On the morning of Nov. 1, 2007, mutual fund unitholders awoke to find that an army of investor advocates had sprung up overnight, recalling the mythical Greek soldiers who emerged fully armed and ready for battle from the dragon’s teeth that Jason sowed. These latter-day warriors were the independent review committees, mandatory for each mutual fund manager, under the Canadian Securities Administrators’ National Instrument 81-107.

Their role was to support the governance of mutual funds by providing an independent assessment of potentially self-serving transactions and arrangements initiated by the fund managers, and to replace the judgment of securities regulators by permitting otherwise prohibited related party transactions.

The goal was noble. As a fund unitholder myself, I applaud safeguards aimed at ensuring fund managers have maximum freedom of action yet don’t succumb to multifarious temptations to further their commercial interests at my expense. However, as the chair of one of these independent review committees working through our start-up, my applause is more tentative and restrained.

Along with considering matters referred to us by our fund manager for review, we are charged with reviewing our committee’s efficacy and our compensation schedule, as well as managing our operations, undertaking continuing education programs, retaining counsel to advise as needed and dealing with third-parties, all the while maintaining strict independence from the fund.

In attending to these responsibilities, I perceive flaws in the design of the NI 81-107 regime with adverse effect. In addition, I have found widespread third-party misconceptions as to the legal nature of the IRCs. Responding to misconceptions that potentially undermine the appearance or the actuality of IRC independence, or both, increases the cost of administering the IRC over and above the main governance tasks. It is not appropriate that the costs arising from this regulatory confusion should be borne by unitholders.

It is important to remember that the IRC members are not directors of the mutual fund manager or trustees of the funds; they are not employees of the fund manager and they are not shareholders of the fund manager. They have no economic interest in the financial affairs of the fund and third parties should not treat them as if they do. The IRC members are, by definition, at arm’s length.

The IRC is not an entity. It is an unincorporated association of individuals with specific statutory responsibilities. As regulatory responsibilities have been downloaded onto the IRCs by statute, they are akin to self-regulatory organizations, not committees of directors; as such, the indemnification of IRC members deserves consideration.

NI 81-107 creates a standard of care for IRC members generally acting honestly and in good faith in the best interest of the fund and exercising the degree of care and diligence and skill that “a reasonably prudent person would exercise in comparable circumstances.”

But what does this mean? It’s not clear what circumstances are comparable to this novel governance structure. Directors and fiduciaries can rely on a long history of common-law jurisprudence that addresses the scope of their duties and their standard of care. IRC members, as a creature of statute, do not. It’s easy to allege that someone has breached a novel duty of care.

So, where does that leave an IRC member — a simple private citizen, not the directing mind and will of the relevant entity — when faced with such an allegation? How much personal risk should IRC members realistically be expected to take on? NI 81-107 permits the manager to provide direct indemnification and liability insurance, assuming the IRC member has complied.

An IE article by Dwarka Lakhan cites IRC insurance costs ranging from $25,000 to $100,000 for $5 million in coverage. This cost would be virtually eliminated if IRC members had statutory immunity from civil claims, comparable to that available to the CSA, SROs, and contemplated for the Canadian Public Accountability Board. This simple step would not only support individuals who have stepped up to the plate and taken on IRC responsibilities, it would greatly reduce the risks of expensive litigation.

Acting with the best of intentions, human beings can make mistakes. The unique exposure of IRC members resulting from their uncertain legal status — and the failure of the system they serve to provide them with any statutory protection as they attempt to fulfill their mandate in a new and untested regime — is both unfortunate and unfair.

@page_break@Julia Dublin practises corporate and securities law at the Toronto law firm of Aylesworth LLP. She has worked for the Department of Finance and spent 18 years at the Ontario Securities Commission.