Independent Review Committee

An Independent Review Committee (IRC) is a special committee that is required to be part of the governance structure of every investment fund that is offered to the public in Canada. IRCs are currently unique to the investment fund business in Canada, as other countries have dealt with the inherent conflicts of interest involved in running public investment funds in different ways. For example, in the United States of America, mutual funds have been required to have independent directors ever since 1935.

In Canada, a securities regulation called National Instrument 81-107 Independent Review Committees for Investment Funds (the Instrument) requires every public investment fund to have a fully independent body, called an Independent Review Committee, whose role is to oversee all decisions involving an actual or perceived conflict of interest faced by the fund manager in the operation of the fund. The Instrument sets out an independent oversight regime for all publicly offered investment funds that is intended to improve investment fund governance in Canada.

The International Organization of Securities Commissions (IOSCO) defines investment fund governance as a framework for the organization and operation of investment funds that seeks to ensure that funds are organized and operated in the interests of fund investors, and not in the interests of fund insiders.

Improving fund governance has been a priority for the Canadian securities regulators for several years. The process began in the 1990s with a debate over the need for independent boards for mutual funds and increased regulatory standards for fund managers. In 1999, the Canadian Securities Administrators (the CSA) retained Stephen Erlichman to provide a summary of the discussion on governance in Canada and abroad and to make specific recommendations to improve fund governance and his report entitled “Making it Mutual: Aligning the Interests of Investors and Managers: Recommendations for a Mutual Fund Governance Regime in Canada” was released in June, 2000.

On March 1, 2002, the CSA released Concept Proposal 81-402 Striking a New Balance: A Framework for Regulating Mutual Funds and their Managers setting out the CSA’s vision for a renewed framework for regulating mutual funds and fund managers based on five pillars: registration of mutual fund managers (now NI 31-103), mutual fund governance, product regulation, disclosure and investor rights and regulatory presence.

After public consultation, the CSA published the Instrument in final form on July 28, 2006^[1] and it came into force in 2007.

An IRC must have at least three members. Every IRC member must be completely independent from the relevant fund(s) and the manager. The IRC must appoint one member as “Chair” of the committee.

The size of the IRC is determined by the manager, with a view to facilitating effective decision-making, and may only be changed by the manager.

The Instrument does not mandate a specific legal structure for the IRC, but the manager is expected to establish an IRC using a structure that is appropriate for the investment funds it manages, having regard to the expected workload of the committee. For example, a manager may establish a separate IRC for each of the investment funds it manages, or establish more than one IRC where each IRC acts for several of its investment funds, or it may establish just one IRC for all of its investment funds.

One committee can act as the IRC for multiple funds that are managed by the same manager and the Instrument states that it does not prevent investment funds from sharing an IRC with investment funds managed by another manager.

New funds are required to have their IRC up and running before the manager can accept purchases in the fund.

Under NI 81-107, the main role of the IRC is to review conflicts of interest that may arise between the fund manager’s own interests and the manager’s duty to manage an investment fund in the best interests of the fund. The Instrument provides, therefore, that the manager must refer all conflict of interest matters, and its proposed course of action on those matters, to the IRC for the IRC’s review or determination.

In respect of certain conflict of interest matters (where the manager is otherwise prohibited from taking action by securities legislation) the IRC must approve the manager’s proposed actions. In respect of all other conflict of interest matters referred to the IRC by the fund manager, the IRC is required to make a recommendation to the manager as to whether, in the opinion of the IRC, the manager’s proposed action achieves a fair and reasonable result for the investment fund.

The IRC is obligated to consider every matter referred to it and provide either a determination (on those matters where the IRC’s approval is required) or its recommendation (on all other conflict of interest matters).

The manager must abide by the decision of the IRC on those matters that require its approval (subject to a manager’s overriding right to seek “exemptive relief” from its regulator). A manager must consider the recommendation of the IRC in respect of other conflict of interest matters, but may disregard the recommendation of the IRC, after such consideration

In March 2007, the CSA published an FAQ on the Instrument entitled "CSA Staff Notice FAQs on 81-107: NI - 81-107 - Independent Review Committee for Investment Funds".