IRC Reporting Under Section 4.5 of NI 81-107
This article was originally published in the Investment Funds Practitioner in September 2016.
Staff have received inquiries about whether a materiality threshold applies to the reporting requirement on Independent Review Committees (IRCs) pursuant to section 4.5 of National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107).
Section 4.5 of NI 81-107 requires an IRC to provide written notice to the principal regulator when the IRC becomes aware of any instance in which the fund manager acted in certain conflict of interest matters1 but did not comply with a condition imposed by securities legislation or any IRC approval. A similar requirement has also been included in exemptive relief decisions granting relief from the conflict prohibitions to permit, for example, interfund trading involving pooled funds or pooled fund purchases of securities of related issuers. Staff were recently asked whether IRCs who become aware of a breach of this type of condition are still required to notify the fund's principal regulator if the IRC or the fund manager consider the breach to be, in their view, 'inconsequential' or 'immaterial' to the fund or its securityholders.
Staff's view is that a materiality threshold should not be applied to the IRC's reporting requirement under section 4.5 of NI 81-107 or the mirrored requirement in exemptive relief decisions. If an IRC becomes aware of any instance involving a breach of condition imposed by securities legislation or IRC approval concerning conflict of interest matters, it is required to report it to the fund's principal regulator. Staff understand that, in the IRC or the fund manager's view, the consequence of the breach may not be material, but the reporting obligation enables staff to know why the compliance procedures of the fund manager may not have worked and how the fund manager proposes to avoid similar breaches in the future.
Staff expect the letter reporting such instances to come from the Chair of the IRC and to discuss (i) the circumstances and facts leading to the breach of condition, (ii) factors relevant to the IRC's consideration of the matter, (iii) how the breach was remedied, (iv) whether the IRC is satisfied with the fund manager's handling of the matter, and (v) how the fund manager plans to avoid similar instances in the future. Staff also remind IRCs of the requirement in section 4.4(1)(h) of NI 81-107 to disclose such instances in the IRC Report to Securityholders that is prepared annually for investment funds that are reporting issuers.
1The three conflict of interest matters are set out in subsection 5.2(1) of NI 81-102, namely (i) interfund trading (ii) purchases of securities of a related issuer and (iii) investment in securities offerings underwritten by a related party.