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In this fourth article in the KB Associates’ series on investment fund governance we outline the responsibilities of a director of an investment fund. We also consider how such responsibilities should be discharged.


With corporate governance under a spotlight there is increased focus on the role performed by directors of investment funds. Directors must understand their duties and be in a position to discharge them properly.

In this paper we make reference to various duties and obligations which are applicable in common law jurisdictions. With the exception of Luxembourg, the principal offshore fund domiciles operate under common law.

Duties of directors can be classified as those arising under the following headings:

  1. Common law
  2. Legislation
  3. Regulation
  4. Contract

1. Common law

Common law duties have been developed over the years by court decisions and can be further divided into:

a. Fiduciary Duties – These duties are principally owed by the director to the company itself. A director is required to act in good faith and in the best interests of the company as a whole rather than in the interests of a particular shareholder.

Clearly a director must not act illegally, but perhaps less obviously directors must not do anything which is “ultra vires” meaning outside of the powers of the company. In addition directors must not exceed the powers which have been granted to them by the company.

Directors should generally avoid putting themselves in a position where their personal interests conflict with the interests of the company. If a director has an interest in a contract which may be entered into by the company this interest must be disclosed by the director and the director should not in any way participate in the company’s deliberations regarding the contract.

Fiduciary duties are similar to those that the law imposes on a trustee and the highest standards are generally applied in assessing if such duties have been adequately discharged.

b. Duties of skill, care and diligence – there is an overriding duty on directors to exercise their powers with reasonable skill and care. The level of skill and care which is required is that of a reasonable person placed in the position of that director with the expertise and experience of that individual. Clearly fund directors need to exercise non-expert oversight of the functions performed by the service providers to the fund. It is generally accepted that directors will not be liable if they make an error of judgement but will be liable for gross negligence. For example, a fund director may not be liable when a fund pursues a particular investment strategy consistent with the terms of the prospectus and makes a loss. However, a director may be considered negligent if he or she permits the fund to make investments which are clearly prohibited by the relevant provisions of the offering document. In such circumstances personal liability may arise.

2. Legislation

Many international fund structures are established as corporate vehicles and company legislation will generally set out various duties which are imposed on directors including the following:

a) A general duty for each director to ensure that the requirements of the relevant company’s acts are complied with. A director must be in a position to demonstrate that he/she took all reasonable steps to ensure compliance

b) A duty to disclose interests in the company – a director is required to disclose any interests which he/she has in the company itself or in any group company and a register of these interests must be maintained.

c) A duty to disclose any interest which he/she has in a contract or a proposed contract with the company – for example if the director is the owner of a service provider offering services to the company.

d) A duty not to engage in fraudulent or reckless trading. Under normal circumstances a company operates with limited liability and the directors of a company are not personally liable for debts of the company. However, under companies’ legislation, if it is established that a director engaged in fraudulent or reckless trading, the director may be personally liable for the debts of the company.

e) A duty to keep proper books of account and to have the accounts of the company audited. In a situation where a company is wound up and found to be insolvent, and it is established that the failure to keep proper books of account has contributed to the insolvency, a director may have unlimited liability for all or part of the company’s debts. Directors are also obliged to have the accounts of the company audited at least once a year. Many investment funds are also required to produce unaudited semi-annual accounts.

3. Regulation

Directors of regulated investment funds, in a personal capacity, are required to comply with the relevant regulations. They also have responsibility for ensuring that the fund itself is in compliance. Various countries have introduced detailed requirements which must be met by a candidate before he/she can be approved to act as a director of a regulated fund. In Ireland, the Central Bank of Ireland (“the Central Bank”) has implemented a Fitness and Probity regime, in the UK the Financial Conduct Authority operates a similar Approved Person’s regime and other jurisdictions are considering the introduction of equivalent rules. A director is required to be familiar with the relevant requirements and to comply with them.

Where an investment fund is listed on a stock exchange there are additional regulations which apply. Many investment funds from different domiciles are listed on the Irish Stock Exchange and the rules of the Irish Stock Exchange require directors to have sufficient knowledge, competence and experience to perform the fund’s activities effectively.

4. Contract

It is standard practise for an independent director of an investment fund to have a service agreement which will set out the duties and obligations of each party. This contract will be in accordance with the requirements of the relevant fund governance code, regulation and legislation. A service contract may be quite detailed and will include various provisions setting out what is expected of the director. Typically it will require that a director devote sufficient time to allow the proper discharge of the director’s various duties and obligations. It will require a director to properly prepare for and attend regular scheduled board meetings. Normally such a contract will also require a director to be available at short notice to address exceptional items which may arise. It will also require that a director disclose any conflicts of interest, any legal actions being taken against the director or indeed any investigations by any regulatory body to which a director may be subject.


There are certain minimum practical steps that a director should take.

The Board of an investment fund is responsible for oversight and for ensuring that risk and compliance are properly managed. Historically for UCITS funds and now for non-UCITS funds under the Alternative Investment Fund Manager’s Directive the business plan / programme of activities will describe the various managerial functions and name the individuals or directors with primary responsibility for each function. It is worth noting that the entire board also has a collective responsibility. The Directors have ultimate responsibility for ensuring that the fund is operated in accordance with the applicable legal and regulatory requirements. Although funds are normally operated using an outsourced model key decisions must be considered by the board dealing with matters such as:

  • Creating new funds / sub-funds
  • Changing investment objectives
  • Changing service providers
  • Anti-money laundering issues
  • Regulatory and compliance issues

Directors should ensure that:

  • Proper board meetings are conducted. Detailed agendas should be prepared and issued in advance together with all necessary supporting documentation. The directors must play an active role in setting the agenda for meetings and requesting reports. The judgement in the Weavering case made it clear that it is not sufficient for directors to simply “rubber stamp” the various resolutions which are proposed for discussion. Board minutes which are prepared in advance may be useful as a checklist but must be amended to reflect the actual meeting and deliberations which take place. Directors must be given sufficient time to review board materials and should come to the board meetings well prepared. All directors are expected to attend and actively participate in each board meeting. The minutes should clearly reflect the role played by the directors in running the board meetings.
  • Board decisions are properly recorded in the minutes. The rationale for actions taken should be clearly documented. Detailed minutes will generally be approved at the next board meeting. As the fund itself may be a regulated entity the directors need to be able to explain their decisions to the relevant regulator if necessary.
  • Legal and regulatory requirements are met. The directors must ensure that proper reporting procedures are in place so that any material legal or compliance issues are reported promptly to the board. The trustee / custodian may have an obligation to report material issues to the relevant regulator and the board must ensure that it is notified of, and thoroughly understands, these issues. A director is not necessarily expected to be an expert in compliance but must have sufficient knowledge to recognise material issues and ensure that appropriate action is taken.
  • Proper books of account are maintained. For an investment fund the board will normally delegate the preparation of the accounts to the administrator. The board is responsible for preparing a director’s report which forms part of the financial accounts. The accounts will also be subject to external audit and must be filed with the regulatory authority. The board should ensure that the chosen audit firm is experienced in the area of investment funds.
  • Fund assets are properly valued. A detailed valuation policy should be established and the directors are responsible for ensuring that the policy is implemented.
  • Service providers are subject to proper oversight. The investment management, administration and distribution functions are typically outsourced. The board is responsible for the appointment of these delegates and must monitor the performance of these functions. Directors should receive regular reports from the service providers which enable them to assess performance. The board must also be satisfied that the internal control procedures of the service providers are operating effectively.
  • Risks relating to the investment fund are identified and managed. The board will receive a variety of different reports from various service providers. In addition to reviewing the reports the directors should also be prepared to challenge the reports and consider the veracity of the information contained therein. The board must ensure that there is appropriate disclosure of the relevant risks in the offering document / prospectus and that there are appropriate procedures and systems in place to monitor and manage risks.

Critical self-evaluation of performance

Many corporate governance codes require that the Board review both its own overall performance and the performance of each individual director. The evaluation of a director’s performance should take various matters into consideration such as whether or not:

  • a director is sufficiently prepared for meetings
  • a director makes a significant contribution and adds value / insight
  • a director provides independent views
  • a director keeps up to date with industry developments
  • a director’s attendance is satisfactory


To take on the role of director to an investment fund, the candidate must have the relevant experience and expertise. A director must be aware of the various duties which are outlined above and must be prepared to discharge these duties in a professional and competent manner. With increased regulation, and the introduction of fitness and probity regimes and fund governance codes in various jurisdictions, potential directors need to be confident that they have the requisite expertise and commitment to operate in an increasingly complex environment.

If you have any questions regarding this article or general fund governance queries please feel free to contact one of the KB Associates consultants below.

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