The time is drawing near for mutual fund managers in Canada to establish their independent review committees, first announced last year in a new fund governance rule, NI 81-107. The rule gives managers until May 1 to establish IRCs, while full compliance of NI 81-107 is required by Nov. 1.
NI 81-107 supplements a host of existing safeguards in an already heavily regulated industry, providing an additional layer of independent oversight of potential conflicts between the interests of fund investors and those of the fund manager. This independent vantage point allows a review of a mutual fund manager’s activities from the perspective of the inves-tor, and will go far in maintaining and enhancing investor confidence in publicly offered mutual funds.
This is a very wide-ranging rule, not one that affects just mutual funds. It applies to all investment funds that are reporting issuers, including mutual funds but also non-redeemable investment funds, labour-sponsored investment funds, venture-capital funds, scholarship plans and funds listed on a stock exchange or an over-the-counter market.
One of the first requirements of the new rule is that the IRC adopt a written charter outlining the IRC’s responsibilities and functions, and the procedures to follow. The charter is of central importance in making the fund manager/IRC relationship workable, and I have encouraged managers to take great care in drafting their charters.
The potential workload of an IRC can be a guide to determine how many IRCs a manager creates, says the rule. A manager that manages more than one mutual fund, for example, can set up one IRC for all of its mutual funds. Or a manager can set up an IRC for each of its mutual funds or groups of funds.
An Investment Funds Institute of Canada task force, made up of members with hands-on experience in the operation of IRCs, helped create a charter framework as a guide to help IFIC members through the process of putting together the nuts and bolts of the governance issues surrounding IRCs.
The framework provides general, non-prescriptive guidance to meet the various needs of different mutual fund managers. Standards are expected to evolve with industry experience, and will differ based on the fund and its business needs.
That same non-prescriptive formula went into producing a checklist for IFIC members to follow as they work toward the May 1 deadline. Items on the checklist include:
> creating an IRC charter;
> determining the size of the IRC (which must have at least three members, independent of the fund manager, although some managers may feel they need to increase that number);
> setting the duration of terms of office for IRC members;
> identifying IRC candidates, including creating a process for assessing the independence and skills of IRC candidates;
> establishing compensation levels for IRC members; and
> implementing a mechanism for referring conflict of interest matters to the IRC.
Some mutual fund managers already have IRCs — and a number have taken it upon themselves to go further than the requirements of NI 81-107.
Others may be working overtime to get themselves in line for the May 1 deadline for creating IRCs. But developing and implementing an ongoing process to identify conflict-of-interest matters, together with consideration of industry best practices as they evolve, should address the needs of regulators and investors, and create a more consistent standard of governance throughout the mutual fund industry.
For more information about the charter or checklist, please visit www.ificmembers.ca and click on “Hot Topics.” IE
Joanne De Laurentiis is president and CEO of the Investment Funds Institute of Canada.