Mutual Fund Independent Review Committee Services

Independent Review Committees for Public Mutual Finds and Private Hedge Funds.

Introduction

The Governance of public mutual funds is now a hot topic around the world. In the U.S., the SEC has mandated that the Chairman and at least 75% of the board of all public mutual funds must be totally independent from the investment manager. Here in Canada, the Canadian Securities Administrators have published for public comment a proposed new National Instrument 81-107 entitled "Independent Review Committee for Mutual Funds" (the "Instrument"). The Instrument is expected to be republished in final form by June 2006 and brought into force later in 2006.

The proposed Instrument is designed to promote investor protection in mutual funds while fostering market efficiency. It requires all publicly offered mutual funds (except for listed funds) to have an independent committee charged with reviewing any conflicts of interest that may arise out of the management of the funds and making recommendations to the manager as to how these conflicts may be fairly resolved.

The Instrument will therefore make it a legal obligation for all mutual funds offered to the public to appoint an Independent Review Committee (IRC). The IRC may be a board of directors or a committee of at least 3 individuals, each of whom is independent from the manager.

Many commentators in the industry have pointed out that there is a very limited pool of people who are both suitably qualified and willing to take on the role of an IRC member (particularly in view of the potential legal liabilities that might attach to such a role) and that such committees may impose a significant cost burden on the industry.

The Costs of Setting up and Running an IRC

The Cost Benefit Analysis that accompanies the Instrument suggests that mutual funds can expect to pay up to $250,000 pa to attract a suitable chairperson for an IRC, and between $30,000 to $200,000, per annum, for each other member. In addition there will be considerable internal administration costs for mutual funds that run their own IRC's, together with external legal fees and "search" fees where external selection of candidates is required.

Overall, the cost benefit analysis suggests that the total cost of setting up and running an IRC will be within the following ranges:

Independent Review inc.'s Business Solution

Independent Review inc. offers to establish and run IRCs for appointment by public mutual funds and private hedge funds as the fund's independent review committee (either in accordance with the legal requirements of the Instrument or by way of a voluntary compliance with the current best practice in corporate governance of funds).

Independent Review inc. offers its IRC service to mutual fund families and hedge funds as a turn-key way to set up an IRC. In other words, a mutual fund client can outsource its independent review committee obligation to Independent Review inc.

The Fund and Independent Review inc. jointly establish a committee and the Fund then appoints that committee to formally be the Fund's independent review committee. Independent Review inc. contracts with the Fund to run that committee on the Fund's behalf (thus saving the Fund the time and expense of constituting its own IRC and having to find and appoint appropriate, independent persons).

Independent Review inc. is the lowest-cost, easiest way to establish a first class IRC.  Independent Review inc.'s committees can act as the IRC for multiple funds/fund families. NB: The Instrument does not prevent mutual funds from sharing an IRC with another fund manager. As the Instrument notes, managers of smaller families of mutual funds may find this a cost-effective way to set up IRC's for their mutual funds.

If a particular Fund has already identified some potential members of its IRC, Independent Review inc. can be engaged to set up and manage the IRC, using the members introduced by the Fund, with a chairman provided by Independent Review inc.

For more details on how to set up and run an Independent Review Committee please see the list of items in the navigation bar on the left.