Is Your IRC Up-To-Date?
Almost twenty years after the establishment of IRCs, CSA Staff have published a Notice[i] setting out their findings from reviews of the disclosure documents of 24 investment fund managers (IFMs) regarding their respective IRCs. The Notice encompasses Staff’s findings, views and guidance on a broad range of topics and some deficiencies which are expected not to be tolerated in the future. Several key points are discussed below.
IRC Mandates
In response to instances where IRCs have taken the position that their mandates include the responsibility to identify conflicts of interest and perceived conflicts of interest, Staff have clarified that this responsibility rests solely with the IFMs, while at the same time encouraging IFMs to “take a broad view of what constitutes a “conflict of interest matter” and err on the side of caution” in determining a matter that must be referred to the IRC for approval or recommendation. It is noteworthy that while IFMs can establish IRCs mandates broader than that required by NI 81-107, none of the IFMs subject to the review had done so.
IRCs Contact the CSA Too Frequently
While IRCs are entitled to contact regulators about any matter concerning their funds, it appears that this is occurring with some frequency as Staff have stated this ability does not extend to “inconsequential matters”, whatever they may be. The message is clear, deal with the IFM on these matters or seek external guidance to get resolution prior to contacting CSA Staff.
Six Year Term Limit Often Exceeded
NI 81-107 provides that a member of an IRC may not serve more than 6 years absent the approval of the IFM. As term limits are generally seen as positive in terms of enhancing effectiveness and independence among other things, Staff noted instances where members have served in excess of 14 years. Given the number of individuals with the required skills and experience who would accept a position on an IRC, IFMs should be wary of providing a term extension without a documented and sound reason for doing so.
IRC Diversity, Training and Recruitment
NI 81-107 recommends that IRC members possess a variety of skills and competencies. Not surprisingly Staff indicated that IRCs should consider diversity beyond skill sets to ensure a wide range of viewpoints are considered in their deliberations regarding conflicts of interest. Given the large number of highly qualified individuals who would be more than pleased to serve on an IRC increasing diversity should not be difficult.
Equally important, IRC members must be provided sufficient training and exposure to their IFM’s operations to have the knowledge to comprehensively understand the conflicts of interest they are to consider.
While the Notice encourages IRCs to lead the recruitment process to select new members and not be overly reliant on the IFM’s candidate suggestions, it is important to remember that NI 81-107 specifically requires IRCs to consider the IFM’s recommendations, if any, when filling a vacancy.
IRCs must at a minimum have three members. While IFMs can determine the appropriate size of their IRCs in order to ensure the skills and experience needed to address the complexity and scope of the matters brought to the IRC for consideration, the minimum of three is seen as generally sufficient.
Deficient Compensation Disclosure and Ranges
Staff has taken the view that despite there being no requirement in Section 4.4 of NI 81-107 to specify the means of allocating IRC compensation across relevant funds, phrases such as “on a fair and reasonable basis” “equitable” or even” pro-rata” absent description of its application (e.g. based on each fund’s AUM), is insufficient. Staff expects that IFMs will provide sufficient detail such that securityholders can comprehend the method by which IRC compensation is allocated to the funds they own.
An IRC’s compensation is initially set by the IFM and thereafter compensation is determined by the IRC itself. IRC Reports to Securityholders need to specify the basis on which compensation is determined. The basis as to the amounts of IRC compensation is determined in not mandated in NI 81-107. Not surprisingly, Staff found a wide range of compensation, especially for IFMs with over 100 billion in AUM ($60,000 to $246,250 in aggregate). One can expect that those on the low end of the range will be pushing for more in the future.
What is Needed
With the Notice CSA Staff have made it clear that IRCs need to assess their current practices and policies which we suspect in many cases have not been reviewed since being established many years ago.
Let us Guide your IRC to Excellence
At North Star, we combine deep industry knowledge with practical experience to ensure your IRC processes reflect the CSA’s expectations and conforms to industry norms.
Ready to Elevate Your IRC Processes
Connect with Kanchan Mehta today at info@northstarcompliance.com and take the first step towards transforming your compliance strategy.