The Canadian Securities Administrators has published a revised version of a proposed rule mandating investment fund governance.

The proposed rule would impose a minimum, consistent standard of governance for all publicly offered investment funds. Currently, there is no requirement that investment funds have a governance body.

Under the proposal, every publicly offered investment fund must have an independent review committee to oversee a fund manager’s decisions in situations in which they are faced with a conflict of interest. Conflicts would include “business” or “operational” conflicts, which are not specifically regulated today, as well as related-party transactions, which currently are restricted.

The revised rule differs from an earlier proposal, published in 2004, in a number of significant ways, including:
– it would apply to all publicly offered investment funds, not just mutual funds (but not pooled funds or capital accumulation plans);
– existing rules and prohibitions on related-party and self-dealing transactions would be retained;
– the IRC would have the ability to stop a manager from proceeding with a prohibited transaction, but it could not fire a manager;
– investors would continue to have the right to vote on a proposed increase of management fees, change of manager, and changes to a fund’s investment objective;
– it would provide the IRC with effective methods to oversee and report on manager conflicts of interest.

It’s not clear whether the BC Securities Commission will go along with the rule. The notice says the BCSC supports some of the objectives of the rule, but because of feedback the BCSC has received from industry, it is still considering whether adoption of the rule is appropriate and whether there are alternatives that might sufficiently address the proposed objectives in a more cost effective manner.

The OSC’s chief economist finds the range of operational costs of an IRC to be $50,000 to $250,000 per year, based on a review of mutual funds with existing IRCs as a condition of exemptive relief. The commission has also found that holding a unitholder meeting costs between $5 and $20 per unitholde. Using the lower estimate, it suggests the benefit of removing a single meeting for the entire mutual fund industry to be $254.35 million, based on 50.87 million securityholders in conventional mutual funds (unitholder votes will no longer be needed to change auditor or to transfer assets between affiliated funds).

It also concluded that the number of meetings of the IRC each year will not have a significant impact on an investment fund’s performance. As a result, the proposed rule specifies only that the IRC meet at least annually.

“We believe the proposed rule will provide substantial protection to investors,” said David Brown, chairman of the OSC. “It will ensure that a manager’s conflicts of interest do not influence the decisions that affect investors.”

“I’m pleased that the CSA members worked collaboratively to find a good fund governance regime for all investment funds,” said Jean St-Gelais, chairman of the CSA and president and CEO of the Autorité des marchés financiers du Québec. “Our capital markets will benefit from this proactive approach to investor protection.”