Update – Fund Management Company Effectiveness – Delegate Oversight

Background

• Investors increasingly focus on an investment fund’s governance structure as an important consideration when allocating capital.
• Regulators in many fund domiciles are considering the most appropriate fund governance requirements.

Recent Developments

• In 2014 the Central Bank of Ireland (“CBI”) issued a consultation paper considering how fund boards should be constructed and act to ensure effective oversight of delegates. Four key areas were considered:
  • The provision of guidance (not rules) as to how oversight of delegates may be performed.
  • The identification of six managerial functions for which individual directors or named delegates of the board would be responsible. These functions would be applicable to both UCITS and AIFM’s
  • A requirement for one rather than two Irish resident directors based on the belief there is a limited supply of local directors with risk and investment management expertise
  • A requirement to document the basis for the appointment of directors.

Our Thoughts

• Practical guidance on delegate oversight is welcome. It may be appropriate for this to be issued by an entity other than the CBI to reinforce that this is guidance and not mandatory.
• The streamlining of managerial functions is entirely sensible. However, any suggestion that the directors responsible for such oversight act in a quasi-executive capacity would be unwelcome. Selection of expert regulated service providers plus appropriate reporting mechanisms can ensure directors’ effective oversight of functions in a manner consistent with the non-executive nature of the role.
• Boards with diverse skill sets including investment management and risk management are appropriate. However, one unintended consequence of the proposal for only one resident director may be for funds to replace directors independent of investment manager with directors from investment managers. This is unlikely to enhance the governance structure.
• Documentation of criteria supporting board appointments is welcome.
• It is important to recognise the role various regulated entities play in the overall governance framework within which funds operate. While directors retain ultimate responsibility any attempt to require day-today management of regulated expert service provide is inappropriate.