IFIC panel chews out NI 31-103

If anyone thought the mutual fund industry was pleased with NI 31-103, think again. On Thursday, the Investment Funds Institute of Canada held a panel discussion to tell its members all that’s wrong with the proposed national instrument.

Moderated by Murray Taylor, president and CEO of Investors Group, panelists Christopher Enright, executive vice-president of FundEX Investments, and Judy Goldring, general counsel and SVP, law and corporate affairs, at AGF Management Limited, outlined numerous issues they have with NI 31-103.

One hot topic relates to the roles of chief compliance officer and ultimate designated person. Goldring told a packed house about two main concerns that need to be addressed — proficiency and the definition of the standard.

“The drafting of the instrument itself, with respect to the UDP, what their standard is and what [standard] the CCO is supposed to meet, is backwards,” said Goldring. “I’m afraid my CCO might walk out the door if she’s told that she’s got to be responsible for discharging the registered firm’s obligation under the securities legislation. It sounds like a really hefty task to meet.”

Goldring sees the UDP as one who’s responsible for ensuring that corporate compliance rules are being followed, while the CCO is responsible for making sure that policy procedures are being designed. “We have to encourage that there be some change in the drafting to reflect that we need a more appropriate allocation of the obligation and responsibilities,” she said.

Her problems with proficiency stem from NI 31-103’s definition of what constitutes a CCO. In a matrix that accompanied the discussion, IFIC writes that a CCO must “have been registered as an advising representative of a portfolio manager or be a lawyer or a CA… have three years’ experience with a registrant or three years’ practice and one year with a registrant.”

An alternative requirement is for the CCO to have five years’ experience working with a registrant, including three years under a CCO, or five years of employment with a federally regulating financial intermediary.

“[Some] current CCOs may not meet these requirements,” said Goldring. “We feel that this doesn’t provide sufficient flexibility. There are a lot of competent individuals in the industry that may not have those designations or haven’t come from a portfolio management side, but have great experience on the compliance side.”

The panel suggests that the regulators amend the language, or make it more specific to the fund manager function. Another option is taking a principles-based approach, but Goldring said that idea hasn’t gotten a warm reception.

Another aspect of the instrument that could negatively affect businesses is related to international investment fund managers.

“To be honest, I find this drafting a little unclear and a little confusing,” said Goldring. The regulators are proposing that all international advisors be certified in Canada or become sub-advisors in order to work in this country. That’s something Goldring thinks many foreign companies won’t consider.

“This will impact the business relationship,” she said. “It will force them to go to an international fund advisor and ask them if they are willing to get registered in Canada. And if this company is the advisor’s only client, I suspect they will say no.”

The panel said they didn’t find a grandfathering clause in relation to international fund advisors, and Goldring is worried that current practices will be disrupted.

Another topic the panel debated was about branch managers. Currently, if there are more than three approved people in the same location, one must be designated branch manager. Enright doesn’t think that’s the right way to go.

“It should be more a principles-based approached,” he said. “If you can demonstrate that you are satisfying the MFDA requirement in providing a two-tiered level of supervision, that should be the test. Not how many bodies are working at a specific branch.” Enright said that a good alternative is employing a regional manager who looks after several branches.

But in the end, Goldring, Taylor and Enright stressed that members should take a close look at the NI 31-103 and get their comments in early. The IFIC matrix of issues can be accessed by clicking here.

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(06/07/07)

Bryan Borzykowski