Independent review committees proposed for mutual funds

(January 9, 2004) Mutual funds will soon be required to set up independent review committees to oversee fund managers and monitor potential conflicts of interest, a move some critics are calling a “half measure.” The proposed new fund governance rule was published for comment today by the Canadian Securities Administrators (CSA).

Under the proposal, each fund manager would be required to establish an independent review committee (IRC) for its funds. The IRC — which must include a least three members not affiliated with the fund manager or the fund — would be responsible for reviewing all matters involving conflicts of interest between the fund manager’s own business dealings and his fiduciary duty to manage in the best interest of unitholders, the CSA says.

“Our proposal is about implementing a governance regime that will help mutual funds resolve conflicts of interest and manage the funds in their care with the interests of the fund holders front and centre,” said CSA chair Stephen Sibold.

The CSA describes the IRC proposal as more “focused” than what it originally planned: independent boards of directors for mutual funds, a system that has been in place in the U.S. for years.

Critics say the original proposal has been softened in response to complaints from the mutual fund industry. Unlike boards of directors, the IRCs would not have the power to overrule fund managers’ decisions.

“This seems something of a half measure, given the U.S. experience, and will not allay investors’ concerns,” said industry consultant Gordon Powers in a recent commentary posted on the Morningstar Web site.

In its response to the CSA’s original fund governance proposal, IFIC said that the initiatives would be of “no benefit to Canadian mutual fund investors if they are simply added as layers to the pre-existing inefficiencies of our current regulatory regime.

“Underlying and long-standing problems must be addressed first and, accordingly, a cost-benefit analysis of a fund governance regime must be preceded by a comprehensive review and restructuring of the existing regulatory framework into which a fund governance structure would ultimately be integrated,” IFIC said.

Sibold says the new version of the rule will require “independent review specifically in the area where people responding to the concept proposal agreed it mattered most, without placing an undue burden on mutual fund managers who may have limited experience working with an independent board.”

“The rules will ensure that every manager will have a minimum level of fund governance,” said Susan Slima, the Ontario Securities Commission’s director of investment funds at a Toronto conference last month. “We think this is a good starting point and a platform for future reform, if appropriate.”

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