The role of the IRC

It is a core principle of Canadian investment fund regulation that the fund manager has the responsibility and accountability for managing its funds in accordance with its fiduciary responsibilities. Accordingly, the CSA did not seek to impose independent board structures on the Canadian investment fund industry, as in the U.S. Instead, they have crafted a unique model and assigned a limited role and functions to the IRC.

Under NI 81-107, the main role of the IRC is to review conflicts of interest that may arise between the fund manager’s own interests and the manager’s duty to manage an investment fund in the best interests of the fund. The Instrument provides, therefore, that the manager must refer all conflict of interest matters, and its proposed course of action on those matters, to the IRC for the IRC’s review or determination.

In respect of certain conflict of interest matters (where the manager is otherwise prohibited from taking action by securities legislation) the IRC must approve the manager’s proposed actions. In respect of all other conflict of interest matters referred to the IRC by the fund manager, the IRC is required to make a recommendation to the manager as to whether, in the opinion of the IRC, the manager’s proposed action achieves a fair and reasonable result for the investment fund.

The IRC is obligated to consider every matter referred to it and provide either a determination (on those matters where the IRC’s approval is required) or its recommendation (on all other conflict of interest matters).

The manager must abide by the decision of the IRC on those matters that require its approval (subject to a manager’s overriding right to seek “exemptive relief” from its regulator). A manager must consider the recommendation of the IRC in respect of other conflict of interest matters, but may disregard the recommendation of the IRC, after such consideration.
An Independent Perspective

The Instrument is premised on the belief that a manager may not be able to objectively determine whether it is acting in the best interests of the investment fund when it has a conflict of interest. The Instrument thus requires managers to refer all conflict of interest matters – not just those subject to prohibitions or restrictions under securities legislation - to an IRC so that an independent perspective can be brought to bear on the manager’s proposed action.

The IRC is expected to bring a high degree of rigour and skeptical objectivity to its review of conflict of interest matters, but the CSA expressly states that they do not consider it the role of the IRC to second-guess the investment or business decisions of a manager or an entity related to the manager.

Rather like the role of the Senate in Canada, an IRC is supposed to provide a “sober second review” of the manager’s proposed course of action in respect of a conflict of interest matter.

Under the Instrument, an IRC does not, therefore, have the general responsibility to oversee or supervise the management of the investment fund. Indeed, the Instrument states that the IRC has no power, authority or responsibility for the operation of the investment fund or the manager except as described above.  Instead, the IRC will assist the manager to prepare written policies and procedures concerning matters that must be referred to it and, thereafter, the committee’s role is to react when the manager refers a matter to it and to conduct annual reviews.

It is very important to note that the fund manager and the IRC may mutually agree that the IRC should have a broader mandate. For example, the IRC may be tasked with monitoring the administration and management of the mutual fund or giving general advice to the manager.

Independent Review Inc. offers several types of IRC, from a standard version that is designed to meet the minimum requirements of the Instrument right through to a committee that provides a full corporate governance audit. Independent Review Inc. has a standard written charter for each type of committee.

Where a particular client needs a customised charter, Independent Review Inc. can constitute a separate IRC with different rules and a customised mandate.

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