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Governance guru can say: I told you so

A lawyer's report written five years ago presaged events from today, KEITH DAMSELL writes

Stephen Erlichman gets struck by a sense of déjà vu when he reads the business press.

Five years ago, the partner at law firm Fasken Martineau DuMoulin LLP in Toronto wrote a landmark report on mutual fund governance. "Making it Mutual: Aligning the Interests of Investors and Managers" addressed conflicts of interest for fund managers, missing fund assets and market timing.

Fast forward to 2005. Governance issues are making headlines for the fund industry.

"I've been called prescient," Mr. Erlichman said. "Unfortunately, sometimes it's true."

He has identified three governance issues behind recent news stories.

Conflict of interest:

Two financial service companies are after Clarington Corp., a Toronto fund company with $4.1-billion in retail assets under management.

On Nov. 14, CI Fund Management Inc. made a hostile bid worth $218.3-million. The offer includes a plan to dramatically cut mutual fund fees paid by unitholders. One week earlier, Clarington's board of directors backed a $210.9-million offer from Industrial Alliance Insurance and Financial Services Inc. Industrial Alliance has the right to match the CI offer, but has yet to commit to cutting fund fees.

The competing offers pose a difficult challenge for the Clarington board, Mr. Erlichman said. "Are they doing what is in the best interests of the shareholders of Clarington or are they going to do something that's in the best interests of the unitholder of the funds managed by Clarington?" he asked.

In his 2000 report, Mr. Erlichman recommended funds establish an independent governing body to vet conflicts.

Analysts speculate the Ontario Securities Commission may weigh in on the Clarington fight. Next year, the regulator will make mandatory independent review committees that will oversee the decisions of fund managers when faced with conflicts of interest.

Missing funds:

Over the summer, investment dollars vanished at three Quebec fund companies: Norbourg Asset Management Inc., Zenith Management and Research Corp. and Argentum Management and Research Corp.

Five years ago, Mr. Erlichman's report recommended the registration of fund managers. "You can't stop fraud but you can try and reduce the probability of it occurring," the lawyer said.

Market timing:

Five fund companies agreed last winter to distribute $205.6-million to unitholders for permitting rapid, in-and-out trading in mutual funds, a practice that raises costs and hurts the returns of long-term investors.

The scandal may have been avoided had the OSC enacted rules governing the controversial trading practice years ago, Mr. Erlichman said. In 2000, market-timing-related problems arose in segregated funds managed by Transamerica Life Insurance Co. of Canada and Standard Life Assurance Co.

A copy of Mr. Erlichman's bulletin Mutual Fund Governance in Canada: Recent Lessons will be available today at

AGF 'tweaks' its roster

AGF Management Ltd. laid off five middle managers last week.

The group includes Pat Phillips, vice-president of communications, and Michael McCorkell, vice-president of marketing.

"We made a few tweaks in our lineup to kind of align ourselves for the next leg of the race," said Randy Ambrosie, AGF's executive vice-president of sales and marketing in Toronto.

The departures come amidst the fund company's long campaign to end more than three years of net redemptions. Retail assets under management have slipped to about $21.7-billion, down 27 per cent from a high of $29.9-billion in 2001.

Case dismissed against fund

An Ontario Court has dismissed a $1.2-million lawsuit against labour-sponsored fund Return on Innovation Fund Inc.

In its July lawsuit, Gould Leasing Ltd. claimed ROI snapped up controlling interests in a troubled construction company to protect its reputation and thwart creditors. ROI, a Toronto investment firm that specializes in mature businesses, claimed it was acting in the best interests of all stakeholders.

On Nov. 16, the Ontario Superior Court rejected Gould's argument.

Allowing the lawsuit to proceed would "adversely affect the integrity of the administration of justice," Madam Justice Alexandra Hoy said in a Nov. 16 decision.

© 2007 The Globe and Mail. All rights reserved.

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