(July 27 – 11:15 ET) – The long-awaited Erlichman Report on mutual fund governance is out.
The Canadian Securities Administrators released the report titled, Making It Mutual: Aligning the Interests of Investors and Managers – Recommendations for a Mutual Fund Governance Regime for Canada Report on Fund Governance. The report, written by Stephen Erlichman, a senior partner with the law firm of Fasken Martineau DuMoulin LLP, was published this morning. It will guide regulators in creating a new fund governance regime.
OSC chairman David Brown calls the report, “a shift and a leap forward in our thinking about the regulatory framework for mutual funds and other investment funds.” Brown said, “We share Mr. Erlichman’s position that improvements in fund governance and the management of mutual funds are desirable, not so much because there may be problems in the fund industry, but, rather, so that investors’ expectations of high standards of conduct from the stewards of their money is not misplaced.”
The Investment Funds Institute of Canada is already at work on a contingency fund and a possible self-regulatory organization for mutual funds.
The report includes 10 key recommendations.
Each mutual fund complex should be required to establish a governance regime that has a governing body independent from the manager of the mutual funds.
If the CSA decide to mandate one specific form of governance it should be a “corporate style” board with a majority of independent directors.
Mutual fund managers should be required to be registered with the CSA.
Each mutual fund should have a compliance plan which is filed with the CSA. The compliance plan, as well as the manager’s compliance with the plan, should be reviewed periodically.
Laws should be enacted to create a statutory fiduciary duty of the governance body and of the manager in favour of the securityholders of the mutual fund.
Laws should be enacted to ensure that securityholders of all mutual funds have uniformity in treatment on certain issues, including the percentage of securityholders required to call meetings of securityholders, quorum requirements for securityholder meetings and the percentage of votes required to take action at securityholder meetings.
The CSA should encourage the development of a mutual fund investor compensation plan to protect securityholders against any losses that could result from the insolvency or fraud of a mutual fund manager.
The CSA should have sufficient powers to inspect and discipline all actors in the mutual fund complex, including the mutual fund, its manager and, if applicable, its trustee. If current powers in any jurisdiction are not sufficient, laws should be enacted to provide such powers to the CSA.
Each mutual fund complex should be required to disclose its approach to fund governance, including how it has concluded that the independent governance body is independent; and a description of each fund’s compliance plan. Each fund complex should also be required to disclose the guidelines that the manager or the portfolio adviser follows in determining whether and how to vote portfolio securities at shareholders’ meetings of companies held in the portfolios of the mutual funds.
Best practice guidelines relating to Canadian mutual fund governance should be developed from time to time by the CSA in conjunction with the mutual fund industry.
The full report is available on the OSC Web site at www.osc.gov.on.ca.
-IE Staff