By James Langton

(November 15 – 17:05 ET) – The prospect of a takeover bid by a fund company for one of its funds’ big holdings raises novel concerns for regulators.

Rumours that AIC Funds might make a play for Mackenzie Financial Corp. raise concerns about conflicts of interest between AIC and the unitholders of AIC funds. AIC holds about 20% of Mackenzie shares in its funds, with another 5% in its own portfolio.

If AIC were to bid for Mackenzie it would obviously try and get it for as low a price as possible, while unitholders of the funds would want the highest price possible for Mackenzie shares. On the face of it the conflict of interest is obvious — the funds could vote their shares in favour of an inferior deal with AIC.

Rebecca Cowdery, manager investment funds at the Ontario Securities Commission, refuses to comment specifically on the Mackenzie situation, noting that it would be inappropriate with the company in play.

But in a hypothetical situation where a fund manager tables a takeover bid for a firm its funds own a large chunk of, she concedes there are obvious conflicts of interest. If this sort of situation does arise, Cowdery says, “Fund managers are obliged by law to make decisions regarding the portfolio securities held by a fund in the best interests of unitholders of that fund, and the fund manager must be able to satisfy the unitholders and the regulators that it has met those obligations in its decision making.”

How the manager satisfies these obligations is an open question. Bill Riedl, president of Fairvest Securities Corp. (now known as E*TRADE Institutional (Canada) Corp.), says the trustees of the funds should obtain a fairness opinion from an independent advisor reporting to them and acting for the unitholders.

There are numerous other conflicts to consider, too. A fund company could table a disingenuous bid to goose a higher bid out a rival, thereby boosting the value of the target company held by its funds.

Similarly, a situation could arise where a competing bid from a manager trumps an earlier bid, but the deal later falls through and the target company’s shareholders are left with nothing, leaving the manager to face the wrath of both shareholders and its own unitholders. The situation gets exponentially more complex if the shares of the manager are publicly traded, too.

Cowdery suggests that this is the sort of nebulous situation that will be better defined under a planned fund governance regime. “Presently there is no one right way to ensure that fund managers meet those obligations — however, the Canadian Securities Administrators have placed a high priority on our project to introduce a independent governance mechanism into the regulatory regime for mutual funds and their managers.”