The Ontario Securities Commission (“OSC”) and the Autorité des marchés financiers (“AMF”, and together with the OSC, the “Regulators”) recently completed a continuous disclosure review (the “CD Review”) related to independent review committees (“IRCs”) of publicly offered investment funds. This sweep spanned several topics, including term limits, diversity and the scope of IRC review. The Regulators’ observations and further guidance have since been published in CSA Multilateral Staff Notice 81-337 Targeted Continuous Disclosure Review and Guidance for Independent Review Committees for Investment Funds (the “Notice”).

Background

National Instrument 81-107 Independent Review Committee for Investment Funds (“NI 81-107”), which came into force in November 2006, requires that every investment fund that is a reporting issuer in Canada have an IRC. An IRC is a fully independent body whose role is to review all decisions involving an actual or perceived conflict of interest encountered by an investment fund manager (“IFM”) in the operation of a fund. In addition to establishing related written policies and procedures, an IFM must refer “conflict of interest matters” to the IRC for its recommendation or approval, as applicable, before decisions regarding such matters are made.

IRC Authority

The Regulators note that the IRC is not intended to replace the IFM in its management of a fund. Responsibility for the identification and mitigation of conflicts rests with the IFM, and IFMs are encouraged to take a broad view of what constitutes a conflict of interest matter and to err on the side of caution to refer matters to the IRC. While the IRC may, among other things, contact the regulator to discuss any matter in connection with a fund, this ability does not extend to inconsequential matters and should be used appropriately.

The Regulators add that the IRC should ensure that it understands at all times what is being asked of it by the IFM. IRC meeting minutes should be fulsome and outline the deliberations and considerations that led to any decision of the IRC. If few or no matters are being referred to the IRC, the IRC should consider whether that is reasonable and whether there is compliance by the IFM with NI 81-107 and other securities legislation more generally.

The CD Review

As the investment management industry has changed significantly since NI 81-107 came into force, the Regulators sought to evaluate the IRC framework. To this end, OSC and AMF staff (collectively, “staff”) reviewed NI 81-107-related disclosure of funds managed by 24 different IFMs of varied size and fund types for which one of the OSC or the AMF is the principal regulator. The Notice provides the following observations and guidance, in light of the CD review:

• Term limits: Most IRCs reviewed use staggered terms. Several IRCs had members with terms longer than six years; however, staff caution that IRCs should strive for ongoing turnover and fresh perspectives, and terms exceeding six years should be viewed as exceptions in limited circumstances. Staff also note that IRCs should consider implementing firm term limits for the chair of the IRC;
• Skills, competencies and recruitment: All IRCs reviewed had members with relevant knowledge, experience, competencies and skillsets. Staff indicate that IRCs and IFMs should continue to aim for diverse skillsets, provide ongoing orientation and education and implement recruitment processes that are fair, transparent and led by the IRC. Staff also note that, given the importance of the independence of the IRC, recruitment of new members should be led by the IRC itself without unduly relying on the IFM;
• Size and diversity: All IRCs reviewed were in compliance with the three-person minimum IRC requirement, and a number of members served on several IRCs. While a majority of IRCs had at least one woman as a member, representation by other diverse groups could not be determined. Staff encourage diversity beyond skillset and are of the view that enhanced diversity may lead to better decision-making and good governance;
• Compensation: IRC members’ compensation varied widely across IFMs of different sizes, and certain disclosure did not describe such costs clearly or consistently across disclosure documents. Staff emphasize that any description used to denote the allocation of costs should be informative, meaningful and not vague. IRC members’ compensation should also be broken down by individual amounts and expressed consistently across disclosure documents. Staff further indicate that compensation disclosure in Canadian dollars, though not required, is preferred to enable comparisons across IRCs;
• Expanded scope of IRC review: Staff discern a degree of commonality in respect of what IFMs consider to be a conflict of interest matter and subject matters for which most IFMs obtain standing IRC instructions. All IFMs and IRCs reviewed were of the position that the IRC’s mandate should not be expanded beyond conflicts. Staff note that while a general list of common conflict of interest matters has been adopted by several IFMs, the identification of new operational conflicts should be ongoing. IFMs should have a disciplined, established and organizational approach to identifying such conflicts (e.g., through regular meetings planned for this purpose) and remain aware of when IRC approval or exemptive relief is otherwise required; and
• Disclosure to demonstrate IRC impact: Staff had queried whether a specific metric or further disclosure might be used to assess, quantify and determine the extent of IRC impact on IFM decisions. Most IRCs reviewed considered the current disclosure requirements in the annual IRC Report to Securityholders to adequately demonstrate the work and impact of the IRC. Staff remind IRCs to ensure that this disclosure is fulsome, substantive and informative, providing a clear picture of the scope of IRC activities and impact of IRC involvement.

What’s Next?

Although amendments to the IRC framework have not been proposed, IFMs and IRCs are encouraged to use the Notice to support and enhance their roles under NI 81-107. The Regulators will continue to monitor disclosure in this area.

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