On 19 September 2014, the Central Bank of Ireland (CBI) published a consultation paper entitled “Fund Management Company Effectiveness – Delegate Oversight”.
The paper sets out a number of initiatives which are designed to encourage fund/fund management companies, acting on behalf of investment funds, to take more control over their delegates and concentrates on two main areas, namely:
- The authorisation process where the quality of the boards and internal arrangements of fund management companies are scrutinised
- The day to day process of guiding and overseeing administration and investment of the monies invested with investment funds
The consultation invites views on four main areas, as follows:
1. Central Bank Fund Management Company Delegate Oversight Guidance
The CBI is considering issuing a delegate oversight good practice guidance document. To devise this good practice guidance, the CBI invited a number of experienced professionals to provide it with a draft set of principles which the board of fund/fund management companies could follow in the supervision of delegates. They also identified a number of tasks which should be retained by the board of directors of a fund/fund management company. Their report is set out in Appendix 1 to the consultation.
The CBI is considering issuing this set of principles as guidance.
2. Streamlining Designated Managerial Functions
At present, the CBI requires UCITS management companies and AIFMs to identify designated persons who will be responsible for specified managerial functions. According to the Consultation Paper, the CBI is of the view that there is significant overlap between these different tasks that could produce a risk in accountability as a consequence of excessive overlap between different designated tasks.
The CBI proposes to consolidate and refine the managerial functions into the following six areas:
- Risk Management
- Investment Management (the same individual should not be appointed to risk management)
- Regulatory Compliance
- Capital and Financial Management
- Organisational Effectiveness
To explain how the CBI envisages the streamlined managerial functions will operate, a non-exhaustive description of the role of designated persons is provided in Appendix 2 of the consultation.
3. Requirement for Irish Resident Directors
The CBI identifies two problems with the current requirement for fund/fund management companies to have at least two Irish resident directors, as follows:
- Residence is not defined
- It potentially limits the range of relevant skills and competencies on fund/fund management company boards
The CBI is proposing to relax the requirement, as follows:
- There should be two directors who are in Ireland for not less than 110 working days per year
- Alternatively, instead of having two such directors, a company need only have one such director provided he/she is:
- Available to “engage” with CBI supervisors on request within any 24 hour working day period and is available to attend meetings at the CBI on reasonable notice
- Unconnected to the depository or a service provider
- Competent in one of the six designated managerial tasks listed at 2 above
4. Rationale for Board Composition
The CBI proposes to implement a new rule to require fund/fund management companies to document as part of the authorisation process specifically how the composition of its board as a whole provides it with sufficient expertise to conduct the tasks expected of the directors, whether acting as members of the board or, where relevant, as the designated person for a managerial function.
On an on-going basis, the person with the managerial function of monitoring organisational effectiveness will be expected to keep under review the effectiveness of the board and the fund/fund management company having regard to the contribution of each of the individual directors and individual designated persons.
Specific Questions for Consideration
While the CBI is consulting on the whole of the fund/fund management company governance package, they are seeking stakeholders’ views on the following questions in particular:
- Is publishing a delegate oversight good practice document along the lines of Appendix 1 a good approach to encouraging the development of the supervision of delegates by fund/fund management companies?
- Is the breakdown of revised managerial functions correct? Should other managerial functions be provided for? What are your observations about what the operational effectiveness function might entail and how this might be performed? Do you see any obstacles to the Chairperson performing the operational effectiveness function?
- Is relaxing the two Irish resident director requirement the correct approach? Will relaxing this requirement have an adverse impact on the ability of the Central Bank to have issues with distressed investment funds resolved? If so, how could this be addressed?
- What are your views on the proposed approach to measuring time spent in Ireland? Can you suggest any alternatives or any enhancements to the definition proposed by the Central Bank?
- Is there a downside to requiring fund/fund management companies to document the rationale for the board composition? Will fund/fund management companies require a transitional period during which they can alter their board composition to ensure they have sufficient expertise and how long do you consider would be a reasonable timeframe for such adjustments?
- Are there any other elements which should be included by the Central Bank in a Fund Management Company Effectiveness – Delegate Oversight initiative?
The consultation closes on 12 December 2014.