With the prospect of National Instrument 81-107 Independent Review Committee for Investment Funds becoming a final rule later this summer, many managers of investment funds have begun to search for candidates for an independent review committee for their funds. In the first Practice Bulletin in our series, BLG’s Countdown to Governance, we discussed important issues for fund managers to consider when setting up an IRC. In this Practice Bulletin, we highlight the ten most common questions we expect a potential IRC candidate will ask you to address. Our Practice Bulletins assume that the final version of NI 81-107 will be substantially the same as the last version published for comment.
1. What are the upcoming issues facing the Canadian investment funds industry over the next 3 to 5 years?
Effective IRC members will want to understand the competitive environment facing investment fund managers and investment funds. Understanding the significant trends, risks and uncertainties facing the industry will assist an IRC member in understanding the role he or she is agreeing to undertake.
2. What unique challenges do you anticipate for you and your funds?
Good governance requires a strong understanding of the relevant business, its strategies and significant risks. Accordingly a potential IRC candidate will likely ask you many questions about your business. How many funds are in your fund family? Are you known for any specific investment strategy or philosophy and, if so, what are the associated risks? Are the funds experiencing any unusual subscriptions, redemptions or performance results? How many related parties might the funds transact with? What changes do you anticipate to your strategic position in the industry? What are the main topics of consideration on your board’s meeting agenda?
3. What skills, competencies and experience do you hope I can bring to your IRC?
NI 81-107 will require fund managers to consider the competencies and skills that an IRC, as a whole, should possess and the competencies and skills of each existing and prospective member of the IRC. Depending on the complexity of the fund operation these may include some or all of the following: financial literacy, industry or relevant business experience, portfolio management knowledge or legal or compliance skills.
4. Who else is being considered for the IRC and what are their skills and competencies?
A strong governance body must work well as a team and have the skills and experience necessary for the tasks at hand. NI 81-107 recognizes this by requiring the IRC, on at least an annual basis, to review its effectiveness as a committee, including a consideration of the competencies and knowledge each member brings to the IRC. A prospective IRC candidate may also be interested in who might be selected as chair of the IRC. An IRC candidate may be more willing to accept an IRC position where a strong independent IRC leader is being considered.
5. What is the strength and depth of management of the fund manager?
NI 81-107 contemplates that the IRC will be reactive to issues presented to them by the fund manager, as opposed to proactively identifying issues for review. Thus the effectiveness of an IRC will in large part depend on the diligence and skill of the fund manager’s staff, especially the senior executives. Prospective IRC candidates may ask you – Do you have a good CEO who works effectively with other senior executives? Do you have a succession plan for senior executives? What is the quality of your human resources and do they seek out staff with good character? Has there been recent turnover in key staff?
6. What is the integrity of the organization and its management?
This is perhaps the most pressing question on a prospective IRC candidate’s mind, whether he or she expresses it or not. The stronger the "culture of compliance" or "tone at the top" as far as compliance is concerned, then the lower the risk (both reputational and financial) to an IRC member. The most attractive fund manager from the perspective of a prospective IRC member will be one that supports a culture of integrity, ethics and compliance and where senior management shows engagement with the values and policies which underlie NI 81-107.
7. How do you identify conflicts of interest in your organization and how do you manage them?
These are critical questions and ones you should be addressing in getting ready for NI 81-107. We can assist you in developing a process for understanding, identifying and managing conflicts of interest and will discuss issues relating to conflicts of interest in later Practice Bulletins in our series.
8. Who is responsible for compliance within the fund manager’s organization? Are there sufficient resources and support given to those who monitor compliance within the organization?
A prospective IRC member will be looking for an answer which shows that compliance is a shared responsibility of all of your staff. He or she will also be looking for clear and delineated reporting and responsibility, especially on the monitoring side. Monitoring effective governance and compliance is increasingly significant. For example, a key component of the SEC’s recent compliance rule (a Canadian version of which is anticipated to be published for comment by the CSA later this year (NI 81-108)) is the annual review required to be undertaken by the chief compliance officer. A prospective IRC member may wish to know that adequate resources and support have been dedicated to internal and external compliance oversight and audit functions. The results of this monitoring should allow for objective opinions to be expressed to your board, and in respect of conflicts, the IRC.
9. What ongoing compliance training do you provide? What orientation will I receive?
Another key component of an effective compliance program is staff training. A prospective IRC member will want to be assured that the importance of good governance is continually reinforced among the staff. NI 81-107 reinforces the importance of training by imposing a positive obligation to provide an orientation program to new IRC members with respect to the nature and operation of the business of both the funds and the manager. The program must educate the IRC member on the role of the IRC and each member of the IRC. The regulators will expect fund managers to provide continuing education for IRC members.
10. In what circumstances will IRC members have personal liability? Will IRC members be indemnified? By whom? And will they be covered under any insurance policy?
Prospective IRC members will likely have questions relating to indemnities and insurance. Is the amount of coverage adequate? What are the exclusions or when won’t an IRC member be covered?
What’s Next? Please watch for our next Practice Bulletin in our Countdown to Governance series – Practice Bulletin No. 3 will discuss indemnities, insurance and compensation for IRC members. Please contact your usual lawyer in BLG’s Investment Management Group if you have any questions about NI 81-107 and the matters outlined in this Practice Bulletin.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.