This Management Practice Inc. (MPI) Bulletin summarizes the detailed findings of our first survey of Canadian Mutual Fund governance practices. This is based on a comprehensive review of the Annual Information Forms filed in the year 2000 by all Canadian Mutual Funds, together with confidential responses from the survey participants. The second edition of this survey for 2001 will also be based on AIFs and participant responses. It will be issued later this year.
Governance of mutual funds in Canada is a hodgepodge of oversight techniques that reflect differing provincial and federal tax, regulatory and legal requirements. In recent times some rationalization has occurred with a trend toward governance independent of the fund manager. This Bulletin explores this trend and summarizes the survey findings about compensation of independent trustees or directors.

The purpose of this MPI Bulletin is to help mutual fund directors think through their responsibilities in connection with an SEC Examination. A panel of mutual fund experts, including an independent director and a representative from the SEC, convened under the auspices of Fund Directions to discuss this issue.

First and foremost, the new SEC Chairman, Harvey Pitt, has emphasized that the SEC is service organization, where there is no inherent virtue in playing "Gotch ya!" He has spoken eloquently about building a partnership with the accounting profession to cooperatively enforce the law and bring abnormalities to light. The panel concluded that the routine listing of inconsequential record keeping deficiencies would play a major part in future SEC examinations. On the other hand, substantive departures from sound business practices, particularly those that reflect veniality and disservice to public investors is not to be tolerated. The success of the mutual fund industry is, in large part, based on the confidence that investors have in the mutual fund industry.

(Mr. Treynor has long argued that portfolio managers should do what they are paid to do - trade based on their skill rather than wait for their luck.)

The true style of your fund group's portfolio managers runs much deeper than simply understanding if they are growth or value disciples. Beyond their apparent investment acumen, portfolio managers' mindsets often determine when, how and why they trade a fund's portfolio. A fund trustee needs to understand the portfolio manager's frame of mind.

Assessing fund performance and the quality of your group's portfolio managers is a key part of your overall responsibilities. But how can you tell -- really tell -- what motivates your funds' portfolio managers to action or restrains them from taking any action? A fund trustee can often peel back the layers and get a glimpse of the "real" managers at the helm.