Mutual Fund Governance in Canada - Introduction

National Instrument 81-107 Independent Review Committee for Investment Funds (the Instrument) came into force on November 1st, 2006. The Instrument sets out an independent oversight regime for all publicly offered investment funds which is intended to improve investment fund governance in Canada.

Improving fund governance has been a priority for the Canadian securities regulators for several years. The process began in the 1990s with a debate over the need for independent boards for mutual funds and increased regulatory standards for fund managers.

National Instrument 81-107 now imposes a minimum, consistent standard of independent oversight for all publicly offered investment funds in each of the jurisdictions represented by the Canadian Securities Administrators (the CSA). The new rules embody the emerging international standards on fund governance but the CSA has tailored these to the specific structures of the Canadian investment fund industry and the Independent Review Committee model is unique to Canada.

Scope of National Instrument 81-107

The Instrument requires every investment fund that is a reporting issuer to have a fully independent body, called an Independent Review Committee (the IRC), whose role is to oversee all decisions involving an actual or perceived conflict of interest faced by the fund manager in the operation of the fund.

The Instrument applies to all investment funds that are reporting issuers (i.e. that are offered to the public) and, importantly, to the managers of those funds. This includes all publicly-offered mutual funds, labour sponsored or venture capital funds, scholarship plans, mutual funds and closed-end funds that are listed and posted for trading on a stock exchange or quoted on an OTC market, and non-redeemable investment funds.

The Instrument does not regulate mutual funds (commonly referred to as pooled funds) that sell securities to the public only under capital raising exemptions permitted by securities legislation (and which, therefore, are not reporting issuers).

As IRCs become more familiar, even private and exempted funds may well find that pressure from institutional investors requires them to voluntarily adopt similar standards of fund governance.

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