CP86: Fund Management Company Effectiveness - Use of Designated Persons
09 Jun 2016
The Central Bank of Ireland (the "Central Bank") has been engaged in a body of work to examine and improve fund management company ("ManCo") effectiveness since early 2014. In June 2016, the Central Bank issued a third consultation paper on Fund Management Company Effectiveness (the "Paper") which is available here.
The Paper addresses managerial functions (primarily regarding the use of designated persons ("DPs")), operational issues (ManCo recordkeeping) and procedural matters (authorisation process for new ManCos). It sets out the work already undertaken by the Central Bank in relation to the governance of ManCos and outlines the proposed approach to compliance and supervision issues.
The draft managerial functions guidance provides that DPs are "the line of management that lies between directors and delegates", and envisages a more substantive and executive type role than may have otherwise been assumed. Whereas the board will have a necessarily high level oversight role, DPs are responsible for tasks that are to be monitored on a "day-to-day" basis (but this does not necessarily need to be monitored "daily"), DPs should have the experience relevant to the particular management function and the capacity necessary (e.g. sufficient time available) to carry out their roles. They should know exactly which regulatory obligations fall within their remit and be up-to-date on developments concerning their managerial function. DPs should be at a sufficient level of seniority such that they are the appropriate individuals to meet with the Central Bank as part of the Central Bank’s supervisory engagement process, or challenge delegates as required.
It further provides that ManCos should not rely on the policies and procedures of their delegates or group without considering whether this is appropriate. They should have their own suite of policies and procedures. Where a ManCo intends to rely on a policy or procedure of its delegate or group, its own policy or procedure should document how this has been verified as appropriate and how it will be kept under review.
Location of directors/designated persons
The Paper proposes new rules on the location of directors/designated persons which are summarised in the table below. It is worth noting that the Central Bank has clarified that DPs can be based outside Ireland (albeit a majority would have to be EEA-based).
|ManCos with a PRISM impact rating of Low||ManCos with a PRISM impact rating of Medium Low or higher|
|At least two Irish resident directors||At least three Irish resident directors or at least two Irish resident directors and one Irish resident designated person|
|At least two thirds of directors to be located in the EEA||At least two thirds of directors to be located in the EEA|
|At least two thirds of designated persons to be located in the EEA||At least two thirds of designated persons to be located in the EEA|
Retrievability of records
ManCos will be required to keep all of their records in a way that makes them immediately retrievable in or from Ireland, and maintain a clearly defined records retention policy. The Paper also sets out that ManCos should maintain a dedicated email address for communications with/from the Central Bank which should be monitored daily.
Monitored email address
The Central Bank is due to issue a reminder to fund management companies of its broad powers to require them to provide the Central Bank with information within such timeframe as the Central Bank may specify.
Consultation Response and Timing
All stakeholders are invited to respond to the proposed rules and guidance outlined in the Paper no later than 25 August 2016. The Central Bank envisages a transitional period of one year following the completion of the consultation process for fund management companies to comply with the new rules and guidance.
Other Regulatory Developments
- The Central Bank has published a thirteenth edition of the UCITS Q&A. It has confirmed in ID 1063 that except in unique and unusual circumstances a UCITS fund management company should conduct an organisational effectiveness review at a minimum on an annual basis. ID 1064 confirms that over-hedged positions should be included by UCITS when calculating leverage as the sum of the notionals, in calculations of counterparty risk and/or in calculations of concentration exposures.
- The Central Bank has provided feedback in relation to CP99 in relation to proposed amendments to the AIF Rulebook. Points worth noting are that (i) knowledgeable employees within the AIFM's group should benefit from the exemption from the eligibility criteria and minimum subscription amount (EUR 100,000) required to invest in a Qualifying Investor AIF managed by that AIFM; and (ii) as expected, the AIF Rulebook will be replaced by a set of regulations in the form of a statutory instrument (similar to the approach taken for UCITS).
The Central Bank also confirmed that it considers the submission of half yearly management accounts covering both six month periods an important and necessary supervisory tool and as such it will introduce this requirement.
- The Central Bank has published a nineteenth edition of the AIFMD Q&A. It has confirmed in Q&A 1104 that except in unique and unusual circumstances an AIFM should conduct an organisational effectiveness review at a minimum on an annual basis. Q&A 1105 confirms that the significant influence rule does not apply to any proportion of assets which is invested in venture capital, development capital or private equity.
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