Fund firms moving on independent committees

(November 16, 2004) The trend towards independent review committees (IRCs) for mutual funds is on the rise. At this point, the reasons are purely practical and the committees have a narrow mandate. Some industry executives view the move as getting a jump on the regulators, who are expected to introduce a broader fund governance regime next year.

“It is reasonable to expect that some fund companies will build on established IRCs and turn those into a broader corporate governance-type body,” says Dwayne Dreger, AIM Trimark’s vice-president of corporate affairs. AIM Trimark announced the establishment of a four-person IRC earlier this month.

To avoid the perception of conflict of interest, Canadian mutual funds are prohibited from making certain related-party trades. As an example, bank-owned fund companies cannot buy common shares of their parent company. But for the past couple of years, regulators have allowed firms who establish independent advisory committees to bypass that restriction. Mackenzie was the first to obtain the exemption. Other fund firms have since followed suit.

“A number of bank-owned fund managers have gone to the regulators in the past to get an exemption to permit their funds to purchase these securities, subject to the establishment of an advisory board that is supposed to consider these conflicts and make sure the interests of the funds and unitholders are protected,” explains Richard Austin, Scotiabank’s deputy head of compliance. Scotia Securities recently set up its own independent committee, the last of the bank-owned firms to take that step.

Austin says Scotia was delaying its move in the hope that there would be a comprehensive fund governance regime in place by now. But the Canadian Securities Administrators (CSA) is still debating the issue.

The CSA’s proposed National Instrument 81-107, published for comment earlier this year, would require fund companies to set up IRCs for each fund, with a mandate to review fund managers and potential conflicts of interest. Originally, the CSA called for independent boards of directors for mutual funds.

Critics accused the regulators of watering down its initial proposal in response to complaints from the mutual fund industry. Unlike boards of directors, IRCs would not have the power to overrule fund managers’ decisions.

At this point, Austin says his board’s mandate is restricted to considering cases where Scotia Securities’ funds want to buy shares of Scotibank or want to participate in an offering that is underwritten by Scotia Capital.

“It’s a step towards IRCs,” he says. “We thought the fund governance regime would take care of these exemptions. We decided we couldn’t afford to wait any longer.”

Dreger sees the trend towards IRCs as something of a revolution in the fund industry, where pure regulation is giving way to active supervision by the fund companies. Still, the idea of an independent review board is nothing new for AIM Trimark, which has had a 10-member committee in place since 1999. Four members of that group, Kathy Chant, Ronald Gage, Marilyn Field-Marsham and Robert Luba are on AIM’s new IRC.

“This frees us up to invest in companies that we were prevented from buying before,” says Dreger. “And that inevitably has to benefit investors in the long run.”

Scotia Securities has attracted several high-profile members for its review board: Rob Bell, founder of BellCharts (and a former ADVISOR Group Career Achievement Award winner), University of Toronto finance professor Eric Kirzner and retired law partner Murray Paton.

“It will be a challenge to get a board as good as ours,” Austin says, pointing out that the latest version of the CSA proposal contains no specific requirements for board members.

“Each fund company will decide and we decided to get highly-qualified people. But arguably a fund company could take three people off the street and say we want you to represent unitholders. I don’t think that’s the way to go, but there’s nothing stopping somebody from doing that.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com