The new mutual fund governance rule known as National Instrument 81-107 was unveiled by the Canadian Securities Admin-istrators with much fanfare at the end of July as a great step forward in investor protection.

The rule requires the managers of all investment funds that are reporting issuers to establish independent review committees to oversee the management and monitoring of fund manager conflicts of interest. David Wilson, chairman of the Ontario Securities Commission, in a stretch of hyperbole, heralded the IRCs as the voice of the retail investor.

The IRCs are a far cry from these voices and offer little protection to them. Indeed, anyone who thinks the new rule has anything to do with investor protection is more than likely a mark for the sellers of the Brooklyn Bridge.

Instead, the rule entrenches the acceptability of long prohibited self-dealing conduct provided that it is blessed by an IRC.

The most blatant examples of self-dealing include a fund manager causing investment fund assets to be invested in debt, equity and derivative securities of related parties or in underwritings of securities brought to market by related parties within the first 60 days of the offering of the securities. Another example relates to inter-fund transfers, a practice in which a fund manager transfers securities owned by one of its managed funds to another of its managed funds.

The new fund governance rule is a victory for the banking industry, which has been seeking the repeal of or exemptive relief from the self-dealing prohibitions ever since the federal government introduced the measures in the 1980s that led to the deregulation of the financial services industry.

These measures allowed banks to own investment dealers, trust companies, investment counsellors and portfolio managers, and to offer and distribute proprietary mutual funds.

Allowing financial institutions to be on both the buy side and the sell side of the market created irreconcilable conflicts of interest between the fiduciary duties flowing from their money management activities and the pressures flowing from their underwriting and sales activities to place securities in managed accounts.

It is interesting that in the U.S., some financial groups are divesting themselves of their money-management activities in recognition of these conflicts and the intolerance of the regulators and law enforcement officers to condone them.

The new rule also represents a dual victory for the regulators. It relieves them from having to deal with applications for exemptive relief from the self-dealing prohibitions. These applications are usually accompanied by a dazzling array of selected data that make it appear in the first instance that investors are suffering because of these prohibitions.

This, of course, makes it difficult for regulators, who lack the expertise to go behind or look beyond these numbers, to “just say no”.

And 81-107 also enables regulators to answer in the affirmative global questionnaires circulated by multilateral agencies such as the Organization for Economic Co-operation and Development and the International Organization of Securities Commissions that seek to establish whether Canada has any independence requirements respecting the organization and operation of investment funds. Canada’s shortcomings in this respect and other fund governance matters have long been a black eye for Canadian regulators.

Various reports, dating as far back as 1969, have stressed the need for independence and other governance standards respecting the organization and operation of investment funds.

Canadian regulators have toyed with and given lip service to the recommendations for years.

It’s disappointing that the resulting rule, 81-107, which has been promulgated in the name of balancing investor protection with industry interests, does so at the substantial expense of investors who have to pay the costs of allowing their fund managers to engage in related party and self-dealing transactions.

What is at stake is the ability of individual investors to provide for their financial well-being through access to professional money management.

What has no place here is the setting off investor protection in favour of industry interests and market efficiency. IE