The principle of pro-
viding a consistent standard of oversight to the mutual fund industry by establishing independent review committees should enhance investor protection and investor confidence in funds. It’s positive for the industry, which has every intention of making the new rule work — and work well.
National Instrument 81-107 states that the IRCs will be made up of at least three people independent of the fund manager.The IRCs will oversee potential conflicts of interest that a fund manager may have in the course of fund operations.
Some have suggested that IRCs are too focused, as they deal only with conflict-of-interest situations. There are a number of fund managers that instituted some form of third-party governance board long before 81-107 was finalized and have gone beyond what regulators have asked for in the new rule. For others, it will bring them up to a level consistent with what regulators feel is important for all mutual fund managers to have.
The rule is a watershed in governance for the mutual fund industry. Governance itself is an evolving issue, and some fund managers will expand the original intent of 81-107 if they feel it’s appropriate.
In addition, mutual fund managers are already corporate entities and are subject to corporate governance rules. They each have a board of directors or governors that look after the day-to-day operations of the company and are answerable to their shareholders. The role of day-to-day operations is separate and distinct from the fund managers’ business operations, which are additionally governed by securities laws and regulations. A fund itself, whether a trust or corporate fund, is also answerable to its unitholders. The new rule is another layer of safety; it has come into place just in case there may be a conflict between the interests of the fund manager and the interests of the fund and its unitholders.
Critics have also asked where managers will find suitable people to be on IRCs. Good question. Finding suitably qualified IRC members who will add value for investors and perform their role properly will be a challenge for fund managers.
Here at theInvestment Funds Institute of Canada, we will be holding forums in which our members can discuss issues related to their obligations under 81-107, as well as strategies that they can use to make the requirements work, including discussions on how to secure IRC members.
IFIC had become increasingly involved with the development of 81-107, especially after its board of directors set up a special committee earlier this year. The committee brought some important clarifications to the final edition of the rule.
IFIC’s input to the regulators focused on the importance of establishing a rule that would engender effective consultation between the fund manager and the IRC, enhancing the ability of both parties to protect investors’ interests.
As with other issues that have affected the mutual fund industry over the years, we will continue to work with regulators and others in the industry to ensure the issues are resolved to the benefit of all
involved. IE
Joanne De Laurentiis is president and CEO of the Investment Funds Institute of Canada.