Investment fund companies are scrambling to find qualified, capable and willing candidates for their independent review committees in the wake of a recent regulatory decision that the IRCs must be in place by May 1.

“It’s extremely difficult to find anyone who understands the complexities of examining transactions or to find qualified people who have the time,” says Mal Spooner, president of Mavrix Fund Management Inc. of Toronto. “We’ve started looking for recruits, but it’s a huge job to educate someone who is not intimately familiar with the industry, and yet there’s a requirement for independence.”

Fund companies must appoint members of their IRCs by May 1, and they must be fully operational by Oct. 31, according to the terms of National Instrument 81-107, which came into force Nov. 1, 2006. The job of IRCs is to review objectively potential conflicts of interest that arise in various funds, and to prevent activities that would not be in fundholders’ best interests.

“The sheer mountain of effort, paperwork and legal counsel required is making this a nightmare for small to medium-sized firms,” says Michael Butler, president of Toronto-based Northwest Mutual Funds Inc. “It’s an incredible bur-den to get the right people in place. IRC candidates will need to know everything about the potential conflicts before they even think of signing on, and bringing them up to speed could be enormously time-consuming.”

The larger fund firms may have an easier time than smaller firms in finding IRC members because they have a wider network of contacts to call upon within the financial services industry and “more points of contact with lawyers, accountants and other business professionals,” says Gavin Graham, vice president at Toronto-based Guardian Group of Funds Ltd.

Larger firms also have a broader base of assets over which to spread the expenses of establishing and running an IRC, he says. But even with access to capable candidates, it could be an industry challenge to find willing ones, adds Graham, whose firm is investigating the possibility of forming an IRC from independent fund trustees currently in place at its affiliated company, BMO Mutual Funds.

William Woods, president of Toronto-based consulting firm Independent Review Inc. , says that, aside from the dearth of capable candidates, there is also a challenge in finding people who are willing to take on the role of IRC member because of potential legal liabilities arising from decisions the committees make on fund activities.

Woods, a securities lawyer with corporate governance experience, established his Toronto-based firm in 2004 when the Canadian Securities Administrators was still drafting the IRC proposals. He says there are about 200 investment fund firms that must establish IRCs by spring.

“We’ve had discussions with 50 firms that are fairly well advanced, but I haven’t heard what the others are doing and suspect that many haven’t focused on it yet,” he says. “I expect there will be a wake-up call. However, it’s not just a matter of calling up a few people to sit in on meetings.”

The new IRC rules apply to all funds that sell their units or shares to the public and are defined as “reporting issuers,” including mutual funds, labour-sponsored funds, scholarship plans and closed-end funds that trade on a stock exchange. The rules do not include private funds or public funds that operate under exemptions permitted by securities legislation, including hedge funds.

About 200 fund companies each require a minimum of three people on their IRCs; that means there are 600 positions for the industry to fill. Although an IRC director may sit on the IRC of more than one fund company, some companies will require more than three members or even more than one IRC — particularly companies with many funds or a wide variety of activities to be reviewed.

Being ahead of the pack can be an advantage. Mackenzie Financial Corp. of Toronto, for example, which assembled its IRC last spring, found a cross-section of talent, including a lawyer, an investment banker and a former portfolio manager.

“The pool of candidates is reducing each day that we get closer to May 1,” Woods says. “Nobody wants to be going madly through their Rolodex on April 30.”

To be free of conflicting loyalties, IRC members cannot be in a material relationship with the relevant company, including being in an ownership, commercial, charitable, industrial, banking, consulting, legal, accounting or familial relationship. Woods says these conditions narrow the field, and ideal candidates tend to be retired partners of legal or accounting firms, former asset managers or securities regulators.

@page_break@The initial slate of IRC members chosen by a fund company is particularly important, Woods says, because thereafter it becomes the job of the IRC to replace its members.

In addition to consulting with fund companies in finding appropriate people to sit on their IRCs, Woods’ firm also has the capacity to establish and run an IRC for a fund company. It can appoint IRC members from its roster of independent and seasoned industry executives available to provide service on boards, government bodies and investigative teams.

Independent Review’s lineup includes former Ontario Securities Commission chairman Stanley Beck, lawyer and investment banker Ian Bandeen, and Warren Law, who is both senior vice president and general counsel for the Canadian Bankers Association and chairman of Manulife Financial Corp.’s IRC. If a fund company doesn’t want to outsource all of the responsibility to Woods’ firm, it can help with setting up templates and timetables so that the required responsibilities are met and documentation and reports are completed.

Fund companies can also find IRC candidates through executive-search firms or legal or accounting firms, which are connected to networks of other professionals.

Northwest is one of the companies that has delegated its IRC to Woods’ firm. Outsourcing has been more efficient, in terms of time and costs, says Butler, adding: “Otherwise, we would be pulling our hair out.”

There is a long list of potentially harmful conflicts of interest involving investment funds, many related to the concentration of ownership in Canada’s financial services industry. Potential conflicts include trading by an investment fund in securities that are issued by a related company, or participating in underwritings or conducting trades with a brokerage firm that is related to the fund company. For example, the major banks have ownership stakes in securities dealers, as do some fund-management conglomerates such as Burlington, Ont.-based AIC Ltd. and Toronto-based Dundee Wealth Management Inc.

There is also a web of connections between fund-management firms Investors Group Inc. and Mackenzie Financial and a group of publicly traded companies that are part of the same family, including IGM Financial Corp., Power Corp. and Power Financial Corp.

The new rules require that a fund manager must refer all conflict of interest matters to the IRC for review. Although the IRC does not have the power to force a fund manager to obey its advice, the manager is required to disclose in its prospectus and various continuous disclosure reports any instances in which it did not follow an IRC recommendation.

“In the context of Canada’s highly competitive investment funds industry, in which investors have daily liquidity, this type of ‘name and shame’ provision should be an effective deterrent,” Woods says. “The ultimate sanction is for IRC members to resign and publish notice that the manager is not acting in a fair or reasonable manner.”

Woods estimates the fees paid to IRC members will run to $20,000-$75,000 per person each year, depending on the level of expertise. With other administrative costs, as well as the cost of liability insurance for IRC members, the total expense is expected to be $150,000-$200,000 a year.

These costs will affect the management expense ratios on funds, Woods says. IE