as to allow for meaningful benchmarking with similar products.
In this paper we examine why robust classifications – such as Lipper’s 159 U.S. open-end classifications – are vital to boards’ ability to meet their 15(c) fiduciary responsibilities, some of the complexities involved in the classification process, and common issues that boards should be aware of when carrying out their roles.
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