National Instrument 81-107 Independent Review Committee for Investment Funds
Part 1 Definitions and Application

Introduction

This National Instrument (the Instrument) contains both rules and accompanying commentary on those rules. The Canadian Securities Administrators (the CSA or we), have made these rules under authority granted by the securities legislation of their jurisdiction.

The commentary may explain the implications of a rule, offer examples or indicate different ways to comply with a rule. It may expand on a particular subject without being exhaustive. The commentary is not legally binding, but it does reflect the views of the CSA. Commentary always appears in italic type and, outside of this introduction, is titled “Commentary”.



National Instrument 81-107 Independent Review Committee for Investment Funds
Part 1 Definitions and Application
Section 1.1

Investment funds subject to instrument

(1) This Instrument applies to an investment fund that is a reporting issuer.

(2) In Quebec, this Instrument does not apply to a reporting issuer organized under

(a) an Act to establish the Fonds de solidarité des travailleurs du Québec (F.T.Q.) R.S.Q., chapter F-3.2.1;

(b) an Act to establish Fondaction, le Fonds de dévelopement de la Confédération des syndicats nationaux pour la coopération et l’emploi (R.S.Q., chapter F-3.1.2); and

(c) an Act constituting Capital régional et coopératif Desjardins (R.S.Q., chapter C-6.1).

Commentary

1. This Instrument applies to all publicly offered mutual funds and non-redeemable investment funds. Investment funds subject to this Instrument include:

    • labour sponsored or venture capital funds;
    • scholarship plans;
    • mutual funds and closed-end funds listed and posted for trading on a stock exchange or quoted on an over-the-counter market; and
    • investment funds not governed by National Instrument 81-102 Investment Funds (NI 81-102).

2. This Instrument does not regulate mutual funds that are not reporting issuers (commonly referred to as pooled funds), for example, mutual funds that sell securities to the public only under capital raising exemptions in securities legislation.



National Instrument 81-107 Independent Review Committee for Investment Funds
Part 1 Definitions and Application
Section 1.2 Definition of "conflict of interest matter"

conflict of interest matter

In this Instrument, “a conflict of interest matter” means

(a) a situation where a reasonable person would consider a manager, or an entity related to the manager, to have an interest that may conflict with the manager’s ability to act in good faith and in the best interests of the investment fund; or

(b) a conflict of interest or self-dealing provision listed in Appendix A that restricts or prohibits an investment fund, a manager or an entity related to the manager from proceeding with a proposed action.

Commentary

1. Section 5.1 of this Instrument requires that a manager refer all conflict of interest matters to the independent review committee (IRC).

2. The CSA do not consider the ‘reasonable person’ test described in paragraph (a) to capture inconsequential matters. It is expected that, among the factors the manager will look to for guidance to identify conflict of interest matters caught by this Instrument, will be industry best practices. The CSA expect, however, each manager to consider the nature of its investment fund operations when making its decisions about which conflict of interest matters it faces for the funds it manages.

3. The types of conflicts of interest faced by the portfolio manager or portfolio adviser (or sub-adviser) or any other entity related to the manager this Instrument captures relate to the decisions made on behalf of the investment fund that may affect or influence the manager’s ability to make decisions in good faith and in the best interests of the investment fund. This Instrument is not intended to capture the conflicts of interest at the service provider level generally. The CSA expect the manager to consider whether a particular portfolio manager or portfolio adviser or any other ‘entity related to the manager’ would have any conflicts of interest falling within the definition. For example, paragraph (a) might, depending on the circumstances, capture these conflicts of the portfolio manager or portfolio adviser: portfolio management processes for the investment fund, including allocation of investments among a family of investment funds; and trading practices for the investment fund, including negotiating soft dollar arrangements with dealers with whom the adviser places portfolio transactions for the investment fund.

4. The CSA contemplate that an ‘entity related to the manager’ will have its own policies and procedures to address any conflicts of interest in its operations. It is expected the manager will make reasonable inquiries of these policies and procedures. The conflicts of interest facing these entities, including any third party portfolio manager or portfolio adviser, may affect, or be perceived to affect, the manager’s ability to make decisions in the best interests of the investment fund. The manager is expected to refer such conflicts to the IRC under this Instrument.

5. For greater certainty, paragraph (b) requires that a ‘conflict of interest matter’ includes any course of action that the investment fund, the manager or an entity related to the manager would otherwise be restricted or prohibited from proceeding with because of a conflict of interest or self-dealing prohibition in securities legislation. These include the types of transactions described under subsection 5.2(1) of this Instrument.



National Instrument 81-107 Independent Review Committee for Investment Funds
Part 1 Definitions and Application
Section 1.3 Definition of "entity related to the manager"

entity related to the manager

In this Instrument, “entity related to the manager” means

(a) a person or company that can direct or materially affect the direction of the management and policies of the manager or the investment fund, other than as a member of the independent review committee; or

(b) an associate, affiliate, partner, director, officer or subsidiary of the manager or of a person or company referred to in paragraph (a).

Commentary

1. The CSA consider an ‘entity related to the manager’ in paragraph (a) to include:

the portfolio manager or portfolio adviser (or sub-adviser) of the investment fund, including any third party portfolio manager or portfolio adviser;

the administrator of a scholarship plan; and

any person or company that can materially direct or affect the manager’s management or policies, including through contractual agreements or ownership of voting securities.



National Instrument 81-107 Independent Review Committee for Investment Funds
Part 1 Definitions and Application
Section 1.4 Definition of "independent"

independent

(1) In this Instrument, a member of the independent review committee is “independent” if the member has no material relationship with the manager, the investment fund, or an entity related to the manager.

(2) For the purposes of subsection (1), a material relationship means a relationship which could reasonably be perceived to interfere with the member’s judgment regarding a conflict of interest matter.

Commentary

1. Under subsection 3.7(3), all members of the IRC must be independent of the manager, the investment fund and entities related to the manager. The CSA believe that all members must be independent because the principal function of the IRC is to review activities and transactions that involve inherent conflicts of interest between an investment fund and its manager. Given this role, it is important that the members of the IRC are free from conflicting loyalties.

2. While the members of the IRC should not themselves be subject to inherent conflicts or divided loyalties, the CSA recognize that there may be inherent conflicts relating to inter-fund issues where a single IRC acts for a family of investment funds. In those cases, this Instrument requires members to conduct themselves in accordance with their written charter and in accordance with the standard of care set out in this Instrument. The CSA do not consider the IRC’s ability to set its own reasonable compensation to be a material relationship with the manager or investment fund under subsection 1.4(1).

3. A material relationship referred to in subsection 1.4(1) may include an ownership, commercial, charitable, industrial, banking, consulting, legal, accounting or familial relationship. The CSA expect managers and IRC members to consider both past and current relationships when determining whether a material relationship exists.

For example, depending on the circumstances, the following individuals may be independent under section 1.4:

  • an independent member of an existing advisory board or IRC of an investment fund;
  • an independent member or former independent member of the board of directors, or of a special committee of the board of directors, of an investment fund;
  • a former independent member of the board of directors, or special committee of the board of directors, of the manager;
  • an individual appointed as a trustee for an investment fund; and
  • an independent member of the board of directors, or of a special committee of the board of directors, of a registered trust company that acts as trustee for an investment fund.

By way of further example, the CSA consider it unlikely that the following individuals would be independent under section 1.4:

  • a person who is or has recently been an employee or executive officer of the manager or investment fund; and
  • a person whose immediate family member is or has recently been an executive officer of the manager or investment fund.

The CSA also consider that it would be rare that a member of the board of directors, or special committee of the board of directors, of a manager could be ‘independent’ within the meaning of this Instrument. One such example of when a member of the board of directors of a manager could be ‘independent’ may be “owner-operated” investment funds, sold exclusively to defined groups of investors, such as members of a trade or professional association or co-operative organization, who directly or indirectly, own the manager. In the case of these investment funds, the CSA view the interests of the independent members of the board of directors of the manager and investors as aligned.



National Instrument 81-107 Independent Review Committee for Investment Funds
Part 1 Definitions and Application
Section 1.5 Definition of "inter-fund self-dealing investment prohibitions"

inter-fund self-dealing investment prohibitions

In this Instrument, “inter-fund self-dealing investment prohibitions” means the provisions listed in Appendix B that prohibit

(a) a portfolio manager from knowingly causing any investment portfolio managed by it to purchase or sell, or

(b) an investment fund from purchasing or selling, the securities of an issuer from or to the account of a responsible person, an associate of a responsible person or the portfolio manager.



National Instrument 81-107 Independent Review Committee for Investment Funds
Part 1 Definitions and Application
Section 1.6 Definition of "manager"

manager

In this Instrument, “manager” means a person or company that directs the business, operations and affairs of an investment fund.

Commentary

1. The CSA are of the view that the term ‘manager’ should be interpreted broadly. The term “manager” is intended to include a group of members on the board of an investment fund or the general partner of an investment fund organized as a limited partnership, where it acts in the capacity of ‘manager’/decision-maker.

2. The CSA have, in connection with prospectus reviews, on occasion encountered investment funds structured in unusual ways. The CSA may examine an investment fund if it seems that it was structured to avoid the operation of this Instrument.