In September 2014, the CBI1 issued a consultation paper entitled Fund Management Company Effectiveness – Delegate Oversight (‘CP86’). The aim of CP86 is to ensure that the management and operation of regulated funds have the interests of the investors at their core. To achieve this aim, the CBI proposed initiatives in the following areas:
- Delegate oversight
- Streamlining of UCITS2 and AIFMD3 managerial functions
- Residency of fund directors
- Board composition
CP86 concentrated on funds / fund management companies under the regimes of the UCITS Regulations 2011 and AIFM4 Regulations 2013. The focus of this note is on the oversight of the delegated functions such as investment management, distribution, risk management and investment operations.
In June 2015 the CBI issued a publication entitled Fund Management Company Boards which updated guidance on the oversight of delegates.
In this publication, the CBI highlighted the importance of funds / fund management companies exercising sufficient oversight over outsourced managerial functions.
The CBI clarified the roles of directors and designated persons. It made clear the ultimate oversight role of directors in contrast to the role of designated persons who are responsible for exercising control over delegates on a day-to-day basis, i.e. performance of managerial functions.
The CBI does not stipulate that directors must perform the managerial functions. Such functions may be performed by individuals who are not directors. However, directors may choose to perform managerial functions. In such circumstances, directors will be required to sign a separate appointment letter for the designated person role. This will include a separate time commitment additional to any time commitment as a director.
Consequences for the Industry
- There is clearly an increased focus on investor protection and oversight of fund operations. Funds / fund management companies need to ensure that the day-to-day monitoring of delegated management functions is prioritised. More active oversight of service providers, including investment managers, appears inevitable.
- The CBI publication of June 2015 is consistent with AIFMD in ensuring that funds / fund management companies do not operate as “letter box” entities. Funds and management companies will have greater substance and more stringent segregation of roles.
- The designated person role is becoming more substantive. A separate time commitment is required for each designated person role to take account of the requirements to perform tasks such as on-going oversight, report review and onsite visits to delegates. Directors exercising day-to-day control over delegates will see an increase in the aggregate time commitment to each fund complex.
- The CBI has concluded that separate letters of appointment from funds / fund management companies should be issued for the roles of directors and designated persons. The letters of appointment will be submitted to the CBI as part of the authorisation process.
- The CBI has stipulated that it will be acceptable for a designated person to perform more than one managerial function. However in line with AIFMD, the same person cannot perform both the risk management and investment management functions for a UCITS fund.
- Given the CBI’s focus on the allocation of sufficient time to each role, it is likely that there will be a significant reduction in the number of instances where directors also perform the designated person role.
- The trend of funds seeing non-directors with appropriate expertise to fulfil the designated person roles will likely accelerate.
How can KB Associates Assist?
KB Associates provides director and designated person services for funds / fund management companies under the UCITS and AIFMD regimes.
If you would like to discuss any issues raised in this article or related to KB Associates’ services in general, please feel free to contact Mike Kirby (+353 1 667 1980), Peter Northcott (+44 203 170 8813) or Mike Parton (+1 345 946 4224).
1 Central Bank of Ireland
2 Undertakings for Collective Investment in Transferable Securities
3 Alternative Investment Fund Managers Directive
4 Alternative Investment Fund Manager