Five year review committee final report reviewing the Securities Act (Ontario)

PART 5 ENHANCING FUNDAMENTAL INVESTOR RIGHTS

When individuals become investors, they become entitled to certain rights. In this part, we discuss reforms aimed at enhancing investors' rights, including reforms in the area of proxy solicitations, take-over bid regulation and mutual fund governance.

Chapter 17 Shareholder Rights

The CBCA was recently amended to, among other things, facilitate communications among shareholders.374 The Committee examined these amendments to determine whether comparable reforms are necessary under the Act.

17.1 Background

The CBCA and most other Canadian corporate statutes contain provisions relating to shareholder meetings, the process for soliciting proxies from shareholders who are unable to attend meetings, and materials to be provided to shareholders in advance of such meetings. In the case of the CBCA, these provisions were largely based on the Kimber Report, which was concerned that shareholders who are unable to attend meetings in person be able to appoint their own nominees to vote at meetings of shareholders.375 Otherwise, the Kimber Report noted, the 'marked tendency for management to perpetuate itself in office' would not be held in check and shareholders who were unable to attend meetings would not have a voice in the management of the company. The Kimber Report recommended that management provide an information or 'proxy' circular to shareholders which contains sufficient information to enable shareholders to be knowledgeable about the proposals on which they are required to cast a vote.376

Like the CBCA, the Act also requires management of a reporting issuer to send a form of proxy to voting security holders in connection with every shareholder meeting.377 Persons other than management (typically referred to as 'dissidents') may also solicit proxies. The Act further provides that no one (whether management or dissident) shall solicit proxies unless the proxy is accompanied by an information circular.378

The terms 'solicit' and 'solicitation' are broadly defined and include any request for a proxy; any request to execute or not to execute a form of proxy or to revoke a proxy; and 'the sending or delivery of a form of proxy or other communication to a securityholder under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.379 These provisions do not allow communications to and among securityholders if the communications may reasonably result in obtaining a proxy unless certain prescribed information contained in a proxy circular is distributed to securityholders. Consequently, the provisions have effectively prevented shareholder communications in anticipation of a vote, unless a dissident proxy circular has been prepared.

The Act contemplates certain exemptions from the rules relating to proxy solicitation.380 For example, reporting issuers are exempt from having to comply with Part XIX of the Act if the issuer complies with 'substantially similar' laws of the jurisdiction of incorporation.381 The CBCA and the OBCA contain provisions that are similar in many regards to the Act.

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17.2 Recent CBCA Amendments

The recent amendments to the CBCA relax the rules relating to proxy solicitation. The basic rule remains that a person shall not solicit proxies unless that person first prepares, files and delivers a proxy circular in the prescribed form.382 However, now a 'solicitation' does not include:

  1. a public announcement (such as a speech in a public forum or press release) by a shareholder of how the shareholder intends to vote and the reasons for that decision;383 or

  2. a communication, other than a solicitation by management, that is made to shareholders in any circumstances that may be prescribed.384

Among the other CBCA reforms, a dissident shareholder may solicit proxies without preparing and sending a proxy circular to shareholders if the solicitation is, in the prescribed circumstances, conveyed by public broadcast, speech or publication.385 Solicitations conveyed by these means must contain information regarding the identity of the shareholder, its percentage shareholdings and its interests in the matter being solicited.386 Before the advertisement or other form of communication is released, it must be delivered only to the Director under the CBCA and the corporation.387

The amendments to the CBCA are consistent with rules adopted by the SEC in 1992 relating to proxy solicitation. The SEC was concerned that any expression of opinion concerning a public corporation could be viewed as a proxy solicitation. In its view, 'the federal proxy rules [had] created unnecessary regulatory impediments to communication among shareholders and others and to the effective use of shareholder voting rights.388 The SEC specifically highlighted newspaper opinion editorial articles, public speeches and television commentary as communications that could be interpreted as a regulated solicitation.389 The SEC adopted amendments that would eliminate regulatory obstacles that prevented shareholders from exchanging views on management performance and initiatives.

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17.3 The Need for Reform in Ontario

The ability of shareholders to communicate with each other is fundamental. As the Ontario Teachers' Pension Plan stated in its presentation to the Standing Senate Committee on Banking, Trade and Commerce:

Shareholders must be informed. They must conduct continual research on the company. They must review policies, prospects and decisions. When questionable decisions are made, they must indicate their concern ... Shareholders must speak with many people in the market. They must speak with each other to learn whether their views are widely shared or are a minority opinion. They must be able to speak with the company as individuals or as a group. When a problem surfaces, they must be able to discuss their concerns; when a corporate proposal is made that demands opposition, they must be able to act. The Canadian proxy rules ... create substantial barriers to this kind of continued, informal communication among shareholders ... The result is detrimental to shareholders, corporations and the integrity of the process itself.390

The Committee is concerned that the existing proxy solicitation rules in securities legislation are too restrictive in that they may discourage shareholders from communicating with each other. For instance, we note the interpretive difficulties with the definition of 'solicitation,' which includes communications that are 'reasonably calculated to result in the procurement, withholding or revocation of a proxy.391 Further, given that these interpretive difficulties have been eliminated in the CBCA, the fact that these rules continue to exist in the OBCA and the Act causes increased difficulties for shareholders in determining whether they can communicate among themselves. As one commenter noted: 'Now that the CBCA has been amended, the doubts it purports to eliminate will be exacerbated, by comparison, in the Act and the OBCA.392

In the Draft Report we indicated our support for the amendments to the CBCA and recommended that Part XIX of the Act be similarly amended. We recommended that similar amendments be made to the OBCA so that companies incorporated under the OBCA are subject to the same regime as companies incorporated under the CBCA. We also suggested that, if feasible, the Act should incorporate by reference the requirements relating to proxy solicitation from other jurisdictions such as the provincial or federal corporate statutes.

The majority of comments we received on our recommendation supported it, and support facilitating communication among shareholders.393 One commenter disagreed with the recommendation as they felt that proxy solicitation matters are better dealt with by corporate legislation.394 However, communications between an issuer and its shareholders are properly the domain of securities regulators given the importance of disclosure by issuers to the efficient functioning of the capital markets. Further, as the proxy rules are also currently contained in securities legislation, we continue to believe that the rules in both corporate and securities legislation should be identical, both so as to facilitate communication among shareholders and so as to eliminate interpretative difficulties with the current rules in the Act and the OBCA.395

Recommendation:

We support the reforms to the CBCA relating to proxy solicitation. We strongly recommend that Part XIX of the Act be similarly amended to ensure that shareholders are able to communicate with each other in prescribed circumstances without having to file an information circular. We also recommend that the Commission co-ordinate with the provincial government so as to ensure that amendments adopted under the OBCA and the Act are uniform. We further urge the Commission to consider whether it has the authority to incorporate by reference the requirements of another Canadian statute such as the OBCA or CBCA with respect to proxy solicitation, rather than stating the rules explicitly in the Act.


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17.4 Shareholder Communications in the Context of a Take-Over Bid

The Committee also examined rules relating to shareholder communication in the context of a take-over bid. In particular, the Committee considered revisions to the proxy solicitation rules adopted by the SEC in 2000.396 These changes were prompted by an increase in the number of merger and other acquisition transactions involving proxy or consent solicitations. The SEC noted that technological advances have resulted in more and faster communications with securityholders and the markets. Thus, the SEC implemented new rules that would:

  • relax existing restrictions on oral and written communications with securityholders by permitting the dissemination of more information on a timely basis, as long as the written communications are filed on the date of first use;

  • permit more communications before the filing of a registration statement in connection with either a stock tender offer or a stock merger transaction;

  • permit more communications before the filing of a proxy statement (whether or not a business combination transaction is involved); and

  • permit more communications regarding a proposed tender offer without 'commencing' the offer and requiring the filing and dissemination of specified information.397

The Committee encourages the Commission and the other members of the CSA to consider whether the take-over bid laws should be revised in a manner similar to the SEC rules, so as to permit communications with and among shareholders in less restrictive circumstances.

Recommendation:

We recommend that the Commission, together with the CSA, undertake further study to determine whether amendments to securities law to relax the requirements relating to communications with and among shareholders in the context of a take-over bid should be enacted.


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Chapter 18 Take-Over Bid Regulation

Most CSA jurisdictions, including Ontario, have enacted legislation implementing the recommendations of the Zimmerman Committee.398 Consequently, the Committee identified only a few areas of take-over bid regulation which require consideration at this time.

18.1 Arrangements/Take-Over Bids

The Committee considered whether the take-over bid provisions should be extended to transactions that are not structured as bids but that achieve the same result, such as arrangements that are intended to acquire control of a company. The CVMQ published a notice for comment on this subject in 2001.399

Some have argued that when an arrangement may lead to substantive results similar to those of a take-over bid, then parties to the arrangement should be required to comply with rules governing take-over bids. However, we note that arrangements attract a different set of safeguards from those associated with take-over bids. For instance, in the take-over bid context, the bidder deals directly with the target shareholders and rules such as the identical consideration provision prevent the bidder from discriminating among them. If a transaction is structured as an amalgamation or a plan of arrangement, the target company's board negotiates and approves the transaction. Shareholders must approve the arrangement by a two-thirds majority and separate class votes are available in many instances. A plan of arrangement is also subject to court approval, and shareholders of the target company are granted a right of dissent if they believe the offer price does not represent fair value. The two types of transactions need not be regulated in an identical manner. We believe that each transaction, and the legislative means to achieve the transaction, must be fair to all interested parties. We believe that investor protection concerns must be balanced with the public policy objective of retaining a flexible regulatory regime which allows parties the freedom to structure transactions to achieve their business objectives. Further, the Commission can always engage its public interest jurisdiction pursuant to section 127 of the Act where the transaction is abusive.

Recommendation:

Nothing has come to our attention that would support the need to regulate arrangements and take-over bids in an identical fashion. We believe that, as a matter of public policy, parties to commercial transactions should have the freedom to structure transactions to achieve their business purposes as long as these transactions, and the legislation that governs these transactions, are fair to all interested parties.


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18.2 Poison Pills

The most common defensive tactic is the shareholder rights plan, typically referred to as a 'poison pill.' Poison pills are sometimes adopted in the face of a take-over bid, or may be put in place when there is no bid pending. Poison pills are rarely, if ever, triggered. They are a device for negotiation and for extending the time period available to the target's board to seek alternative offers. In the context of a hostile bid, the target and the offeror are unlikely to agree as to when the pill will be terminated and the offer allowed to proceed.

Frequently, Commission hearings are convened in the context of hostile take-over bids so that the Commission can consider whether it is 'time for the pill to go' and thereby permit the bid to proceed. These hearings consume considerable resources and entail significant cost. We note that guidance as to when it is time for a pill to go has been generated through decisions rendered in the context of specific poison pill hearings. In our Draft Report we recommended that the Commission should consider consolidating the experience and guidance which has come out of these hearings by preparing a policy statement outlining the considerations as to when in a take-over bid a poison pill should be terminated.

One commenter on this Recommendation disagreed with us, and felt that such a policy statement is both unnecessary and inappropriate.400 Further, the commenter suggested that the Commission should rethink its 'interv400entionist' approach to rights plans particularly as, in the view of the commenter, it has created an unlevel playing field between Canada and the U.S. and put Canadian companies at a serious disadvantage in comparison with their U.S. counterparts:

One need only compare the situation of a Canadian target of a U.S. consolidator (which target may not be able to rely on structural defences to fend off an unwanted advance for more than a brief period of time because of the interventionist approach of the Canadian securities commissions) and a U.S. target of a Canadian consolidator (which may well be able to rely on its structural defences for an extended period or even indefinitely because of the very different approach to unsolicited bids adopted by the SEC). We believe that this unlevel playing field between Canadian and U.S. companies cannot be justified and is an important factor in the 'hollowing out' of corporate Canada recently commented upon publicly by the Chief Executive Officer of the Royal Bank of Canada.

We note with interest the point made by the commenter concerning the difference in regulatory approach to poison pills between Canada and the U.S. With respect to our recommendation concerning the policy statement, however, we disagree that it would be unnecessary or inappropriate. We recognize that each bid is fact specific, and while there appears to have been a decline recently in the number of poison pill hearings, we believe that an overall policy derived from the guidance in these decisions could be useful in obviating the need for hearings in the future to determine when it is time for the pill to go. This, in turn, should lead to fewer requests for intervention by securities regulators on a case-by-case basis, a result which the commenter favours.

Recommendation:

We recommend that the Commission prepare a policy statement setting out guidance as to the factors to consider in determining when, in the context of take-over bid, a poison pill should be terminated.


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18.3 Break Fees

Break fees are fees which are negotiated between a take-over bid target and a bidder as part of the inducement for the bidder to make an offer to acquire the shares of the target. The fee is paid to the bidder if the board of directors of the target recommends accepting a competing offer. Often, break fees are in the amount of two to four per cent of the value of the target company, thereby adding two to four per cent to the cost of acquisition of the target company by a different, and successful, bidder.

Bidders who negotiate break fees argue that such fees are a necessary inducement for them to make an offer. Opponents of break fees argue they are an unjustified use of the target's asset (being cash) to prefer one bid over another.

Currently the use of break fees as a defensive tactic is not regulated by the Commission. One commenter on the Draft Report felt break fees should be regulated by the Commission:

We believe strongly that an egregious break fee sewn into a take-over bid (or plan of arrangement), violates the public interest in just the same way as a poison pill. The Commission has no issue with striking down shareholder rights agreements that serve to entrench management and, in so doing, allow the shareholders to ultimately decide on the success or failure of a bid. We believe that a break fee can have the same desultory effect on the auction process as a poison pill.401

Alternatively, other people do not believe that the Commission is the proper forum to hear disputes about break fees. It is their view that it should be solely up to the board of directors of the target company to decide if a break fee is an appropriate payment for the company to make in the circumstances.

Break fees are not in and of themselves offensive; it depends upon the purpose for which they are being used. The Commission can, and should, exercise its public interest jurisdiction in appropriate circumstances. Although we are of the view that there may be situations where, based on the facts surrounding the negotiation of a particular break fee, the Commission's public interest jurisdiction may be engaged, we do not believe that every use of break fees should be subject to a single regulatory standard.

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18.4 Partial Bids

A partial bid is a take-over bid made by an offeror to acquire some, but not all, of the outstanding shares of the target corporation. The purpose of the partial bid is to allow the bidder to acquire a substantial enough position in the target so that the bidder may exercise de facto control or significant influence over the target, without incurring the cost of purchasing all the shares in the target which it does not own.

There is no prohibition in Ontario securities law, or the securities legislation of the other provinces and territories in Canada, against partial take-over bids. To the extent a partial bid constitutes a take-over bid for purposes of Part XX of the Act, it must be conducted in accordance with the take-over bid regime set out in Part XX; however, nothing in Part XX requires that any proposed take-over bid made must be for all of the issued and outstanding shares not then owned by the bidder. In this respect, Canadian regulation of take-over bids is similar to the approach in the U.S., where partial bids are also permitted. In contrast, in the U.K. the legislation provides that the Panel on Take-overs and Mergers must approve any partial bid, and if an offer is made that will result in the offeror owning more than 30 per cent of the issued and outstanding shares of the target, then the offer must be conditional on receiving the approval of shareholders holding more than 50 per cent of the target's voting securities not held by the offeror.

There are two schools of thought concerning partial bids. One school of thought tends to view partial bids as coercive. After the completion of the partial bid, there is less liquidity for trading in the shares since there are fewer shares still trading in the public market. Further, it is unlikely that another bidder will make an offer to acquire the remaining shares in the company given the ownership position of the bidder. Finally, in situations where the partial bid results in the offeror owning more than 50 per cent of the shares of the target, the remaining shares will constitute a minority position in the company. For these reasons, critics of partial bids are concerned that shareholders may feel compelled to tender to a partial bid in order to realize at least some premium, and accordingly, they are not able to react to the bid on its merits.402

The other school of thought is that partial bids are not inherently coercive. Shareholders are competent to make their own decisions as to whether to tender to a bid, partial or otherwise. Facilitating change of control transactions, where shareholders are able to influence the outcome of the transaction by deciding whether to tender, or not, is important.

The Commission has had occasion to consider partial bids in the context of certain poison pill hearings. In In the Matter of Ivanhoe III Inc. and Cambridge Shopping Centres Limited,403 the Commission acknowledged that partial bids could be coercive and allowed the poison pill (which Cambridge had put in place in the face of a partial bid), additional time to operate. Two years later, in In the Matter of Chapters Inc. and Trilogy Retail Enterprises L.P.,404 the Commission considered whether a pill put into place by Chapters in the face of a partial bid by Trilogy could stay in place until a subsequent bid for all the outstanding shares, made by a white knight, could be prepared and mailed to shareholders of Chapters. In its decision, the Commission qualified its decision in Ivanhoe noting that, while in that case it had agreed 'in general' with the view that partial bids are coercive, 'Chapters cannot simply rely on Ivanhoe as establishing the principle that partial bids are ipso facto coercive.' In the Chapters situation, the Commission was not persuaded that the bid would result in a less liquid market or less valuable minority interest. The decisions of the Commission in Ivanhoe and in Chapters suggest a willingness on the part of the regulator to continue to allow partial bids, but to deal with allegations of coercion in the context of such bids on a case-by-case basis.

In the Draft Report we invited comment on whether there should be a change in regulatory approach in Ontario to partial take-over bids, and if so, what the new regulatory response should be. Two commenters responded.405 One acknowledged that shareholders of a target company may have to consider different factors when determining whether to tender to a partial bid than when determining whether to tender a bid for all the shares of a company.406 The commenter did not feel there is currently any overriding public interest in favour of protection of shareholders of a target company which would necessitate a change in the present regulatory structure concerning take-over bids. The commenter suggested the CSA should undertake an informed study of the matter. The other commenter did not support additional regulation of partial bids as a general matter.

We have not found any need for legislative change in this area, and accordingly have no recommendations concerning the regulation of partial bids.

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18.5 Mini-Tenders

Mini-tenders are widely disseminated offers to acquire less than 20 per cent of the outstanding securities of a class, typically at a discount to the current market price of such shares. Because they are offers for less than 20 per cent, they fall outside the provisions of Part XX of the Act, which impose rules governing the conduct of take-over bids. The Committee discussed whether 'mini-tenders' should be subject to regulation by the Commission.

In 1999, CSA staff issued a notice outlining its concerns and recommendations relating to mini-tenders.407 The Mini-Tender Notice focused on potentially abusive mini-tenders where investors are unaware that they are tendering to a below-market offer that is not regulated under provincial securities legislation. Staff recommended that mini-tenders should include information such as the principal market for the securities; a warning that the offering price is below the current market price; and a statement that people tendering to the offer should consult their financial advisers.

We do not believe legislative amendments is necessary to address mini-tenders. We believe that the most effective mechanism for dealing with inappropriate or abusive conduct in connection with mini-tenders is through investor education and enforcement proceedings in appropriate cases.408 In our Draft Report we had recommended that the Act be amended by adding a provision which would prohibit market manipulation and fraudulent activity. The 2002 Amendments contain such a provision. We believe that this will enable the Commission to deal with those cases which involve mini-tenders that are conducted in an abusive, misleading or deceptive manner. We also note that mini-tender concerns appear to have subsided to some extent since the publication of the Mini-Tender Notice.

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18.6 Convertible Securities

The Committee also examined the application of formal take-over bid rules to convertible securities. The anti-avoidance provision contained in section 92 of the Act provides that an offer to acquire 'shall be construed to include a direct or indirect offer to acquire or the direct or indirect acquisition or ownership of securities . . . .' In interpreting this provision, it is unclear when a purchase of convertible debentures constitutes the purchase of the underlying shares as opposed to the debenture. This issue has implications for the way in which other provisions of Part XX of the Act are interpreted and applied. For instance, if an offer to acquire convertible securities is an offer to acquire the underlying shares, must the price offered for convertible securities be identical to the price offered for common shares in the direct offer made to common shareholders?409

We note that there are opposing views within the legal profession regarding the interpretation of section 92. One view is that one must assess the true intention behind an offeror's purchase of the convertible securities. If the intention is to acquire the underlying shares, then the offer for the convertible securities will be characterized as an offer for the underlying shares. There is no need to regulate all acquisitions of convertible debt as take-over bids but, rather, to have the Commission exercise its public interest jurisdiction in the rare, abusive situations.410 Others find the subjective test unacceptable and believe that further clarity is required as to when an offer for convertible debt is an offer for underlying shares.

We are inclined to the view that providing absolute certainty in this area ultimately would not be constructive. The purpose for acquiring convertible securities will vary from transaction to transaction, and each transaction needs to be analyzed in the context of its circumstances, facts and commercial details to determine the objective of the transaction, the true intent of those who designed it and whether it should comply with the take-over bid rules.

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Chapter 19 Mutual Fund Governance

In considering whether any changes are needed to the regulatory regime governing mutual funds, we focused primarily on fund governance.

19.1 Background

A mutual fund is an investment vehicle for retail investors. The assets of the investors are pooled in one portfolio and are managed by professional money managers.

Mutual funds are organized and promoted by a company which is typically referred to as the 'mutual fund manager' or 'manager.' In establishing a mutual fund, the mutual fund manager organizes the fund; arranges for the offering documentation of the fund to be prepared, filed and cleared with securities regulatory authorities in every province in which the fund will be offered for sale to the retail public; and takes on the management, administrative and investment management responsibilities associated with operating the fund on an ongoing basis. The manager may provide these services directly or may subcontract with third parties to provide these services to the fund on its behalf. The manager is paid a fee by the mutual fund for providing these services.

Conflict issues in the mutual fund industry may arise because the manager is an entity separate from the mutual fund itself and is in business to make a profit for its shareholders from its management function. This may place the manager in a conflict of interest when making decisions as to the management of the fund as some decisions that are profitable for the manager and its shareholders may not be in the best interests of investors in the fund.411 The conflicts of interest are compounded when managers are not managers of one fund only but of a number of funds.412 The questions then become, whose job is it to safeguard the interests of the mutual fund, and can we reasonably expect the manager to fulfil that role?

There is at this time no legislative requirement to ensure that there is a player in the mutual fund family, independent of the mutual fund manager, whose role is to ensure that the interests of the unitholders are taken into account by the manager.413 A mutual fund investor has no remedy if he or she is displeased with the performance of the management company, other than to exit the mutual fund. The decision to exit will generally attract negative economic consequences.

Mutual fund governance has been the subject of a number of studies in Canada in the past 35 years. While all of these reports have recognized the importance of independent oversight, they have reached different conclusions regarding the need to legislatively mandate this requirement.

The Report of the Canadian Committee on Mutual Funds and Investment Contracts (the '1969 Report') noted there are certain types of risks that investors in mutual funds would not generally be assumed to have accepted in making their investment decisions, including risks arising from the lack of independent oversight. The 1969 Report continued:

The best protection against the types of risks here being considered would be an arrangement whereby the management company and the distribution company were subjected to continuing independent scrutiny over their operations. This scrutiny might be provided by the mutual fund investors, or by a surrogate acting on their behalf; what is essential is that the procedure used be effective but not interfere unduly with the freedom of management to make investment decisions.414

However, the 1969 Report stopped short of recommending a statutory requirement for each mutual fund to have a board of directors or equivalent body or that a specified percentage of the members of such bodies be independent of management, although it suggested there could be voluntary adoption of such a structure.

A report prepared for the Department of Consumer and Corporate Affairs in 1974 also considered whether a system of fund governance was necessary in the Canadian mutual fund industry, but concluded that:

Except in special circumstances the mutual fund should not be treated as a separate entity from its investment manager, requiring a separate board of directors.415

More recent reports strongly support the adoption of a fund governance regime in Canada. In Regulatory Strategies for the Mid-90's: Recommendations for Regulating Mutual Funds in Canada (the 'Stromberg Report'), former Commissioner Stromberg stated that:

There is something inherently wrong with a structure that permits all the functions that are required to be carried out in respect of an investment fund to be carried out by related parties on terms that are in effect unilaterally imposed without there being some degree of review by unrelated persons who are considering the merits solely from the perspective of the best interests of the investment fund and its investors.

In the current structure, there is no one whose sole responsibility it is to look out for the interests of investors and it is not clear that the primary obligation of the investment fund manager is to put the interests of its sponsored investment funds ahead of all other interests. ... [I]nvestment fund organizations are focussed on gaining market share and benefiting their shareholders and other stakeholders. Their focus is not exclusively on their obligations to their sponsored investment funds.416

Consequently, the Stromberg Report contained a recommendation that each investment fund should be required to have an independent board. Former Commissioner Stromberg stated:

I believe that there is justification for this [recommendation] by reason of the unique relationship that exists between the investment fund and its manager. This relationship gives rise to conflict of interest situations that occur on a continuing basis in the ordinary course of business and otherwise. In view of the fact that it is impractical for each situation involving a conflict of interest to be referred to security holders for approval, it is essential that there be an independent body whose sole focus is the interests of the investment fund and its security holders.417

The Investment Funds Institute of Canada and the Commission jointly established a steering group (the 'Steering Group') to review and respond to the Stromberg Report. In its report, the Steering Group agreed in principle with the recommendations of former Commissioner Stromberg, but ultimately recommended that each fund family, rather than each fund, should have a board of at least five members, the majority of whom are independent of the manager, and an audit committee comprised entirely of independent members of the board.418 Further, the Steering Group recommended that the fund family board should not have the power to terminate the manager.

In Canada, the most recent report to consider the matter of mutual fund governance was produced for the CSA by Stephen Erlichman in August 2000.419 The Erlichman Report provides an overview and analysis of the historical consideration of mutual fund governance in Canada and a review of the governance structures which could be adopted by the mutual fund industry in Canada. The Erlichman Report recommended that each mutual fund family should be required to establish a governance regime that has a governing body independent from the manager of the mutual fund. The report does not insist upon a particular governance structure. Rather, it states that if regulators choose to mandate one specific form of fund governance, then each mutual fund should have a 'corporate style' board (of governors, trustees or directors, as the case may be), which should be comprised of at least a majority of independent directors. The sole interest of this governance board would be to focus on the best interests of the mutual fund and its unitholders.420

On March 1, 2002, the CSA issued a Concept Proposal concerning the regulation of mutual funds in Canada.421 In the Concept Proposal, the CSA outlines its vision for regulating the mutual fund industry in Canada in the future, including its proposals to improve mutual fund governance. The Concept Proposal recommends requiring a governance agency which is independent of the mutual fund manager that will supervise the manager's management of its funds and will act to ensure the funds are managed in the best interests of investors. The governance agency would be vested with specific responsibilities including meeting regularly with management; overseeing and monitoring the manager's compliance with policies and procedures; acting as an audit committee; and monitoring that funds are managed in accordance with their stated investment objectives and strategies. The Concept Proposal was open to comments until June 7, 2002, and the CSA is currently reviewing the many responses received.422

On November 14, 2002, the BCSC published for comment a paper entitled 'New Proposals for Mutual Fund Regulation.423 The Proposals developed further some of the thinking of the BCSC reflected in a paper it published in February 2002 entitled 'New Concepts for Securities Regulation.' The Proposals addressed a number of topics relating to the mutual fund industry, including the disclosure documents to be prepared by mutual funds and the ability of foreign funds to be offered for sale in Canada.

The Proposals also suggested a new approach to governing business practices and product regulation in the fund industry. Detailed rules would be replaced by codes of conduct applicable to fund companies, advisers and dealers which would set out general principles for business practices and product regulation. The proposed Code of Conduct for fund companies would require a fund company to: (i) ensure it has a governance structure suitable for the structure of its funds and which addresses the conflicts of interest the company faces; (ii) have the members of the governance structure responsible for ensuring that management has appropriate compliance systems in place to deal with conflicts of interest; and (iii) disclose governance practices including whether the body is independent of the fund company. The Proposals deliberately did not set out the responsibilities of the governance body. The Proposals acknowledged that setting out specific responsibilities provides consistency in the marketplace and investor certainty about the structure of governance in the industry, but preferred to allow fund companies to determine the appropriate responsibilities of their governance body.424

In the U.S., the Investment Company Act of 1940 (the '1940 Act') has contained long-standing provisions requiring investment companies to have boards of directors including independent directors. On January 2, 2001, the SEC adopted rules and rule amendments regarding investment company fund governance and the role of independent directors of investment companies. The effect of the rules and rule amendments is to require a majority of the board of directors to be independent of the manager if the investment company wishes to rely on exemptive rules contained in the 1940 Act to engage in certain self-dealing transactions. Furthermore, the independent directors must select and nominate any other independent directors and their legal counsel, who must also be independent of the manager.

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19.2 The Case for an Independent Mutual Fund Governance Requirement

In considering the question of mutual fund governance, the Committee was guided by our principle that there must be a compelling public policy reason to introduce regulation. We also took into consideration the fact that most major jurisdictions other than Canada have some form of a mutual fund governance requirement, and considered whether there is anything particular to the mutual fund industry in Canada that justifies the continued absence of such a requirement in Canada.

The fundamental reason for requiring mutual fund governance in Canada is that the structure of the fund industry is by definition conflicted and there is no one whose sole responsibility is to protect the interests of unitholders. The fund manager is responsible for establishing the fund, managing the fund, retaining the investment manager for the fund, setting fees paid to the investment manager and the manager, and settling all expenses to be charged to the fund. At the same time, the management company is in business to do all of this in a manner most profitable to the shareholders of the management company. That the profit may be enhanced by increasing fees or expenses to the mutual fund, and therefore its unitholders, is disciplined only by market forces. An efficient market would dictate that a mutual fund with high fees and expenses would be less likely to be purchased. Undoubtedly, many mutual fund managers also see the correlation between success by the funds they manage and success for themselves. Nevertheless, the reality of the Canadian mutual fund industry is that manufacturers of mutual funds are primarily in the business of marketing their mutual funds, and a number of the marketing techniques employed encourage investors and their advisers to purchase funds that may have higher fees and expenses than competing mutual funds, either because of successful advertising or because of favourable compensation structures for advisers who recommend the mutual funds.

We believe that the introduction of a system of mutual fund governance in Canada, so as to provide oversight of the functioning of the mutual fund which is both independent of the management company and focused exclusively on the best interests of the unitholders, is overdue. Currently there is no constituency to exercise oversight on behalf of mutual fund investors and to raise issues of concern to them. Further, it is likely that implementing specific requirements for oversight of the operation of mutual funds will assist managers in establishing and maintaining appropriate policies and standards of conduct to govern themselves and the funds they manage.

We received a number of comments concerning our recommendation in the Draft Report that the Commission and the CSA should introduce a requirement for all publicly offered mutual funds to establish and maintain an independent governance agency.425 Commenters were divided as to whether they supported this recommendation. This split is consistent with the response the CSA has received concerning the Concept Proposal.426 Those commenters who support the recommendation do so because of the conflicts inherent in the mutual fund industry:

We are of the opinion that the time has finally come to address the issue of the governance of mutual funds. The potential for conflict of interest is ripe when dealing in management of mutual funds and we agree with the Review Committee that it is [not] to say that just because there has been no publicly reported cases of abuse, one can safely conclude there is no concern. The very fact that the manager of a mutual fund is an entity apart from the mutual fund itself and is in business to make a profit for its shareholders presents a very serious conflict of interest situation for investors of this fund and this situation cannot be overlooked longer.427

Some commenters support the concept of an independent governance agency but insist it should only be introduced if there is a concurrent relaxation of certain existing rules governing mutual funds.428 On the other hand, one commenter is adamantly opposed to any sort of regulatory quid pro quo:

It is a dangerous precedent for statutory regulators to succumb to industry demands that there be trade-offs for new regulatory requirements. Regulatory reforms should serve a purpose and not come at an expense to investors.429

We also received a suggestion that the adoption of fund governance should be voluntary and not mandatory.430

Commenters who are opposed to the recommendation are either not convinced that the case has been made for the necessity of such a body or are concerned that any potential benefit would be outweighed by potential costs.431

We acknowledged there is no clear consensus in Canada as to whether there should be an independent governance body for mutual funds. Nevertheless, we continue to believe that the presence of experienced, independent people on a board (or other equivalent body) of a mutual fund will improve the process by which decisions are made and, therefore, the results for unitholders. A strong, independent governance body is a discipline on the manager and on management of the mutual fund; for example, some business plans, cost allocations or marketing programs will not receive the approval of a strong, independent governance body, which will in turn cause management to develop alternative plans, allocations or programs. Independent directors can also scrutinize management performance and fees. Such results can only be of benefit to the entire industry. The existence of a governance body to which management is accountable would also cause management to establish written policies and procedures where informal practices had existed, and to submit them to third-party scrutiny.

The Committee is aware, however, that the implementation of a system of mutual fund governance will be difficult in Canada. There will be costs involved in attracting and retaining directors for each mutual fund or family of mutual funds. These costs will likely be borne by mutual funds and, by implication, their investors. However, the existence of an independent governance body will help to protect the interests of unitholders so that the cost of establishing and maintaining the governance body should be recouped by its vigilance on behalf of the unitholders.432

The Committee also considered whether the independent governance body should have the right to terminate the manager for any reason. We are mindful of the fact that the manager took the initiative to found, organize and sponsor the mutual fund and that, if the manager is terminated for any reason, this could be seen as an expropriation of the manager's property interest in the fund. On the other hand, the moment the manager offers the mutual fund for sale to the public, the unitholders become stakeholders and the manager assumes an obligation to them. Indeed, there is a fiduciary relationship between the mutual fund manager and the investors. Furthermore, the independent governance body's sole mandate will be to act in the best interests of the unitholders of the fund. Failure to empower the independent governance body to terminate the manager for appropriate cause will create serious difficulties for it in fulfilling its obligations to the unitholders.

We therefore believe that the independent governance body should have the right to terminate the manager. In our Draft Report we recommended that the governance body should have the right to do so at any time when, in the reasonable opinion of the independent directors: (i) there is cause (including poor performance of the fund); or (ii) when the interests of the manager have been placed ahead of the interests of the unitholders through self-dealing, conflict of interest transactions, or other breach of fiduciary obligations. We received a number of submissions on this point.433 Many commenters did not favour allowing the independent governance body to terminate the manager for poor performance. As one commenter noted:

The criteria to terminate a manager for poor performance would be difficult and probably unacceptable in many instances. After all, in a statistical universe the majority of managers do not meet the benchmark indexes, which ultimately qualifies them for firing. This is the law of averages, which means that most managers will continually be fired and probably rehired elsewhere. Any suggestion that members of such Boards would be better equipped to make financial investment decisions for someone else's money, in our opinion, is incorrect. Also, the ability to expropriate a manager from his position of financial interest for something other than fraud or misleading conduct, in our opinion, is inappropriate.434

We agree. We have therefore amended our recommendation to remove the ability of the independent governance agency to terminate the manager for poor performance.

We have also considered whether it is sufficient to give the governance agency only one remedy - the power to terminate the manager - where the interests of the manager have been placed ahead of the interests of the unitholders. There may be circumstances where a governance agency feels the costs to unitholders of terminating the manager are too detrimental for it to want to exercise this remedy. We believe that the governance agency will best be able to exercise its fiduciary obligations to unitholders if it can adopt a solution which is most appropriate to all the facts and circumstances of the situation and which will best reflect the best interests of the unitholders. Consequently, we believe that the governance agency should have two alternative remedies available to it where a manager has placed its interests ahead of the interests of unitholders. One remedy would be to terminate the manager. Another remedy would be to notify the unitholders of the manager's behaviour and to provide unitholders with a period of time, likely 30 days, in which to redeem their units without cost. Under this second remedy, the decision as to whether to terminate the manager is made by each unitholder who elects to redeem his or her units rather than by the governance agency on behalf of all unitholders.

Recommendation:

We recommend that the Commission and the CSA introduce a requirement for all publicly offered mutual funds to establish and maintain an independent governance body. When, in the reasonable opinion of the independent directors, the manager has placed its interests ahead of those of unitholders of a mutual fund through self-dealing, conflict of interest transactions or other breach of its fiduciary obligations, this body should have the right either to terminate the manager or to tell the unitholders about the manager's actions and provide unitholders with a period of time within which to redeem their units at no cost.


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19.3 Conflicts of Interest

Certain fund managers support fund governance because National Instrument 81-102, which governs mutual fund structures and operations in Canada, as well as Canadian securities legislation, prohibits mutual funds from engaging in certain self-dealing activities. These industry participants have suggested that the presence of an independent board would remove or at least lessen the need for these prohibitions in the governing legislation as the independent board could determine whether any particular transaction or arrangement would compromise the interests of the unitholders of the fund.

We believe that the types of conflicts of interests which a governance agency will address will go beyond those currently addressed in securities legislation. A governance agency is not simply an alternative to current prescriptive conflicts rules in securities legislation. We imagine that governance agencies will also deal with matters such as the allocation of expenses between the manager and the fund; allocation of trades and trading revenue to brokerages; soft dollars; personal trading by portfolio managers; and voting of proxies.

It is possible that once governance agencies are well established and understand the fund industry, its business and its conflicts, some of the current conflicts rules can be eliminated. We do not believe they should be eliminated until a transition period has expired, however, as governance agencies need to understand their function, their relationship with the fund manager and how and why the current conflict rules exist and work before their judgement should be substituted for current rules.

As the rules governing conflicts matters are relaxed or eliminated it will become increasingly important that each mutual fund disclose the approach it has adopted to the various conflict scenarios. Currently there is general consistency of approach to those conflicts which are regulated. When consistency is replaced by the discretion of the governance agencies, investors will need to be able to make informed choices among funds in these matters.

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19.4 Recruiting Qualified Mutual Fund Directors

A second and critical concern with establishing a fund governance system is the ability to find a sufficient number of qualified people to serve as directors. There are currently in excess of 1,700 mutual funds and 70 mutual fund management companies in Canada. The Committee is concerned that, unless a new approach to selecting, recruiting and nominating directors is adopted, the Canadian marketplace will be strained to field the appropriate number of qualified directors.

The current process for identifying and recruiting public company directors in Canada relies extensively on a network of experienced directors who are familiar with other directors and their capabilities, and who rely on this information in recommending new directors. This process is reinforced by the reluctance both of recruiters to look at individuals below the level of CEO of companies, and of certain companies to allow employees other than the CEO to act as directors. While the Committee refrains from commenting generally on these practices, we do believe that the introduction of a requirement for mutual fund governance bodies provides an excellent opportunity for the introduction of new approaches to recruiting directors.

We believe that there is a sufficient pool of talent available in Canada to support a new governance regime for mutual funds, but that pool of talent will only be accessed if the traditional process for recruiting and nominating directors is modified. We believe that mutual funds and their nominating committees should expand the pool of talent they will consider to include individuals below the ranks of CEOs, as well as retired professionals. Non-profit organizations such as universities, business schools and hospital administrations should also be viewed as potential sources of directors. Commenters on this recommendation agreed with us.435

In addition to finding and attracting potential directors, mutual funds will need to ensure that the majority of directors are completely independent from the management company. This issue presents challenges since the management company will nominate the first directors. If the first and subsequent directors are not independent, then effective governance may be compromised. Mutual fund governance rules will need to set out a test or definition of independence.436

Recommendation:

We recommend that the process by which potential directors of mutual fund governance bodies are identified and nominated be expanded so as to include a broader range of potential directors. We further recommend that the majority of directors be independent of the management company. Lastly, the potential liability and defences available to directors of fund governance agencies needs to be settled in the legislation.


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19.5 How the Independent Governance Body Will Look

The Committee identified a number of elements that should comprise a mutual fund governance model:

  • The governance body should be independent from the manager and should have a mandate to act only in the best interests of the fund and its investors.

  • The majority of directors must be independent of the management company but should not be the same as any independent directors of the management company. It is our strong belief that there is no reason to have a governance agency if a majority of its members are not independent of the manager.

  • The independent governance body should have the ability to fix its own fees based on such advice as it may seek to rely on, including the advice of an independent compensation adviser. The members of the governance body must disclose annually the fees they receive from that fund and all other funds in the same family.437

  • The number of governance bodies that is appropriate for each family of mutual funds will depend upon a number of factors particular to that family of funds. We do not want directors to be overburdened with respect to the number of funds for which they will be responsible. We do not propose that the regulator specify a definitive limit on the number of mutual funds that may be overseen by any one governance agency. However, we are concerned that this determination should not be made solely by the manager, given its conflict. It is appropriate for the independent mutual fund governance body to decide how many mutual funds it should be responsible for overseeing, and for publicly disclosing its reasons if it does not limit, or cap, the number of funds within one fund family for which it is responsible.

  • Members of the independent governance body should have the right to retain counsel independent of counsel to the fund manager and should have the right to retain other independent advisers as well.

  • The independent governance body should have the right to terminate the mutual fund manager in circumstances where, in the reasonable opinion of the independent directors, the mutual fund manager has placed its interests ahead of those of the mutual fund unitholders through self-dealing, conflict of interest transactions, or other breach of fiduciary obligations (see discussion above in section 19.2).

  • The names and contact information of the directors should be published annually and otherwise made available to unitholders so that unitholders have access to those who are acting in their best interests.
Recommendation:

We believe that the mutual fund governance body should have certain characteristics, including: independence from the manager; a majority of independent directors; the right to retain counsel and other independent advisers; the right to set its compensation and establish the obligation of each member to disclose annually all fees received from the fund and all affiliated funds; and the right to terminate the manager in specified circumstances.


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19.6 Functions of the Governance Body

We also considered what the responsibilities of a governance body should be. While this list is not exhaustive, we believe the body should have responsibilities similar to those of a corporate board, including:

  • overseeing the establishment and implementation of policies related to matters material to investors and relating to conflict of interest matters such as related party transactions, pricing, brokerage allocation and soft dollars;

  • reviewing compliance with such policies;

  • monitoring fees and expenses and their allocation;

  • receiving reports from the manager concerning compliance with investment goals and strategies;

  • reviewing the appointment of the fund's auditor, and considering whether the auditor should be separate from the auditor of the management company;

  • meeting with the fund's auditor, which should report to the governance body, not the manager or management company; and

  • approving material contracts.
Recommendation:

We believe that it is important to identify certain fundamental responsibilities of the mutual fund governance body. We believe these responsibilities should include, at a minimum, overseeing the establishment and implementation of policies related to conflict of interest issues; monitoring fees, expenses and their allocation; receiving reports from the manager concerning compliance with investment goals and strategies; reviewing the appointment of the auditor; meeting with the fund's auditor; and approving material contracts.


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19.7 Should Mutual Fund Managers Have to be Registered to Carry on Business?

In our Draft Report we considered whether mutual fund managers should be registered or otherwise regulated. Currently managers are not required to be registered to carry on business as a mutual fund manager. A number of the past reports on mutual fund governance have recommended that fund managers be registered with the securities regulatory authorities.438 The rationale for this recommendation is that managers of mutual funds play a pivotal role in establishing, promoting and running a mutual fund. Further, because of the range of services provided to a fund by a manager, or overseen by a manager, an investor could risk impairment to, or loss in value of, his or her investment if a manager failed to discharge its obligations fully, in a timely manner, and in a manner free from potential conflicts of interest.

In the Draft Report we said that, while the manager's role is primarily operational in nature, the functions it performs on behalf of a fund and its investors are integral to the proper functioning of a fund. Further, we believed that independent oversight of the manager will play a significant role in enhancing the integrity of the mutual fund industry in Canada. We therefore recommended that there be independent oversight of the capital adequacy, personnel proficiency and standards of business practice of mutual fund managers, and that this oversight be conducted by the independent governance agency.

One commenter agreed with our recommendation.439 Two other commenters disagreed with vesting this responsibility in the independent governance agency.440 They felt that, at least initially, the independent governance agency would be faced with a steep learning curve, and that formatting appropriate guidelines for complex issues such as capital adequacy and personnel proficiency will require expertise which is more often found in regulators. Additionally, there was concern that adding this responsibility to the independent governance agency would add potential liability to its members, making it even more difficult to attract qualified people. In addition, we note that, if standards for mutual fund managers are left to be established by governance bodies, consistency of standards across the industry will likely suffer.

We continue to believe that there are important reasons for requiring oversight of mutual fund managers; they have been articulated in earlier reports on the mutual fund industry and in the discussion above. In our Draft Report we identified capital adequacy, personnel proficiency and standards of business conduct as matters with respect to which standards for mutual fund managers might be established. There may be others.

We do not offer any conclusions on whether mutual fund managers ought to be 'registered.' Having concluded, however, that they should be subject to certain minimum standards and that compliance with those standards should be overseen by an appropriate and independent third party, we suggest the following framework for addressing this issue:

  1. What standards or requirements should be satisfied by mutual fund managers before they are permitted to establish, promote and run a publicly offered mutual fund?

  2. Depending on the answer to question number 1, who is best positioned to establish those standards and requirements, and monitor compliance with them?

  3. Is registration of mutual fund managers a necessary and justifiable means, from a cost-benefit analysis point of view, of imposing and monitoring compliance with the applicable standards for mutual fund managers?
Recommendation:

We urge regulators and the mutual fund industry to work together to determine what standards or requirements should be satisfied by mutual fund managers before they are permitted to establish, promote and run a publicly offered mutual fund; who is best positioned to establish those standards or requirements and to monitor compliance with them; and whether registration of mutual fund managers is necessary and justifiable, from a cost-benefit point of view, as a means of imposing and monitoring compliance with the applicable standards or requirements for mutual fund managers.

19.8 Rulemaking Authority

As a final matter, we considered whether there is sufficient authority under the Act for the Commission to regulate with respect to fund governance. Subsection 143(31) of the Act states that the Commission may make rules 'regulating mutual funds or non-redeemable investment funds and the distribution and trading of the securities of the funds' and enumerates 12 examples of the type of regulation in which the Commission may engage. In the event that the language of subsection 143(31) is not sufficiently broad to cover the mutual fund governance regime we contemplate, then we would support an amendment to confer upon the Commission the necessary authority to address mutual fund governance reform through rulemaking.

Recommendation:

We recommend that subsection 143(31) of the Act be amended, if required, to give the Commission the necessary authority to address mutual fund governance reform through its rulemaking power.


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  1. The amendments to the CBCA were effected by the passage of An Act to Amend the Canada Business Corporations Act and the Canada Cooperatives Act and to Amend Other Acts in Consequence, proclaimed in force November 24, 2001 (SI/2001-114).
  2. Kimber Report, para. 6.02.
  3. Ibid. para. 6.24.
  4. The Act, section 85.
  5. The Act, subsections 86(a) and 86(b).
  6. The Act, section 84.
  7. Two exemptions not discussed here are contained in subsection 86(2) and subsection 86(3) of the Act.
  8. The Act, subsection 88(1). The provision states that '[w]here a reporting issuer is complying with the requirements of the laws of the jurisdiction under which it is incorporated, organized or continued and the requirements are substantially similar to the requirements of this Part, the requirements of this Part do not apply.'
  9. CBCA, subsection 150(1).
  10. CBCA, paragraph 147(b)(v) and Canada Business Corporations Regulations, 2001 (SOR/2001-512), paragraphs 67(a) and (b).
  11. CBCA, subclause 147(b)(vii).
  12. Ibid. subsection 150(1.2).
  13. Canada Business Corporations Regulations, 2001, supra note 383 at subsection 69(1) and paragraphs 61(a) to (d).
  14. Ibid. subsection 69(2).
  15. SEC, Regulation of Communications Among Shareholders, 17 CFR Parts 240 and 249, Release No. 34-31326170, (22 October 1992).
  16. Ibid.
  17. The Standing Senate Committee on Banking, Trade and Commerce, 'Corporate Governance' (August 1996) (http://www.parl.gc.ca/english/senate/com-e/bank-e/rep-e/cgo-e.htm at 49-50).
  18. The Act, clause 84(c); CBCA, clause 147(c); OBCA clause 109(c).
  19. See comment letter of Fasken Martineau DuMoulin LLP.
  20. See comment letters of Investment Counsel Association of Canada, Torys LLP, Ontario Teachers Pension Plan, and Fasken Martineau DuMoulin LLP.
  21. See comment letter of the Canadian Bankers Association.
  22. In June 2002, a number of Canada's largest pension plans, mutual funds and money managers formed the Canadian Coalition for Good Governance 'to fight for improved governance at Canadian companies.' Claude Lamoreux, President and CEO of Ontario Teachers' Pension Plan, one of the organizing members, stated that the Council was able to be formed because the CBCA Amendments 'provide institutional investors with the opportunity to work together as shareholders' and to share information so as to take the initiative to hold management accountable for a company's growth. See www.otpp.com/web/website.nsf/web/CoalitionforCorpGov. The establishment of the Council is a positive example of the practical implications of the CBCA Amendments for communication among shareholders.
  23. SEC, Regulation of Takeovers and Security Holder Communications, 17 CFR Parts 200, 229, 230, 232, 239 and 240, Release No. 33-7760, 34-420055.
  24. Ibid. at 61408-61409.
  25. The Zimmerman Committee consisted of members of the IDA and was formed to review take-over bid time limits. The Zimmerman Committee issued a report in 1996 that recommended a number of changes in the regulation of take-over bids.
  26. CVMQ, Bulletin Hebdomadaire: 2001-06-29, vol. xxxii, no. 26.
  27. See comment letter of Davies Ward Phillips & Vineberg LLP.
  28. See comment letter of Ontario Teachers' Pension Plan.
  29. See In the Matter of Ivanhoe III Inc. and Cambridge Shopping Centres Limited (1999), 22 OSCB 1327 at 1329.
  30. Ibid.
  31. (2001), 24 OSCB 1064 and 1663.
  32. See comment letters of Fasken Martineau DuMoulin LLP and Davies Ward Phillips & Wineberg LLP.
  33. See comment letter of Fasken Martineau DuMoulin LLP.
  34. CSA Staff Notice 61-301, Staff Guidance on the Practice of Mini-Tender (1999), 22 OSCB 7797 (the 'Mini-Tender Notice').
  35. In SEC Release #34-43069; IC-24564 'Commission Guidance on Mini-Tender Offers and Limited Partnership Offers' the SEC outlines examples of certain mini-tender practices which may be fraudulent, deceptive or manipulative practices within the meaning of section 14(e) of the Exchange Act.
  36. See William Ainley, Legal Developments in Canadian M&A Practice (Toronto: Insight Information Co., 2000).
  37. See comment letter on Issues List of James Turner.
  38. For example, in determining the allocation of expenses as between the manager and a fund, the manager may be tempted to characterize as fund expenses certain items that are more appropriately characterized as expenses of the manager carrying out its management obligations to the fund. Or, if a fund is performing poorly, the portfolio manager should perhaps be terminated but if the portfolio manager is an affiliate of the manager, and is bringing additional fees into the management complex for its services, the manager may be disinclined to terminate the portfolio manager.
  39. For example, a manager may choose to allocate more resources to funds with better performance records and, in effect, orphan its lesser-performing funds.
  40. Section 116 of the Act, however, does provide that 'every person or company responsible for the management of a mutual fund shall exercise the powers and discharge the duties of its office honestly, in good faith and in the best interests of the mutual fund, and in connection therewith shall exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances.'
  41. Report of the Canadian Committee on Mutual Funds and Investment Contracts - Provincial and Federal Study (Ottawa: Queen's Printer, 1969) at 151.
  42. J.C. Baillie and W.M.H. Grover, Proposals for a Mutual Fund Law for Canada, vols. I & II, Consumer and Corporate Affairs (Ottawa: Information Canada, 1974) [hereinafter the 1974 Proposals], in Vol. 1 at 3-4.
  43. G. Stromberg, Regulatory Strategies for the Mid-90's: Recommendations for Regulating Investment Funds in Canada, prepared for the CSA (Toronto: Ontario Securities Commission, January 1995) at 147-148.
  44. Ibid. at 152.
  45. Investment Funds Steering Group, The Stromberg Report: An Industry Perspective, prepared for the CSA (Toronto: Queen's Printer, November 1996) at 50-51 [hereinafter the Steering Group Report].
  46. Stephen Erlichman, Making it Mutual: Aligning the Interests of Investors and Managers, prepared for the CSA, (June 2000) [hereinafter the Erlichman Report].
  47. Ibid. at 8-11.
  48. CSA Concept Proposal 81-402, Striking a New Balance: A Framework for Regulating Mutual Funds and their Managers (2002), 25 OSCB 1227 [hereinafter, the Concept Proposal].
  49. The CSA received 57 responses concerning the Concept Proposal.
  50. BCSC, Notice 2002/46, 'New Proposals for Mutual Fund Regulation.'
  51. In Consultation Paper 81-403, Rethinking Point of Sale Disclosure for Segregated Funds and Mutual Funds issued in February 2003, the BCSC has indicated its intention to put its efforts into the proposals reflected in the consultation paper rather than to proceed at this time with its own mutual fund proposals as a separate initiative.
  52. See comment letters of the Independent Financial Brokers of Canada, Ontario New Democratic Party, Fasken Martineau DuMoulin LLP, Investment Funds Institute of Canada, Larry Schwartz, Ontario Teachers' Pension Plan, Investment Counsel Association of Canada, Ogilvy Renault, Nova Scotia Securities Commission, Royal Bank of Canada, Investment Dealers Association of Canada, and BCSC.
  53. See comment letter of Fasken Martineau DuMoulin LLP, which states that in reviewing the comment letters the CSA has received on the Concept Proposal, the CSA has indicated that there is no clear consensus in Canada that an independent governance body is needed.
  54. See comment letter of Ontario Teachers' Pension Plan.
  55. See comment letters of Investment Funds Institute of Canada and Royal Bank of Canada.
  56. See comment letter of Nova Scotia Securities Commission.
  57. See comment letter of Investment Funds Institute of Canada.
  58. See comment letters of Larry Schwartz, Independent Financial Brokers of Canada, and BCSC.
  59. In their comment letters, Independent Financial Brokers of Canada and the Investment Funds Institute of Canada raised the concern that the costs involved will be even more difficult for small fund companies to bear.
  60. See comment letters of the Independent Financial Brokers of Canada, Larry Schwartz, Royal Bank of Canada, and the Investment Dealers Association of Canada.
  61. See comment letter of Independent Financial Brokers of Canada.
  62. See comment letters of Fasken Martineau DuMoulin LLP, Ontario Teachers' Pension Plan and Royal Bank of Canada.
  63. One additional issue relating to attracting potential directors relates to their potential liability as directors. A director of a corporation is liable if the director does not meet the standard of care the law imposes on directors, and the director's liability is in theory unlimited. However, the courts have over time articulated defences which directors can raise to a charge of breach of the standard of care, including the 'business judgement rule.' The availability to directors of a fund's governance agency of defences which courts have developed for directors of corporations is unclear. We believe governance agency directors should have the same responsibilities, liabilities and defences as corporate directors; a legislative solution may be required.
  64. Some commenters on the Draft Report disagreed with this suggestion and felt that since the manager will pay the fees, it should set them. We strongly disagree, as the independence of the members of the governance body could be perceived of as being impaired if the manager determines their fees. Public disclosure by members of their fees is, in our view, a sufficient discipline on the quantum of their fees.
  65. Including the 1969 Report, the 1974 Proposals, the Stromberg Report and the Steering Group Report.
  66. See comment letter of Ontario Teachers' Pension Plan.
  67. See comment letters of Faskin Martineau DuMoulin LLP and Ogilvy Renault.

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