With the rate of fund mergers increasing, the Independent Directors Council has released a task force report guiding directors on factors they should consider when reviewing a merger. There were more than 200 fund mergers in 2005, according to the report.

The board of the acquiring fund as well as the board of the fund being acquired must approve the merger. When one board represents both funds, the board should consider the merger from the both perspectives, the report advises. When two boards are involved, each should consider its own perspective but can meet jointly to consider certain information, such as performance and expense information, the report adds.

The report outlines questions that directors should ask when considering a merger. These cover various areas, including:

* comparison of investment objectives, policies, strategies,

* restrictions and risks

* repositioning of fund securities

* direct costs

* fund performance

* distribution and other fund services

* fund fees and expenses

* alternatives to the merger

The board must also consider how the merger will affect its composition. This should be considered by both the acquiring and acquired boards. "All, some, or none of the acquired fund's directors may become members of the combined fund's board," the report says. "Combining the boards may result in a larger-size board than desired. In addition, the acquiring fund's ability to add directors to its board may be limited in that new directors need to be elected by the acquiring fund's shareholders."

Another important factor for boards to consider is how the merger will affect its D&O insurance. "The insurance coverage for a particular board may cease when the fund it oversees is merged out of existence," the report warns. "If it does, the acquired fund's board may consider purchasing 'tail' or 'run off' insurance to protect it from claims that may arise after the merger for activities that occurred before the merger." The acquiring fund's advisor may also indemnify the acquired fund's board for these claims.

The directors on the task force were Peter Gordon, Wells Fargo Advantage Funds; Susan Kerley, Legg Mason/Citi Funds and Mainstay Funds; Ruth Quiqley, AIM Funds; Richard Redeker, Prudential Funds;Gary Schpero, EQ Advisors Trust; and Thomas Theobald, Columbia Funds. Last year the IDC released task-force reports on the independent chairman requirement, board self-assessment and director oversight of multiple funds.