Getting Started: Initiating Your IRC

Borden Ladner Gervais LLP


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In the coming weeks, Canadian securities regulators are expected to publish the final version of National Instrument 81-107 Independent Review Committee for Investment Funds, substantially in the form published for comment in May 2005.
Canada Corporate/Commercial Law
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In the coming weeks, Canadian securities regulators are expected to publish the final version of National Instrument 81-107 Independent Review Committee for Investment Funds, substantially in the form published for comment in May 2005. This Practice Bulletin discusses the work that can be done now in anticipation of NI 81-107 becoming effective later this year. Fund managers should use the time before the rule becomes effective to review their businesses and relationships in order to identify possible conflicts of interest. Managers should also develop the IRC’s mandate and charter and ensure that written policies and procedures exist to manage conflicts of interest.

Deciding on a Mandate

You can agree on a broader mandate for your IRC than the minimum conflict of interest oversight mandate required by NI 81-107. For example, an IRC could provide general advice, monitor the administration and management of the funds or act as an audit committee. When considering an expanded mandate, you should be mindful of an IRC’s obligations under NI 81-107, including reporting to the regulators and to securityholders. NI 81-107 will apply to any expanded mandate of an IRC.

Drafting the IRC Charter

NI 81-107 will require that a charter be adopted by the IRC within three months from the date the IRC is appointed. An IRC will be required to consider the manager’s recommendations before adopting its charter. We expect that most fund managers will prepare a draft IRC charter in anticipation of its consideration and eventual adoption by the IRC. If you and your IRC have agreed to a broader mandate than that required by NI 81-107 the charter must describe these additional duties. Where an IRC acts for more than one fund complex, its charter must be separate from the charter of any other fund complex.

The charter must set out the procedures that the IRC will follow when reviewing conflicts of interest or other matters under its mandate, as well as how the IRC is to assess and report to any existing advisory board or board of directors of the fund and the manager. Among other things, the charter should address internal governance of the IRC, the process of appointment and composition of its members, the IRC’s standard of care, orientation and continuing education, conduct of its meetings, reporting to regulators and compensation matters. You may also consider including other applicable matters such as personal trading by members and maintenance of a restricted list, as well as indemnification of IRC members. Amending procedures for the charter should be carefully thought through and clarify that the IRC should not amend its mandate without fund manager approval. It will be important to strike an appropriate balance between detailed provisions versus broad objectives to provide the IRC (and the fund manager) with future flexibility.

Conflicts of Interest

Within six months following the adoption of a fund’s IRC charter, the manager of the fund will be required to begin to refer conflicts of interest matters to the IRC before taking any action in connection with those conflicts of interest. The IRC will consider the conflicts of interest referred to it and recommend what actions the manager should take to achieve a fair and reasonable result for the investment fund. In some cases the IRC will have decision-making authority and the fund manager will be required to adhere to the IRC’s decisions. NI 81-107 expects that a fund manager and the IRC for its funds would initially consider the nature of conflicts of interest raised by the fund manager’s business and from time to time, reconsider those conflicts and how the fund manager manages them. In a future Practice Bulletin in our Series we will discuss approaches that can be taken in identifying conflicts of interest.

Fund Manager Policies and Procedures

For each conflict of interest matter that must be referred to the IRC as required by NI 81-107, a fund manager must establish written policies and procedures to manage that conflict. These policies and procedures must be approved by the IRC within six months following the adoption of the IRC charter. This means that fund managers will not have a lot of time to put these written policies into place.

For those conflicts of interest that are likely determinable in advance, policies and procedures will be more easily established. At a minimum we would expect fund groups to be developing policies and procedures in respect of the following: fee/expense allocation, personal trading by fund manager staff, soft dollars and best execution and allocation of investments. As many of these confict of interest matters will occur on a continuing basis, your policies and procedures with respect to those matters should contemplate the IRC giving you standing instructions to manage those conflicts by following your policies and procedures.

There will be a variety of conflicts of interest for which you will not necessarily have policies and procedures in place today and for some one-off conflict situations, you will not be able to establish procedures in advance. For unanticipated conflicts, some general methodology for assessment will be required.


Managers are required to formulate the programs and materials that will enable members of the IRC to understand the nature and operation of the manager’s business and the business of the funds. As part of the orientation expected by NI 81-107, both a manager and the IRC must be in a position to advise new members of the role of the IRC and the role of each individual member. The CSA have indicated that educational activities could include presentations, seminars or discussion groups conducted not only by personnel of the investment fund or manager but also outside experts, industry groups, representatives of the fund’s service providers and educational organizations and institutions.

Constating Documents

Reviewing the constating documents of your funds will be important in order to determine any necessary changes to ensure that your fund’s IRC can be effectively initiated. For example, does the declaration of trust of a fund contain provisions that provide the IRC with the necessary decisionmaking authority? Are provisions in the declaration of trust broad enough to provide IRC members with the necessary indemnifications? We expect most fund constating documents will require some amendment. In most cases, constating documents permit amendments to be made without notice to unitholders or without meetings where necessary to comply with securities regulatory changes.

What’s Next?

We will be resuming our Countdown to Governance Series in August. Please watch for our Practice Bulletin No. 5 which will cover items that an IRC and a fund manager will need to address at the IRC’s first meeting. 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.

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