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VIEWS: 7 PAGES: 42

									Lawyers · Patent and Trade-mark Agents




                                                What’s Coming:
                                         Investment Fund and Manager
                                                 Regulation

                                                   Kathryn E. Ash
                                                 Rebecca A. Cowdery
                                              Borden Ladner Gervais LLP
                                                   March 28, 2007

                                                                 Lawyers • Patent and Trade-mark Agents
Lawyers · Patent and Trade-mark Agents   Presentation Overview


                                           Where we are
                                           What is upon us
                                           What is coming
                                                And how does all of it affect a money
                                                 management (portfolio manager) firm?




                                                                                         2
    Lawyers · Patent and Trade-mark Agents




          NI 81-107
                                   What is Upon Us




3
Lawyers · Patent and Trade-mark Agents   Application and Timing


                                            All managers of publicly offered
                                             investment funds must:
                                                Establish an IRC by May 1, 2007
                                                Achieve compliance by November 1, 2007
                                                     Get IRC operational, including Charter
                                                     Identify conflicts and how they are managed
                                                     Write policies and procedures
                                                     Take conflicts and policies to IRC before deadline
                                                      and get standing instructions
                                                     Take “no action” on any conflicts not taken to IRC
                                                      after November 1, 2007

                                                                                                           4
Lawyers · Patent and Trade-mark Agents   The Rule (in a nut-shell)


                                            Mandatory independent oversight over how
                                             a fund manager manages conflicts of
                                             interest vis a vis its investment funds that
                                             are reporting issuers
                                                 Central concepts: IRC independence and
                                                  conflicts of interest
                                                 Mandatory detailed requirements:
                                                      Structuring and operating the IRC
                                                      Actions of fund manager re conflicts
                                                      Decision-making by IRC
                                                      Reporting and disclosure
                                                 With some additional flexibility from today’s
                                                  restrictions/prohibitions

                                                                                                  5
Lawyers · Patent and Trade-mark Agents   The Rationale


                                            Fund managers have fiduciary
                                             responsibilities and good business reasons
                                             to operate investment funds honestly, in
                                             good faith, in best interests of funds and
                                             with care and diligence
                                            NI 81-107 designed to reinforce those
                                             responsibilities and good business
                                             practices, but imposes independent
                                             oversight in areas where fund manager may
                                             not be objective in making decisions about
                                             funds

                                                                                          6
Lawyers · Patent and Trade-mark Agents   The Rationale


                                            Due to large public participation in funds,
                                             particularly mutual funds, reluctance to
                                             continue to rely on combination of fiduciary
                                             responsibilities, disclosure, prohibitions,
                                             prescriptive regulation to regulate conflicts
                                            Independent oversight central concept for
                                             regulatory initiative, although recognition
                                             that independent oversight generally brings
                                             more value (arguably more necessary) in
                                             areas of conflicts of interest


                                                                                             7
Lawyers · Patent and Trade-mark Agents   The Basics - IRC


                                            At least three members: each member must
                                             be independent
                                            Term of office: between one and three years
                                            Four primary functions:
                                                 review all conflict of interest matters referred to it and
                                                  recommend whether the action proposed will achieve
                                                  a fair and reasonable result for the funds
                                                 review written policies and procedures dealing with
                                                  conflict of interest matters
                                                 decide whether a fund can make certain investments
                                                  that are currently prohibited under securities
                                                  legislation and
                                                 approve mergers and changes in auditor (mutual
                                                  funds)
                                                                                                               8
Lawyers · Patent and Trade-mark Agents   IRC Compensation


                                           Manager sets the initial compensation and
                                            expenses of the IRC
                                           IRC expenses, together with all of the other
                                            reasonable costs and expenses that are
                                            incurred in order to comply with 81-107, are
                                            initially charged to the investment funds
                                           Manager may reimburse, with disclosure
                                           Manager expected to allocate costs on an
                                            equitable and reasonable basis among the
                                            investment funds for which the IRC acts


                                                                                           9
Lawyers · Patent and Trade-mark Agents   The Basics - Fund Manager


                                           Self-identify “conflict of interest matters”
                                           Decide how to manage “conflict of interest
                                            matters”
                                           Write policies and procedures describing
                                            how conflicts managed
                                           Refer conflict of interest matters to IRC
                                           Consider recommendations/follow
                                            conditions to IRC approvals
                                           Regular reports to IRC


                                                                                           10
Lawyers · Patent and Trade-mark Agents   Self-Identify Conflicts


                                            Conflicts #1 and #2 [recommendations]:
                                                 Reasonable person would consider
                                                      Manager
                                                     Entity related to the Manager
                                                 Has an interest that
                                                 May conflict with manager’s
                                                 Ability to act in good faith and in the best interests of
                                                  the investment fund
                                            Conflicts #3 [approvals]
                                                 Inter-fund trading
                                                 Investing in securities issued by related parties
                                                 Investing in securities underwritten by related parties


                                                                                                              11
Lawyers · Patent and Trade-mark Agents   “Entity related to the manager”


                                            Person or company that can direct or
                                             materially affect the direction of
                                             management and policies of the
                                                   Manager or
                                                   investment fund
                                            Associates, affiliates, partners,
                                             directors, officers or subsidiaries of
                                                   The manager or
                                                   Persons referred to above



                                                                                      12
Lawyers · Patent and Trade-mark Agents   “Entity Related to the Manager”


                                            Specifically includes sub-advisers to
                                             investment funds, including unrelated
                                             entities
                                            Means that fund managers will
                                             reinforce their prudent oversight over
                                             sub-advisers to funds by asking
                                             about conflicts of interest at sub-
                                             adviser level


                                                                                      13
Lawyers · Patent and Trade-mark Agents   Monitoring of Subadvisers – NI 81-107


                                            Fund managers must monitor services
                                             provided by sub-advisers (part of fiduciary
                                             obligations and reinforced by regulators as
                                             best practices)
                                            NI 81-107 requires fund managers to ask
                                             about conflicts, so fund managers will add
                                             to their oversight regime
                                              1.   Ask about conflicts, how they are managed and at
                                                   least a summary of written policies and procedures
                                              2.   Consider whether those conflicts = conflicts at fund
                                                   manager level
                                              3.   Monitor conflicts at level of sub-adviser, including
                                                   asking for compliance certificates relating to conflicts

                                                                                                              14
Lawyers · Patent and Trade-mark Agents   Conflicts Compliance by Fund
                                         Managers

                                           Identify related entities
                                           Does manager/related entity have an
                                            interest in any particular matter that is
                                            different, opposed, not aligned with best
                                            interests of the fund
                                           Perception of conflict enough
                                           Would someone consider that there is a
                                            reasonable likelihood that the fund manager
                                            could favour its own interests (or the
                                            interests of related entity) over those of the
                                            funds? Can the fund manager be objective
                                            in making decisions?

                                                                                             15
Lawyers · Patent and Trade-mark Agents   Conflicts Compliance by Fund
                                         Managers

                                           Write policy and procedure and obtain IRC
                                            input into policy
                                           Refer to IRC for recommendations
                                                Describe situation
                                                Explain why situation is a “conflict of interest matter”
                                                Explain fund manager’s proposed actions and identify
                                                 how that action will meet fund manager’s fiduciary
                                                 responsibilities
                                                Illustrate how proposed action “achieves a fair and
                                                 reasonable result” for the fund
                                                Explain monitoring of how related entities manage the
                                                 conflicts or ensure that fund manager makes
                                                 appropriate decisions in light of that conflict (if
                                                 applicable)
                                                                                                            16
Lawyers · Patent and Trade-mark Agents   Conflicts compliance by Fund Managers


                                           Consider IRC recommendations in making
                                            decisions and seek standing instructions,
                                            where appropriate
                                           Consider when IRC “approval” needed and
                                            note precise matters to be decided by IRC
                                                Free from influence by a related entity and without
                                                 taking into account any consideration relevant to that
                                                 related entity
                                                Represent the business judgment of the manager
                                                 uninfluenced by considerations other than best
                                                 interests of fund
                                                In compliance with manager’s policies and
                                                 procedures
                                                Achieves a fair and reasonable result for the fund
                                                                                                          17
Lawyers · Patent and Trade-mark Agents   Annual Assessment


                                           IRC to review:
                                               Policies and procedures and standing
                                                instructions
                                               Independence of members
                                               Compensation of members
                                               Effectiveness as a committee and
                                                contribution by members
                                           Focus on both substantive and
                                            procedural aspects of the IRC’s
                                            operations

                                                                                       18
Lawyers · Patent and Trade-mark Agents   Report on Standing Instructions


                                            At IRC’s regular assessment,
                                             manager must provide written report
                                             describing each instance that it acted
                                             in reliance on a standing instruction




                                                                                      19
Lawyers · Patent and Trade-mark Agents   IRC Report to Manager


                                           IRC to report to manager “as soon as
                                            practicable” after annual assessment
                                            with written report of the results of
                                                  the conflicts assessment
                                                  independence/ compensation assessment
                                           Report to include:
                                                  Description of any breach of policies and
                                                   procedures
                                                  Description of any breach of conditions imposed
                                                   by IRC in a recommendation / approval
                                                  Recommendation for any changes to manager’s
                                                   policies and procedures

                                                                                                     20
Lawyers · Patent and Trade-mark Agents   IRC Report on Breach to Regulators


                                            IRC must report to securities
                                             regulators [principal regulator] “as
                                             soon as practicable” of any instance
                                             where:
                                                     Manager did not meet a condition imposed by the
                                                      IRC in its approval (including any conditions in a
                                                      standing instruction)
                                                     Manager did not comply with conditions imposed
                                                      by securities legislation
                                                Report to include the steps the manager
                                                 proposes to take (or has taken) to remedy
                                                 the breach

                                                                                                           21
Lawyers · Patent and Trade-mark Agents   Annual IRC Report to Investors


                                            Annual report describes IRC and its
                                             activities for the financial year
                                                 Name of each IRC member as at date of report with
                                                        Length of service on IRC
                                                        Name of any other fund family for which member serves
                                                         on IRC
                                                        Description of relationship that may cause reasonable
                                                         person to question member’s independence and basis
                                                         upon which IRC determined member is independent
                                                 % of securities by class/series owned by IRC
                                                  members in aggregate of:
                                                        each fund if total exceeds 10%
                                                        manager
                                                        any person or company providing services to fund or
                                                         manager


                                                                                                                 22
Lawyers · Patent and Trade-mark Agents   Annual IRC Report to Investors


                                                Name of Chair
                                                Changes in composition or membership
                                                Aggregate compensation and any indemnities
                                                Description of process / criteria used to determine
                                                 level of compensation and any instances where IRC
                                                 not follow manager’s recommendations re
                                                 compensation or expenses
                                                Description of where manager acted contrary to IRC
                                                 recommendation
                                                Description of each instance where manager failed to
                                                 meet condition imposed by IRC in its approval /
                                                 recommendation
                                                Summary of recommendations /
                                                 approvals manager relied upon
                                                                                                        23
Lawyers · Patent and Trade-mark Agents   Annual IRC Report to Investors


                                            Prepare no later than date fund files its
                                             annual financial statements (i.e. 90 days
                                             after year end)
                                            Send to investors as soon as practicable
                                             upon request and at no charge
                                            Prominently display on manager’s website
                                             for entire year (until new report)
                                            File with securities regulators via SEDAR as
                                             continuous disclosure document
                                            Deliver copy to manager

                                                                                            24
Lawyers · Patent and Trade-mark Agents   Annual IRC Report to Investors


                                            First report must be sent 120 days
                                             after fund’s year end (thereafter 90
                                             days)
                                            Applies to year ends after fund
                                             complies with NI 81-107
                                            This means first report (RBC Funds)
                                             is available now
                                            Others by May 1, 2008


                                                                                    25
Lawyers · Patent and Trade-mark Agents   Dispute Reporting by Manager


                                           If manager proceeds contrary to IRC
                                            recommendation
                                                Provide IRC with advance written notification
                                                Notify investors of manager’s decision, if IRC
                                                 insists
                                                Mandated notice must be sent to each
                                                 investor at least 30 days before effective
                                                 date of proposed action
                                                File investor notice with CSA via SEDAR at
                                                 time of mailing to investors

                                                                                                  26
Lawyers · Patent and Trade-mark Agents   Termination of IRC Members


                                           Manager must report to principal
                                            regulator if IRC member:
                                                  Resigns
                                                  Term of office expires and not reappointed
                                                  Majority of IRC vote to remove
                                                  Majority of investors vote to remove at special
                                                   meeting
                                           File as soon as practicable and
                                            disclose date of and reason for
                                            termination

                                                                                                     27
Lawyers · Patent and Trade-mark Agents   MRFP Disclosure


                                           “Recent Developments”
                                                Changes to composition of IRC
                                           “Related Party Transactions”
                                                Whether fund has relied on IRC approval
                                                 /recommendations to proceed with
                                                 transaction
                                                Details of any conditions / parameters
                                                 surrounding transaction imposed by IRC



                                                                                           28
Lawyers · Patent and Trade-mark Agents   What is coming?


                                           Registration Reform [comment period
                                            ends June 20]
                                           New long-form prospectus rules and
                                            rules applicable to “investment
                                            funds” [comment period ends March
                                            30]




                                                                                  29
Lawyers · Patent and Trade-mark Agents   Proposed Rule 31-103


                                           Will affect:
                                                Dealers, advisers and “managers” – “In the
                                                 business of managing investment funds”




                                                                                              30
Lawyers · Patent and Trade-mark Agents   Individual categories of registration


                                            Representative (for advisers and
                                             dealers)
                                            Ultimate designated person (for
                                             advisers, dealers and managers)
                                            Chief compliance officer (advisers,
                                             dealers and managers)
                                            Different proficiency for advisers’ and
                                             dealers’ CCOs than fund managers’


                                                                                       31
Lawyers · Patent and Trade-mark Agents   Compliance and Supervision


                                           Applies to all registrants
                                           Establish a system of controls and
                                            supervision documented in the form
                                            of written policies and procedures
                                           Principles-based rules for effective
                                            compliance and supervision systems
                                           Include complaint handling and
                                            conflict of interest management


                                                                                   32
Lawyers · Patent and Trade-mark Agents   Relationship Disclosure Document


                                           Prescribed disclosure documenting the
                                            registrants (advisers and dealers)
                                            relationship with retail clients (non-
                                            accredited investors)
                                           RDD must
                                                Be written in plain language
                                                Articulate the features of the registrant-client
                                                 relationship
                                                Respond to 12 disclosure points, including description
                                                 of conflicts of interest, disclosure of client service fees
                                                 and charges and description of registrant’s
                                                 compensation

                                                                                                               33
Lawyers · Patent and Trade-mark Agents   New capital requirements (advisers,
                                         dealers and managers)

                                           New minimum capital requirements, which
                                            will be an increase in minimum capital
                                            requirements for most non-SRO registrants
                                           New financial records and reporting
                                            requirements (New Form 31-103F1
                                            Calculation of Excess Working Capital)




                                                                                        34
Lawyers · Patent and Trade-mark Agents   New insurance requirements (advisers,
                                         dealers and managers)

                                           Modernized insurance requirements for non-
                                            SRO registrants, with a formula for
                                            calculating insurance limits, rather than a
                                            flat rate
                                           New guidelines for account opening and
                                            know-your-client information, record-
                                            keeping, client assets, account activity
                                            reporting




                                                                                          35
Lawyers · Patent and Trade-mark Agents   New Information sharing requirements


                                           On request a registered firm must disclose
                                            information about a former registered individual to
                                            another registrant that is considering hiring the
                                            individual that is relevant to an assessment of
                                            whether the individual is suitable for registration or
                                            material to the hiring
                                           This is a new requirement in all CSA jurisdictions.
                                            The CSA views this requirement as important
                                            because sponsoring firms have an obligation to
                                            conduct due diligence before hiring individuals who
                                            will be conducting activities requiring registration
                                           Employment Law issues? Privacy concerns?
                                               Defamation?

                                                                                                     36
Lawyers · Patent and Trade-mark Agents   Referral Arrangements


                                          Registrants wishing to enter into referral
                                           arrangements will be required to:
                                             provide specified written disclosure of the referral
                                              arrangements
                                             establish clear lines of authority for compliance with
                                              securities regulation
                                             enter into written agreements clarifying the roles and
                                              responsibilities of referring party and referral recipient




                                                                                                           37
Lawyers · Patent and Trade-mark Agents   Investment Fund Manager Registration


                                           UDP and CCO registration
                                           Supervision and compliance
                                           Appointment of Auditor
                                           Financial Reporting (quarterly and
                                            annually)
                                           Capital and insurance
                                           Initial registration requirements
                                            (significantly enhanced)
                                           Conduct requirements

                                                                                 38
Lawyers · Patent and Trade-mark Agents   New Prospectus Form (NI 41-101)


                                           Does it fit for all investment funds
                                            (non-mutual funds)?
                                           Based on NI 81-101 SP and AIF




                                                                                   39
Lawyers · Patent and Trade-mark Agents   New Custodial requirements (NI 41-101)


                                            Based on NI 81-102
                                            Do they fit? Make sense?




                                                                                  40
Lawyers · Patent and Trade-mark Agents   What’s next?


                                           Point of sale disclosure?




                                                                        41
Lawyers · Patent and Trade-mark Agents   Thank you and Questions


                                          Kathryn E. Ash
                                          416-367-6746
                                          kash@blgcanada.com

                                          Rebecca A. Cowdery
                                          416-367-6340
                                          rcowdery@blgcanada.com


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