The Canadian Securities Administrators announced Friday hat they are adopting a rule aimed at improving governance of investment funds.
The rule, which has been in the works since 1999 when the Ontario Securities Commission published a report examining fund governance, is not being republished for comment as he changes made since the last comment period are not deemed material.
The rule requires investment fund managers to have independent oversight of their management and monitoring of conflicts of interest. All investment funds that are reporting issuers must establish an Independent Review Committee to oversee all decisions involving conflicts of interest faced by a fund manager. The role of the IRC, depending on the nature of the conflict, will be to either approve the fund manager’s decision or provide recommendations before the manager may proceed, the CSA explains. The fund manager will also be required to establish and follow written policies and procedures before referring issues to the IRC.
Assuming it receives approval, the rule would come into force as early as November 1. However, BC plans to adopt a local instrument that exempts an investment fund that is a reporting issuer only in that province. Compliance with the rule may take place over a one year transition period.
The CSA says that it expects the rule to enhance investor protection, “by ensuring that the interests of the investment fund (and ultimately, investors) are at the forefront when a fund manager is faced with a conflict of interest.” It will also improve the transparency surrounding a fund manager’s fiduciary obligation, it says. “ This process does not mean, nor do we intend it to result in, the second-guessing of the investment or business decisions of the fund manager. However, it does mean that, for the first time, the fund manager must formally account for each decision involving a conflict of interest to an independent body considering the decision solely from the perspective of the best interests of the investment fund and its investors,” it adds.
“We also expect the rule to contribute to more efficient Canadian capital markets by permitting fund managers to engage in certain related-party and self-dealing transactions without prior regulatory approval,” it says. “This will give fund managers greater flexibility to make timely investment decisions to take advantage of market opportunities they believe are in the best interests of the investment fund and investors.”
Small fund managers are expected to face a higher cost burden from implementing the rule. The CSA notes that it believes all fund managers, large and small, face conflicts of interest and will benefit from the independent perspective brought to bear by an independent body. “We believe the costs associated with the rule, published with the 2004 Proposal and the 2005 Proposal, will be proportionate to the benefit. We are further satisfied that the limited scope of the independent body’s mandate will in turn limit its corresponding fiduciary duty and duty of care,” it says.
“This rule will ensure the interests of the fund, and ultimately the investor, are at the forefront when a fund manager is faced with a conflict of interest,” said Jean St-Gelais, chair of the CSA and president & CEO of the Autorité des marchés financiers. “Also, managers of investment funds will benefit from having the perspective of an independent body when they encounter actual or perceived conflicts of interest.”
Following this news, RBC Asset Management Inc. issued a response endorsing the new independent fund governance rule.
“I would like to congratulate all of the Canadian Securities Administrators for working together to arrive at a fund governance rule with Canada-wide application,” said George Lewis, chair and CEO of RBC Asset Management. “This instrument will provide Canadian mutual fund investors with additional investor protection through enhanced governance of the very large, and still growing, Canadian mutual fund industry.”
Since 1994, an advisory board of governors has provided advice to RBC Asset Management, the manager of the RBC Funds and RBC Private Pools. “Having adopted and operated this governance model on a voluntary basis over a long period of time, RBC Asset Management is well-positioned for NI 81-107,” said Mr. Lewis. “Our most important commitment is to our investors. RBC Asset Management has seen first-hand the benefits to our funds’ investors of independent input on conflict of interest matters. Governors representing the interests of investors from all regions of Canada provide an essential element of our success, which rests on strong ethics, compliance and good governance.”
CSA develops governance regime for investment funds
New rule requires fund managers to oversee all decisions involving conflicts of interest
- By: IE Staff
- July 30, 2006 July 30, 2006
- 21:20