Securities Law

BCN 2006/15 - Advance Notice of National Instrument 81-107 Independent Review Committee for Investment Funds [BCN - Lapsed]

Published Date: 2006-07-28
Rescinded Date: 2012-05-30
Related Document(s):

Concurrently Published:

In the attached advance notice, the Canadian Securities Administrators announce the expected implementation of National Instrument 81-107 Independent Review Committee for Investment Funds, its related companion policy (in the form of commentary), and related amendments to other national instruments, effective November 1, 2006.

NI 81-107, if adopted, will require each investment fund that is a reporting issuer to have an independent review committee comprised of at least three individuals who are independent of the investment fund manager. The fund manager will be required to refer all of its conflicts of interest to the independent review committee.

For a “structural conflict,” such as a proposed transaction between a fund and a related party of the fund manager, the independent review committee must approve, before the manager can proceed, the manager’s proposed course of action. With the approval of the independent review committee, the fund manager may proceed with the transaction despite the prohibitions that otherwise apply to inter-fund trades or related party transactions.

For a “business conflict” or “operational conflict,” or any other situation where the manager’s interests conflict with the fund’s interests, the independent review committee must give the manager a recommendation as to whether the manager’s proposed course of action achieves a fair and reasonable result for the fund. The manager may choose whether or not to follow the recommendation but, if it does not, the independent review committee may require the manager to notify the securityholders of the fund.

After publishing a concept proposal in March 2002 that set out a framework for mutual fund governance, the CSA developed NI 81-107 and has published versions of it for comment twice. The attached CSA notice summarizes the comments we received from the most recent publication in May 2005 and provides the CSA’s responses. The notice we published in May 2005 summarized the comments we received from the first publication in January 2004.

Since publishing the concept proposal in March 2002, the Commission has questioned whether it would be effective in regulating conflicts and whether any benefits from the imposition of an independent review committee, particularly on funds that do not have “structural conflicts,” would exceed the costs.

Many commenters who submitted written comments about NI 81-107, as well as the BC-based fund managers the Commission consulted with, told us that these were appropriate concerns.

Other commenters told us that imposing some type of independent oversight over how investment fund managers handle their conflicts of interest was appropriate and necessary. Some investors told us that the requirements in NI 81-107 were the minimum requirements we should impose, though they also expressed concern that these requirements would not go far enough.

The Commission has carefully considered whether it should adopt NI 81-107 and has decided to adopt it, subject to receiving the Minister’s approval.

The Commission decided to do so, despite its concerns and the comments that supported those concerns, for the following reasons:

  • Only a few investment funds are reporting issuers in British Columbia only. All others will have to comply with the rule in other provinces, even if we do not adopt it.
  • The Commission is committed to working with our CSA colleagues on developing the securities passport system founded on highly harmonized securities laws. The benefit of harmonizing this aspect of investment fund regulation outweighs any benefit of taking a different approach that would practically have a very narrow application.
  • The Commission can still avoid imposing inappropriate costs on investment funds that are reporting issuers in BC only by exempting them from complying with NI 81-107.

If the Commission receives the Minister’s approval for NI 81-107, it intends to adopt NI 81-107, its companion policy and related amendments to the following national instruments:

  • NI 81-101 Mutual Fund Prospectus Disclosure
  • NI 81-102 Mutual Funds
  • NI 81-104 Commodity Pools
  • NI 81-106 Investment Fund Continuous Disclosure
  • NI 13-101 System for Electronic Document Analysis and Retrieval (SEDAR)

The Commission also proposes to issue a blanket exemption from NI 81-107 for investment funds that are reporting issuers in British Columbia only. If the Commission receives the Minister’s approval to adopt NI 81-107, we will publish an instrument containing that blanket exemption when we publish notice of adoption for NI 81-107.

If you have questions about NI 81-107, its commentary, or any of the related amendments, you may contact:

Noreen Bent
Manager and Senior Legal Counsel
Corporate Finance, Legal Services
604 899-6741
nbent@bcsc.bc.ca

Christopher Birchall
Senior Securities Analyst
Corporate Finance
604 899-6722
cbirchall@bcsc.bc.ca

July 28, 2006

Douglas M. Hyndman
Chair 

Ref:     CSA Advance Notice of National Instrument 81-107 Independent Review Committee for Investment Funds
National Instrument 81-107 Independent Review Committee for Investment Funds with related Appendix A and B to the Instrument and Appendix A to the Commentary
National Instrument 81-101 Mutual Fund Prospectus Disclosure
National Instrument 81-102 Mutual Funds
National Instrument 81-104 Commodity Pools
National Instrument 81-106 Investment Fund Continuous Disclosure
National Instrument 13-101 System for Electronic Document Analysis and Retrieval
BCN 2002/13
BCN 2004/03
BCN 2005/30
Concept Proposal 81-402 Striking a New Balance: A Framework for Regulating Mutual Funds and their Managers

This Notice may refer to other documents. These documents can be found at the B.C. Securities Commission public website at www.bcsc.bc.ca in the section Securities Law & Policy: Policies & Instruments.