Scrap fund governance proposals: Stromberg

(April 19, 2004) Securities lawyer Glorianne Stromberg has joined the growing chorus of advocates railing against new mutual fund governance rules proposed by the Canadian Securities Administrators (CSA). Stromberg says the changes will not serve the interests of investors or the fund industry and should be withdrawn.

“If the proposals are implemented in their present form, there is a strong likelihood that they will undermine investor protection and erode confidence in the safety and soundness of the mutual fund industry,” Stromberg wrote in a submission to the CSA.

National Instrument 81-107, published for comment earlier this year, would repeal existing fund industry provisions that relate to conflicts of interest, Stromberg says.

Those provisions would be replaced by the requirement that funds set up independent review committees (IRCs), charged with reviewing fund managers and potential conflicts of interest.

“There is a concern that IRCs may simply become rubber stamps for management proposals,” Stromberg explains, since the committee’s recommendations will not be mandatory.

Stromberg believes attempts by regulators to “spin” the proposals as an initiative to boost investor confidence border on “questionable marketing practices.”

Last week, the Small Investor Protection Association (SIPA) released a similarly harsh critique calling the CSA’s proposals toothless and naive.

“I trust the numerous submissions make it clear — National Instrument 81-107 needs to be withdrawn, and quickly, by the CSA,” said SIPA’s Ken Kivenko in a e-mail to Advisor.ca. “It is an embarrassment and most untimely given the corporate and fund scandals that are hitting the news every day.”

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Thirteen submissions regarding the fund rules have been posted on the Ontario Securities Commission’s Web site. Most are from retail investors strongly opposed to the recommendations. But even some industry insiders are unhappy, noting that the CSA’s recommendations are significantly different than their original proposals, which called for funds to introduce boards of directors with “real powers and real teeth.”

“We are both disappointed and disturbed that the CSA has significantly gutted the requirements of the concept proposal,” said Michael Meighen, writing on behalf of the independent governors of the Cundill Funds.

“Reducing the role of the independent review committee to dealing with conflicts of interest only… removes important protections for mutual fund investors,” Meighen wrote in his submission.

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What do you think about Stromberg’s assertions about IRCs and the CSA’s proposal? Is NI 81-107 good or bad for the industry? Share your thoughts in the Talvest Town Hall on Advisor.ca.

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

(04/19/04)

Doug Watt