Commoditized Governance: The Curious Case of Investment Company Shared Series Trusts

The registered fund industry, which manages around $22 trillion in assets, uses series entities, such as trusts, pervasively to organize and operate the affairs of thousands of mutual funds and exchange traded funds. A shared series trust is a fairly recent variation in this method of organizing multiple funds in a single series entity. The primary difference between a conventional series trust and a shared series trust is that, in the former and more common situation, the trust sponsor (i.e. the sponsor of the entity) is an affiliate of the adviser to all the funds in the trust. In a shared series trust, the trust sponsor is typically unrelated to the many unaffiliated advisers who may sponsor funds in the shared trust. Notwithstanding the technical nature of this distinction, the practical effect is profound. The shared series trust combines the economies derived from using a series entity with a structure that permits each participating fund to avail itself of a ready-to-serve form of entity governance. Through its choice of a shared series entity, a prospective fund sponsor effectively outsources governance of the fund to the existing board of the shared entity. In short, the shared variation for a series entity produces a unique result among business entities: commoditized governance, that is governance procured by virtue of unaffiliated sponsors of distinct businesses (in this case, funds) voluntarily choosing to become part of an umbrella shared entity governed by a board established by the shared entity and its sponsor. Shared series trusts account for only a small fraction of series trusts in the fund industry, whether measured in terms of number of funds or assets under management. Nevertheless, the unique result produced by a shared series trust – namely, commoditized governance – warrants closer examination both as a matter of regulatory policy in the fund industry and as a matter of legal theory relating to business entities. This article addresses both of these aspects of commoditized governance in the shared series trust context. As a matter of fund regulatory policy, the article explains how shared series trusts developed historically with the trend toward externalization of fund management and the proliferation of series entities in the fund industry. The development of shared series trusts rests uneasily with regulatory policies that have sought to enhance the role of boards in fund governance by mandating greater engagement and independence on the part of fund boards. This article suggests that shared series trusts may represent a situation where the seeming independence of the board may not lead to greater engagement by the board in overseeing the fund. In addition, the example of commoditized governance in the fund industry provides insights regarding the nature of governance of entities generally. Specifically, by showing why commoditized governance is viable in this one specialized context, the article offers a more precise account of why business entities do not generally outsource governance of the business entity, i.e., why governance is generally viewed as a core, rather than an ancillary, function of a business. Where a board’s role primarily involves organizational, rather than strategic, oversight of an underlying business, as in the fund industry, commoditized governance may prove attractive for at least some industry participants. In contrast, where a board’s role encompasses both organizational and strategic oversight of an underlying business, as is more commonly the case, commoditized governance will not be a successful governance model. Accordingly, and consistent with practical experience, commoditized governance will exist largely as an exceptional, rather than common, form of entity governance.