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Communications from the Institute do not constitute, and should not be considered a substitute for, legal advice.
[20237]
August 1, 2006
TO: INTERNATIONAL MEMBERS No. 16-06
INTERNATIONAL OPERATIONS ADVISORY COMMITTEE No. 21-06
RE: CANADIAN SECURITIES REGULATORS ADOPT NEW RULES ON FUND
GOVERNANCE IN CANADA
Last Friday, the Canadian Securities Administrators (CSA)1 released National Instrument 81-
107, which will require all investment funds that are reporting issuers in Canada to establish an
Independent Review Committee (IRC) to oversee all decisions involving conflicts of interest faced by
the fund’s manager.2 NI 81-107 is particularly noteworthy as the latest and most significant step in
more than seven years of work on a new regulatory framework for fund governance in Canada.
Background
In 1999, the CSA retained Stephen Erlichman to summarize the debate over fund governance
in Canada and to make specific recommendations on possible improvements. His report was released
in June, 2000.3 In March 2002, the CSA released a concept proposal based on the Erlichman report
that set out a system of fund governance with a board-like body that would oversee all of the fund
manager’s activities. The CSA followed that consultation with a January 2004 proposal for a national
instrument on fund governance. Notably, the 2004 proposal limited the role of the governance body
(now called the IRC) to the oversight of potential conflicts of interest, substantially carving back the
broad oversight role described in the 2002 concept release. The CSA reproposed the national
instrument in May 2005, strengthening the role of the IRC in response to comments that it should
have more “teeth.” The final adoption of NI 81-107 is a result of the public consultation on the May
2005 proposal.
1 The CSA is comprised of the thirteen provincial and territorial securities regulators in Canada.
2 NI 81-107, “Independent Review Committee for Investment Funds,” (July 28, 2006) , available at
http://www.osc.gov.on.ca/Regulation/Rulemaking/Current/Part8/rule_20060728_81-107_independentreview.pdf, or
http://members.ici.org/getPublicPDF.do?file=20237link
3 Stephen Erlichman, “Making it Mutual: Aligning the Interests of Investors and Managers: Recommendations for a Mutual
Fund Governance Regime in Canada” (June, 2000).
2
The IRC
NI 81-107 requires all investment funds that are reporting issuers to establish an IRC to oversee
all decisions involving conflicts of interest faced by a fund manager. An IRC must have at least three
members, each of whom is independent from the manager. The role of the IRC, depending on the
nature of the conflict, will be to either approve a fund manager’s decision or provide recommendations
before the manager may proceed.
NI 81-107 covers two types of conflicts: (i) “business” or “operational” conflicts - those relating
to the operation by the manager of its funds that are not specifically regulated under securities
legislation, except through the general duties of loyalty and care imposed on the fund manager; and (ii)
“structural” conflicts – those conflicts resulting from proposed transactions by the manager with related
entities of the manager, fund or portfolio manager currently prohibited or restricted by securities
legislation. Structural conflicts and certain other enumerated transactions, such as the change of the
fund’s auditor, must be approved by the IRC before the transaction may proceed. For other conflicts of
interest, the IRC must provide the fund manager with a recommendation, which the fund manager
must consider before proceeding.
Although NI 81-107 requires each fund to have an IRC, it is flexible with respect to the actual
structure employed by fund managers. In the commentary accompanying the rule, the CSA explains
that:
Each manager is expected to establish an IRC using a structure that is
appropriate for the investment funds it manages, having regard to the
expected workload of that committee. For example, a manager may
establish one IRC for each of the investment funds it manages, for
several of its investment funds, or for all of its investment funds. . . . [NI
81-107] does not prevent investment funds from sharing an IRC with
investment funds managed by another manager [nor does it] prevent a
third party from offering IRCs for investment funds. Managers of
smaller families of investment funds may find these to be cost-effective
ways to establish IRCs for their investment funds.4
NI 81-107 also requires that the fund manager establish written policies and procedures
governing the review of conflicts of interest and the referral of matters to the IRC.
Next Procedural Steps; Effective Date
Although each of the 13 provincial and territorial securities regulators in Canada are
represented at the CSA, securities regulation in Canada remains provincial and “national instruments”
4 See commentary accompanying Section 3.1.
3
adopted by the CSA are not, in and of themselves, binding law. Each province or territory must act to
approve the national instrument as a local rule or policy and may, in the course of that approval process,
amend the national instrument.
Provided that all necessary provincial and territorial approvals are obtained, NI 81-107 will
come into force on November 1, 2006, with a one-year transition period for full compliance.
Robert C. Grohowski
Senior Counsel - International Affairs