Sub-Adviser Conflicts of Interest

This article was originally published in the Investment Funds Practitioner in November 2012.

We recently received an application for relief from subsection 4.1(1) of NI 81-102 to allow mutual funds to invest in a private placement underwritten by an underwriter that is related to the funds’ portfolio sub-adviser. Both the sub-adviser and the underwriter are not related to the funds’ investment fund manager who also acts as the portfolio adviser. As subsection 4.1(1) of NI 81-102 applies only to dealer managers which are defined in NI 81-102 as portfolio advisers, staff’s position is that on a technical reading of subsection 4.1(1) of NI 81-102, the funds’ investments in securities underwritten by an underwriter related to a sub-adviser are not prohibited and exemptive relief is not required.

While staff are of the view that subsection 4.1(1) of NI 81-102 is not triggered, the fact that a sub-adviser and an underwriter are related does raise a conflict of interest pursuant to NI 81-107. Such a conflict of interest is contemplated in item 4 in the commentary to section 1.2 of NI 81-107 and in item 1 in the commentary to section 1.3 of NI 81-107. Staff expect the manager of the funds to refer this conflict of interest matter to the funds’ Independent Review Committee.