Time for Compliance with the Funds Corporate Governance Code
The Corporate Governance Code for Collective Investment Schemes and Management Companies (the "Code") issued by the Irish Funds Industry Association (the "IFIA") in consultation with the Central Bank of Ireland (the "Central Bank") became effective on 1 January 2012. The Code applies to Irish corporate funds and corporate entities that act as fund management companies (of either UCITS or non-UCITS). The Code aims to ensure that the board of directors of each fund/management company effectively oversees the fund’s activities.
The Code covers two key elements, namely, guidelines on the composition of the board and guidelines on the key measures or activities that should be undertaken by the board. The Code is voluntary however the Central Bank expects that every fund and management company will adopt the Code before 31 December 2012. Any non-adherence will need to be explained to the Central Bank and may cause that fund/management company to be closely scrutinised by the Central Bank – so non-compliance should only be considered in exceptional circumstances.
Some of the main points addressed in the Code are as follows:
In line with the aim of ensuring effective oversight of the fund/management company’s activities by the board, the following measures are prescribed within the Code:
- Board must meet quarterly (some exemptions for certain non-UCITS);
- Key strategic decisions to be taken by the board to be set out – the Code includes a non-exhaustive list and a reserved powers schedule must be formulated;
- A valuation policy should be adopted or a valuation committee appointed and competent persons formally approved to value the fund’s assets; and
- Additional specific obligations on directors time commitments, conflicts of interest, internal controls, risk monitoring, compliance, audit and accounting and monitoring of delegates.
- No hard limit on the number of fund directorships an individual can hold, rather it requires that each director has sufficient time to devote to each role (and the fund/management company will be required to document the time commitment it expects for each director and each director will be required to disclose in writing to the board their other time commitments);
- There is a rebuttable presumption that no more than eight non-fund directorships may be held without impacting on the director’s time available to fulfil his or her role and functions as a director of a fund/management company;
- Minimum three directors/permanent chairman/board composition formally reviewed every three years;
- Two Irish resident directors (existing Central Bank requirement);
- One independent director – range of criteria including not receiving other fees from the fund/management company;
- One promoter/investment manager linked director (third party management companies are exempt); and
- Two directors (one independent) must be reasonably available at short notice to meet the Central Bank.
Reference should be made to the Code and the Frequently Asked Questions for further details on specific elements of the Code. These can be accessed here.
From a practical perspective, we envisage two options that boards may consider in order to ensure compliance with the Code.
(i) Gap Analysis
The first option, and more familiar at this stage, is to engage a gap analysis of the present board (composition and functions) against the requirements contained in the Code and put in place necessary measures for any gaps identified.
Particularly for UCITS funds/management companies that operate under a UCITS IV business plan, many of the measures outlined in the Code will be carried out already. Therefore the actions required or “gaps” identified in the gap analysis are likely to be quite few. Qualifying investor fund ("QIF") boards are likely to require a greater amount of new measures to comply.
However, in either case, a disadvantage of this is that documented compliance with the Code is likely to be framed across a range of sources - business plan, compliance manual, minutes of board meetings and any additional disparate policies and procedures. There is also the question of where to keep any newly documented elements put in place specifically for the Code.
(ii) Fund Governance Guidelines
Maples and Calder have developed a Fund Governance Guidelines ("FG Guidelines") document which avoids any need to do a gap analysis on board functions (just gap check on composition). Instead, the FG Guidelines outline, in a single source document, all the obligations, requirements, policies and procedures the board will need to follow.
The FG Guidelines, once tailored for a specific fund/management company, can be simply adopted by the board, therefore ensuring full compliance with the Code. The FG Guidelines (along with supporting draft minutes for adoption) have been developed specifically by Maples and Calder as a best practice operating model for our Irish fund and management company clients following a detailed analysis of the Code and an understanding that it requires a greater amount of documented policies and procedures than was initially anticipated.
In addition to the logistical benefits of a single source document and the anticipated efficiencies in implementing (versus the gap analysis and documenting gaps route), there are a number of other potential benefits to using the FG Guidelines. It can be formally adopted by the board and can then operate as a reference tool for directors themselves. Boards can also consider a policy of making this accessible to investors (as well as the Central Bank, if requested). It also more clearly aligns the board with the compliance statement that will be made in the financial statements regarding adherence to the Code. In addition, it may have additional positive marketing impact, for example, in the context of investor due diligence questionnaires.
How can Maples and Calder help?
Fund boards (both UCITS and non-UCITS) now need to review the Code, assess its impact on their business and take the appropriate measures in order to comply with its terms before the end of the 12 month transition period (i.e. by 1 January 2013).
Maples and Calder is pleased to engage with our Irish fund and management company clients in order to facilitate this adherence on the terms that are most appropriate in each case, be it on the basis of a gap analysis and supplementing compliance or on the basis of a newly adopted set of FG Guidelines.