29 January 2017 by Haley Camp and Jo Carre
An exclusive extract from ICSA’s new study text, Fund Administration – part of the Level 5 International Finance and Administration qualification
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.
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.
Fund directors, howsoever that role is established within the fund structure, will generally consider their responsibilities through various categories:
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:
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:
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.
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