Series 7: 6.1.1 Structure Of Mutual Funds

6.1.1  Structure of Mutual Funds

Mutual fund companies have executive structures similar to those of other publicly owned companies. A mutual fund company is likely headed by a chief executive officer (CEO), below which are various vice presidents and likely a chief financial officer (CFO) and chief operating officer (COO). The officers and board of directors manage the company and set objectives and policy but do not manage the company’s investment portfolio; this will be done by the investment adviser.

An elected board of directors manages the mutual fund company. The board helps choose and manage the investment adviser, custodian, and transfer agent and establish the company’s investment policy. Members of the board of directors are elected by fund shareholders. At least 40% of the members of the board of directors must be non-interested persons. This means they are not involved with the company or its investment adviser, custodian, or transfer agent, except through their work on the board.

The investment adviser manages the fund’s investment portfolio by implementing the officers’ and board’s objectives and policies. The investment adviser, also known as the portfolio manager, is on a short-term contract that must be approved annually. The investment adviser is usually a company rather than an individual and must be registered under the Investment Advisers Act of 1940. The investment adviser is paid a percentage of the fund’s value, so it has incentive to grow the company. Investment advisers make their investment decisions based on federal securities regulations and federal, state, and local tax laws. The investment adviser manages the portfolio’s day-to-day trading. It also identifies the tax status of distributions made to shareholders.

The custodian, a bank or stock exchange member broker-dealer, holds the mutual