By her own description, Brenda Vince, the new chair of the Investment Funds Institute of Canada, is no shrinking violet. Indeed, she may be the leader the fund industry needs to have new life breathed into it.

In a no-nonsense speech on Sept. 28, Vince acknowledged that both IFIC as an association and the mutual fund industry as a whole face a number of challenges, the most serious being the perception that the mutual fund industry, at best, lacks concern for the interests of investors and, at worst, is rudderless and lacks a common voice.

IFIC proposes to tackle this challenge by setting an agenda for change and playing a significant role in leading that change. In doing so, IFIC will seek to ensure that: the most senior voices of the industry will be actively and constructively engaged; there will be real dialogue and collaboration to produce real and lasting solutions rather than “sound bite” fixes; and, anything done by IFIC and the industry will also be designed to
protect the interests and maintain the trust of the investing public.

Vince’s answer to the serious hurdle of reconciling different business models and different competitive strengths is not to lose track of the unitholders along the way. This focus on the interests of unitholders and the investing public makes good business sense and should serve as a guide for steering change and making the difficult decisions that go with it.

As Vince points out, one of the benefits of mutual fund investing has been to place the complexity of investing in the background for many investors. However, by doing so, the industry has implicitly asked mutual fund unitholders to trust the products they buy, the processes that are used surrounding the investment and all the people involved at various stages of investing — managers, dealers and advisors. In a timely reminder, Vince has observed that high-trust businesses require a much more sophisticated web of checks and balances.

The investment fund industry needs to heed her messages.

The recent problems encountered by investors in various hedge funds, mutual funds and labour-sponsored funds, combined with the market-timing scandals of the past few years, serve to reinforce the need to put in place the checks and balances of which she speaks. Increased manager regulation — which has long been recommended — is overdue.

Manager regulation is an integral part of investment fund governance, a subject that has
met with much lip service from the industry but little action. In addition to higher capital requirements, manager regulation must address: the need for independent oversight on a manager’s board of directors, audit and compensation committees; the need for minimum bonding and insurance coverage; the need to ensure the adequacy of management resources; the competency and proficiency of personnel; the adequacy of internal systems, controls and procedures; and procedures for monitoring the compliance with, and sufficiency of, the internal systems, controls and procedures.

The standards for the governance and operation of fund managers should be similar to those expected or required of publicly traded enterprises. Failure to meet these standards should be warning signs to investors, their advisors and regulators.

The continuing lack of minimum standards respecting these matters raises significant investor- protection concerns, including the suitability of the managed funds for investors.

Time is running out on the credibility of the industry’s commitment to protecting the interests and maintaining the trust of the investing public. It is no longer acceptable to hide behind excuses such as “You can’t prevent fraud,” “We have to encourage innovation” and “We can’t have barriers to entry” to avoid or delay putting acceptable minimum standards for fund managers in place.

It is in the industry’s best interest to rally around Vince and collaborate in seeking out best practice standards and creative solutions that are good for the investing public as well as for the industry. Now is the time to act. IE