Fund administration and regulation

An exclusive extract from ICSA’s new study text, Fund Administration – part of the Level 5 International Finance and Administration qualification

3. The fund’s governing body

3.1 Introduction

In law and regulation there must always be a body with ultimate responsibility for the performance of the investment fund. In examining what this body is, this section will identify who these people are, the duties they owe to investors and how those duties originate.

3.2 Identifying the governing body

The governing body is that person or group of people ultimately charged with managing the fund. Where the fund is a company, that company will take on those duties through its board of directors. Where the fund is a limited partnership, the role will be assumed by its general partner and a trust will be governed by its trustee. Typically all of these structural lines will arrive back at a board of directors and so this chapter will consider the responsibilities of those directors and how they may seek to perform them.

3.3 Responsibilities

Fund directors, howsoever that role is established within the fund structure, will generally consider their responsibilities through various categories:

• Fiduciary duties – Most, if not all, of the major offshore centres recognise that these functionaries owe fiduciary duties to the fund and its investors. The most common of these duties are those to act in the interests of the fund and to act with skill, care and diligence. These duties would ultimately fall to be judged by a court of law as they are enshrined in law, whether included through statute or resting within the common law, but many regulators will consider their application when considering whether any regulatory laws or rules have been broken.
• Statutory duties – These are contained within the relevant statutes underpinning the legal structuring of the fund. In recent years, fiduciary duties have been expressly inserted into various statutes, formally codifying what was best practice formerly. In addition to fiduciary duties, functionaries will be granted, amongst others, the responsibility to take care of assets, to avoid conflicts of interest, to communicate with investors and to seek permissions from investors in certain circumstances. A breach of any of these obligations can result in the functionaries being found guilty, in civil and/or criminal law, which may result in prohibitions, fines, custody and/or other financial penalties (such as restitution).
• Regulatory duties – Although enshrined in financial services legislation, rules and other regulatory codes may create additional responsibilities surrounding the format and provision of information to investors.
• Contractual duties – When an investor subscribes to the fund it enters into a legally binding arrangement with the fund, and thus its governing body. In so doing, the governing body agrees to invest those monies in accordance with the terms of the fund’s governing documents, i.e. the offering document and other constitutive documents (e.g. its memorandum and articles of association).

Wherever the duty lies, the standard utilised to determine whether the duty has been met or whether it has been breached will remain broadly the same. Typically that standard is a blend of both objective and subjective considerations. This means that not only will a functionary be judged based upon what a reasonable man would have expected of someone in that position but they will also be judged upon their own experiences and skills.

For example, whilst all the directors may reasonably be seen to have been remiss in the misstatement of a fund’s financial statements and guilty of a breach of duty, where one of those directors was also an accountant, the scale of fault found on his part may be somewhat greater than that of a director whose personal experience lay elsewhere.

Fault will generally be established upon the following criteria, which rest in law:

Civil considerations

• Negligence – Conduct that falls below the standards of behaviour established by law for the protection of others against unreasonable risk of harm. A person has acted negligently if he or she has departed from the conduct expected of a reasonably prudent person acting under similar circumstances.
• Default – An omission or failure to do that which is anticipated, expected or required in a given situation. It is distinguishable from negligence in that it does not involve carelessness or imprudence with respect to the discharge of a duty or obligation but rather the intentional omission or non-performance of a duty.
• Breach of duty – Any act which is in violation of the duties established in law or through fiduciary duties owed (which are generally now enshrined in law) to the investors (shareholders/unitholders).
• Breach of trust – Any act which is in violation of the duties to act in the terms specified in agreements, such as the offering documents and other constitutive documents in addition to law and rule.

Criminal considerations

• Fraud – A false representation of a matter of fact—whether by words or by conduct, by false or misleading allegations, or by concealment of what should have been disclosed—that deceives and is intended to deceive another so that the individual will act upon it to her or his legal injury.

4. Governance

4.1 The Governing body and governance

Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed. Governance structures and principles identify the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators and other stakeholders) and includes the rules and procedures for making decisions in corporate affairs.

Governance has evolved over the last decade or so, creating an obligation on various stakeholders but none more so than the governing body of an investment fund. A number of offshore jurisdictions have enacted specific corporate governance codes, designed to capture these responsibilities in a formal matrix in respect of which governing bodies must find ways to comply or explain their non-compliance.

At the heart of governance is transparency, which is achieved through various broad categories of consideration, such as:

• the balance and composition of the board;
• how the board determines powers reserved for itself and those delegated to management etc.;
• the directors and how they meet their legislative and regulatory duties; 
• performance evaluations; 
• training and development; 
• conflicts of interests; 
• conduct and ethics; 
• accountability; 
• risk management; 
• disclosure;
• remuneration; and
• shareholder relations.

How corporate governance is best evidenced is not a matter of one size fits all and the governing body will need to consider the nature of the fund, including the ease with which units can be redeemed, whether the fund is private or public and the varying rights of the investors, to name a few. However, corporate governance, in particular governance failings, are shaping the way in which governance is developing.

In Guernsey, the abolition of the Sark Lark in 1999 spelled a leap forward for governance. The Sark Lark arose due to a twist that saw tax liability removed if director’s meetings were held outside of Jersey and Guernsey. As a consequence, thousands of Guernsey and Jersey companies appointed Sark resident directors, each director of hundreds of companies, if not more. This practice came under criticism as Sark had no company or financial services law but, more importantly, because of the ‘rubber-stamping’ approach that was developed by the Sark resident directors. In the intervening years since 1999, both Guernsey and Jersey have adapted their financial services and corporate laws, introducing robust measures to engender good governance practice.

Haley Camp and Jo Carre are both Directors and Founders of Centillion Consulting Ltd

Fund administration For more information about 'Fund Administration', or to order your copy, visit the ICSA shop at icsa.org.uk/shop

IFA Level 5 Fund Administration is part of ICSA’s Level 5 International Finance and Administration qualification. To find out more, visit icsa.org.uk/ifa