Fund Governance Advances in Canada
October 23, 2000
TORONTO - Currently, there is no standardized fund regulation in Canada and many fund complexes are structured as trusts, overseen by trustees, who use an advisory regulatory model. The advisory board offers guidance but has no decision-making authority over the fund complex. Altamira and Royal Mutual Funds currently use this model.
A panel of regulators and industry representatives discussed the issue of fund governance at the annual conference of the Investment Funds Institute of Canada in Toronto last month.
A task force of the Ontario Securities Commission is developing a method for putting into effect recommendations to standardize fund governance in Canada, said Rebecca Cowdery, manager for investment funds at the commission. Cowdery heads the task force.The recommendations the group hopes to put into effect are from the Erlichman report, prepared for the Canadian Securities Association in the summer. The group hopes to have its work completed by early 2001, said Cowdery. The Ontario Securities Commission is working on the issue with securities commissions across Canada.
Some of the problems holding up the process include liability issues of board members and what authority directors will be given, said Cowdery. The commission's goal in developing the governance regulations is to protect investors, she said.
"We believe that mutual fund management companies have many masters and our goals say, in essence, that you must honor your investors," she said. "It's our job as regulators...as a preventive measure... to ensure that focus is on the investor."
The average investor is changing, necessitating changes in fund governance, said Meyrick Payne, a senior partner with Management Practice of New York. The industry in most countries has done a good job of meeting the needs of investors with discretionary investments in the mid-to-wealthy category, he said. But, "the new era for mutual funds in whichever country you're talking about, depends upon garnering the assets of lower-income people who actually are putting their savings into mutual funds, not their investments, and the moment you turn from investments to savings, your level of responsibility is markedly higher," he said.
Payne said he favors the corporate form for mutual funds, with independent directors.
"It's worked well in the past, offers enormous potential for the future, and is cost effective," he said.
Steve Erlichman, senior partner with Fasken Martineau DuMoulin LLP of Toronto, made ten recommendations to the Canadian Securities Association:
* Mutual fund complexes should have governing bodies independent of the manager of the mutual funds.
* If the securities association decides to mandate one form of governance, it should be a "corporate style" board, similar to the U.S. model, but not identical.
* Mutual fund managers should be required to be registered with the securities association.
* Mutual funds should file compliance plans with the securities association.
* Laws should be enacted to create a statutory fiduciary duty of the governance body of the manager (similar to the Canadian Securities Act).
* Laws should be enacted to ensure that security holders of all funds are treated uniformly such as in the right to call unit holder votes.
* The securities association should encourage the development of a mutual fund investor compensation plan.
* The association should have the power to inspect and discipline mutual fund complexes.
* Mutual fund complexes should be required to disclose their governance practices and voting practices.
* Best practice guidelines relating to mutual fund governance should be developed.
Erlichman said he favors flexibility in the governance of fund complexes at the outset because it is not clear what system works best.
"The CSA could monitor how those fund complexes under various governance regimes in Canada are working, and then based upon the evidence, decide at some future date a specific governance regime," he said.
Even with the development of a governance system, products will continue to be regulated, said Cowdery.