26 June 2017 by Ronan Donohoe
New Central Bank of Ireland recommendations aim to enhance fund management effectiveness and protect investors
The Central Bank of Ireland (CBI) began a project in 2014, known as CP86, to review how to enhance the effectiveness of Ireland’s fund management companies, and by addressing their governance, compliance and effective supervision, to improve investor protection. The CBI published three consultation papers, as well as related feedback, and issued its final guidance on 19 December 2016.
The final guidance applies to: Undertakings for Collective Investment in Transferable Securities (UCITS) management companies; authorised alternative investment fund managers; self-managed UCITS investment companies; and internally-managed alternative investment fund companies (collectively, the ‘fund managers’). The guidance contains very few rules, but provides six chapters of detailed guidance setting out the CBI’s expectations of how fund managers should operate.
The opening proviso of the guidance states ‘it should be evident from the fund management company’s board minutes that the fund management company is acting in accordance with this guidance, if this is the case’. Company secretaries must therefore become familiar with the guidance to ensure that compliance, or otherwise, is adequately evidenced in board minutes.
Although the transition period for implementation of most provisions does not end until 30 June 2018, there is plenty for fund managers to do in the meantime and implementation will likely pose a number of challenges.
Company secretaries should work closely with management, the board of directors, and the legal and compliance functions of the fund managers when formulating board calendars, to ensure a balanced and careful plan is put in place for achieving compliance with the guidance.
The key requirements of CP86 are as follows:
The most significant change to the operation of fund managers in the guidance is the recategorisation of the plethora of existing key managerial functions for fund managers into six streamlined managerial functions.
Fund managers must identify individuals, known as ‘designated persons’, who will be responsible for monitoring and overseeing the managerial functions assigned to them. The guidance sets out how the CBI expects a designated person to carry out his or her role and how it believes regulatory obligations should be allocated to each managerial function.
For company secretaries, this is likely to impact significantly the drafting of agendas and the structuring of board meetings. The form of this reporting will be a matter for the board to decide, but early indications suggest that written designated persons reports will probably become a significant portion of board meeting materials, so adequate time must be allocated to designated person reporting at board meetings.
The CBI has outlined a range of measures in its delegate oversight guidance aimed at ensuring that external delegation by the board of a fund manager does not undermine the exercise of overall control by the fund manager. A list of the board’s key reserved responsibilities are outlined in the guidance, which also states that ‘decisions on matters reserved to the board should be minuted in precise, unequivocal and directive terms’.
The guidance also details requirements to be included in the periodic reports to be received from delegates and identifies best practice when delegating tasks or decisions. Company secretaries should familiarise themselves with the guidance, ensuring adequate time is allocated to delegate reporting at board meetings, and that the minutes demonstrate the granularity of delegate reporting and the monitoring of delegates by the board.
The guidance says one of the independent directors should undertake an organisational effectiveness role. This is not a managerial function, rather the role is more strategic and inward-looking, focusing on issues such as the fund manager’s resources, organisational structure, board composition and board effectiveness. The CBI introduced this role to ensure an independent director within each fund manager is monitoring the way the fund manager is organised and can make suggestions for improvements.
Company secretaries should work closely with the person performing the organisational effectiveness role to ensure he or she has access to the information necessary to carry out the role adequately, and that enough time is allocated at board meetings to consider organisational effectiveness.
One of the more controversial aspects of the third CP86 consultation paper was the location rule, which proposed that fund managers must have at least three Irish-resident directors and one designated person based in Ireland.
It also proposed that fund managers must have at least two-thirds of its directors and designated persons resident in the EEA and that designated persons should work in the same location or should be employed within the same economic group.
However, following feedback from the industry expressing concern that, given the prevalence of US and UK-based fund promotors, this would probably result in suboptimal governance models being employed, as directors who are employees of the promotors/fund managers and bring a particular expertise would have to be replaced by EEA directors.
As a result, the CBI decided to reduce the ratio from two-thirds to one-half of EEA resident directors and designated persons, and abandoned the single location/economic group proposal for designated persons.
In parallel with the issue of the initial CP86 consultation paper, the CBI conducted a thematic review to assess the number of directorships held by individuals on the boards of investment funds and fund managers and the impact on fund governance.
Subsequently, the CBI published guidance to assist boards when assessing the necessary time commitment of directors to fulfil their roles, which has been restated in the final CP86 guidance.
The guidance on directors’ time commitment received a great deal of attention when initially published in June 2015, so directors should by now be compliant with the requirements. Company secretaries, through the keeping of directorships lists, are in a unique position to monitor their directors’ time commitments and advise directors when time commitment thresholds are in danger of being exceeded.
The guidance also sets out the CBI’s minimum expectations in relation to the retention, maintenance, security, privacy, preservation and accessibility of the records of fund managers and the funds under their management.
The guidance states that document management is particularly important for fund managers, as the content of documentation and records is the principal means by which the CBI can assess the control and resources of a fund manager, its compliance with laws and regulations, and the quality of oversight, governance and control exercised by the board and its designated persons.
Decisions on whether documents should be retained in hard or electronic format, as original or copy documentation, the location and period of retention, method for retrieving, security, privacy, and the document destruction policy is strictly a matter for the fund manager’s board. However, when engaging a fund manager, the CBI will expect as a minimum a clearly-defined records retention schedule outlining where and what documents are stored.
The CBI also expects ‘immediate and unfettered access’ to relevant documents, regardless of where or how they are held. Immediate and unfettered access means that documents are readily accessible, easily retrievable and available on request by the CBI.
As the traditional guardians of company records, company secretaries play a key role in ensuring compliance with the guidance on record retention. However, the requirements extend far beyond the retention of company registers, board packs and minutes books.
The records that must be kept and made immediately accessible are wide-ranging, so a cross-functional collaborative effort is needed – first, to document the fund manager’s policy, and second, to put the policy into practice.
To ensure fund managers are in a position to comply with the document production requirements and to facilitate efficient communication between the CBI and fund managers, the guidance requires fund managers to maintain a designated email address, which must be monitored daily.
A fund manager may choose to maintain a single email address for the fund management company and all funds under management, or maintain separate email addresses for each.
Although divergence from the guidance will not be a regulatory breach, the CBI has indicated it will use the guidance as a benchmark when forming a view about whether or not fund managers have complied with their regulatory obligations. The funds industry can expect to see aspects of the guidance included in the CBI’s themed inspections and enforcement priorities from now on.