Tax inspection

Fund managers should refresh their internal oversight committees that review potential conflicts of interest more frequently — and cast a wide net over those conflicts, regulators say.

In a joint staff notice, the Ontario Securities Commission (OSC) and the Autorité des marchés financiers (AMF) set out the details of a continuous disclosure review that focused on the work of the independent review committees (IRCs) at investment funds operated by a selection of 24 fund managers.

The review found that some IRC members may be overstaying their welcome. Several committees reviewed had members that had been on the job for more than six years.

The regulators called on these groups to rejuvenate their ranks more frequently.

“IRCs are encouraged to strive for ongoing turnover and fresh perspectives on conflicts of interest by limiting IRC terms to a maximum of six years,” the regulators said in their guidance.

To that end, they suggested that IRCs consider adopting term limits for committee chairs in an effort to ensure that IRCs are providing independent feedback to fund managers on potential conflicts.

“Staff are of the view that such independent insights may be challenged or compromised by an extensive IRC term which could be perceived as a lack of independence of the IRC member,” the guidance said.

The regulators also recommended that IRCs seek to improve their diversity, which “may lead to better decision making and good governance,” they said.

As for the work of the IRCs, the regulators called on fund managers to “take a broad view of what constitutes a ‘conflict of interest matter’ and to err on the side of caution to refer an actual or perceived conflict of interest to the IRC.”

While there’s a relatively standard list of conflicts that IRCs are called on to review — such as personal trading, inter-fund trading, and soft-dollar allocations — the regulators stressed that fund managers should be prepared to identify new operational conflicts that arise on an ongoing basis.

“The increasing complexity of investment fund management regulation and operations makes it appropriate for the [fund manager] to have an ongoing and specific focus on the identification of new conflicts of interest and to refer those to the IRC for its recommendation or approval,” the guidance said.

At the same time, the regulators reported that fund managers and IRCs unanimously pushed back on the idea of expanding the role of IRCs beyond reviewing conflicts of interest. They noted that the industry’s view was that expanding the mandate of IRCs would impose added costs without generating benefits for investors.