Structure of Open-End Management Companies
Structurally, mutual fund companies resemble corporations, except that they are not an operating company, and they don’t have employees. A fund sponsor sets up the organization. The sponsor, usually a bank or financial institution, will hire officers and directors to set up fund policies and oversee the fund. It also assembles a group of independent third parties to manage the day-to-day operations. The sponsor then registers the fund under state law as either a corporation or trust and also registers the investment company with the SEC.
The board of directors helps the sponsor establish the company’s investment policy, and it selects and manages the independent parties who will operate the fund, such as the investment adviser, custodian, and transfer agent. The Investment Company Act requires that at least 40% of the members of the board of directors be non-interested persons, also called independent directors. This means they have no involvement with either the company or its service providers, except through their work on the board. If the principal underwriter is affiliated with the investment adviser, which is usually the case, the board must have a majority of independent directors.
The investment adviser manages the fund’s investment portfolio and engages in the day-to-day trading. Also known as the portfolio manager, the investmen