Corporate Governance Code for Funds: What Will it Mean?

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1 Crprate Gvernance Cde fr Funds: What Will it Mean? The Irish Funds Industry Assciatin has circulated a draft Vluntary Crprate Gvernance Cde fr the Funds Industry in Ireland. 1. Backgrund On 13 June 2011, the Irish Funds Industry Assciatin circulated a draft Vluntary Crprate Gvernance Cde fr the Funds Industry in Ireland (the Cde ). This arse frm an invitatin frm the Central Bank f Ireland (the Central Bank ) t the funds industry last year, as part f a prcess f intrducing Crprate Gvernance Cdes fr specific sectrs f the financial services industry in Ireland, t develp such a cde. A steering grup within the industry was established t lead the prject, which invlved significant cnsultatin with the Central Bank. 2. Applicatin The Cde will apply t Irish authrised investment funds and Irish authrised management cmpanies. The Cde has been cnfirmed by the Central Bank as an apprpriate and rbust cde f standards fr the gvernance and management f such Irish authrised investment funds and management cmpanies. The draft has been circulated fr industry cnsideratin and any bservatins r feedback was requested t be submitted n r befre 24 June The IFIA received a significant amunt f feedback frm the industry and this is currently being cnsidered by the Central Bank Plicy Cmmittee. Althugh the Cde is vluntary in nature, its adptin is strngly recmmended by the Central Bank. Hwever, rather than intrducing a cmpletely new crprate gvernance regime, the Cde largely utlines a set f principles and guidance which cdify existing practice and it cmbines this with what is seen as best internatinal practice. The requirements utlined in the Cde are the minimum recmmended requirements that a fund shuld meet in the interests f prmting strng and effective gvernance. 3. Timing It is expected that a respnse t industry feedback will be received frm the Central Bank shrtly, with a finalised Cde t be circulated afterwards. The final Cde will nt be effective until January 2012 and it is currently envisaged that a transitinal perid f 12 mnths will apply. The Cde will ultimately cme int effect n a cmply r explain basis. This means that where a Bard decides nt t apply any prvisin f the Cde, it shuld set ut its reasns why in the Directrs Reprt in the annual financial statements r alternatively publish its reasns thrugh a publicly available medium (eg a website). 4. Main Implicatins f Adpting the Cde We are satisfied that the vast majrity f the requirements set ut in the Cde are already being cmplied with by Irish authrised funds. As stated abve, the Cde represents a restatement f bligatins which already apply, rather than the intrductin f a significant new crprate gvernance regime.

2 Hwever, ver the cming mnths, Bards f Directrs f funds and management cmpanies will need t review the Cde and cnsider whether t adpt it. Obviusly, the practical implicatins f adpting the Cde will need t be understd by each directr. Accrdingly, the fllwing is a summary f the principal practical implicatins f adpting the Cde in full (as it currently stands), in terms f prcesses t be implemented and dcumented, which may r may nt be in place at the mment: (i) (ii) (iii) (iv) (v) (vi) (vii) the Bard will need t specify n a peridic basis, as apprpriate, the time cmmitment it expects f each directr; directrs will be required t disclse t the Bard any cncurrent directrships held n ther authrised funds, management cmpanies and/r related entities which supply services t such schemes; directrs will als be required t disclse t the Bard their ther time cmmitments, including thse devted t any directrships f nn-irish funds; the Bard will need t satisfy itself that directrs have sufficient time t fully discharge their duties; in cnsidering directr appintments, the Bard will be required t assess, and dcument its cnsideratin f, pssible cnflicts f interest; the Bard will als be required t dcument its prcedures fr dealing with such cnflicts and must review cmpliance with thse prcedures annually; the Bard will be required t frmally review Bard membership at least nce every three years; (viii) the Chairman f the Bard will be required t be reviewed at least nce every 3 years; (ix) (x) (xi) (xii) (xiii) the verall perfrmance f the Bard will be required t be reviewed annually, tgether with the perfrmance f individual directrs, with a frmal dcumented review taking place nce every three years; a schedule f directrs attendance at Bard meetings will be required t frm part f the annual infrmal Bard perfrmance review prcess; the Bard will be required t establish a dcumented cnflict f interest plicy fr its members and where cnflicts arise, the Bard must ensure they are nted in the minutes; the Bard will be required t establish a frmal schedule f matters specifically reserved t it fr decisin, which schedule must be dcumented and updated in a timely manner; the Bard may establish cmmittees, which will be required t have dcumented terms f reference evidencing all authrities delegated t them and detailing their

3 functins, membership, reprting lines, meeting frequency, vting rights and qurums; (xiv) the Fund will be required t detail in its annual reprt its cmpliance with the Cde and explain any deviatin, r alternatively publish the infrmatin thrugh a publicly available medium (eg a website) detailed in the annual reprt; (xv) the Bard must ensure that internal cntrl prcedures f delegates are being mnitred t ensure that they are effective; (xvi) the Bard will be required t ensure that there are apprpriate prcesses and systems in place t mnitr and manage risks identified by it r its delegates at all times. The abve is a summary nly f what we see as being the mst likely practical implicatins f adpting the Cde. We wuld recmmend that the directrs review the Cde in detail and frmally cnsider the Bard s current practices t identify any deficiencies. 5. Other Key Prvisins The ther key prvisins cntained in the Cde can be summarised as fllws: (i) Cmpsitin f the Bard three directrs is recmmended as the minimum size fr the Bard; the majrity f the Bard must cnsist f nn-executive directrs and there must be at least ne independent directr; an independent directr will nt be an emplyee f any service prvider firm receiving prfessinal fees frm the fund; it is strngly recmmended that at least ne directr be an emplyee f the prmter r the investment manager; a minimum f tw directrs n the Bard must have Irish residency; if any directr has in excess f eight nn-fund directrships it raises a rebuttable presumptin that that directr s time available is impacted this must be explained in the cmply r explain statement referred t abve; befre being appinted, a new directr needs t demnstrate t the satisfactin f the Bard that he r she meets the Central Bank s fit and prper standards. appintments t the Bard require the prir apprval f the Central Bank and any departure frm the ffice f directr, alng with the reasn(s) fr departure, shuld be made knwn t the Central Bank. (ii) Chairman a nn-executive Chairman, wh will lead the Bard, encurage critical discussins, challenge mindsets and prmte effective cmmunicatin, must be appinted t the Bard.

4 (iii) Independent Directrs independent directrs must be identified clearly in the annual reprt; they must have a knwledge and understanding f the investment bjectives, plicies and utsurcing arrangements t enable them t cntribute effectively. (iv) The Rle f the Bard the Bard is respnsible fr the effective, prudent and ethical versight f the fund; it is ultimately respnsible fr ensuring that risk and cmpliance is prperly managed n behalf f the fund and the Cde sets ut hw this respnsibility might be discharged; it may delegate t cmmittees r third parties, must have mechanisms in place fr mnitring the exercise f delegated functins but cannt abrgate respnsibility fr thse functins. (v) Appintments the Bard is respnsible fr appinting all directrs and fr ensuring they are adequately trained t discharge their duties. (vi) Meetings the Bard must meet as ften as is apprpriate t discharge its duties but shuld nrmally meet quarterly; detailed agendas must be circulated in advance and detailed minutes must be prepared afterwards; all directrs shuld attend all meetings; nging cnflicts f interest may necessitate a change in Bard membership. (vii) Cmmittees the Cde utlines sme details gverning the manner in which Cmmittees f the Bard cnduct their business. (viii) Delegates the Bard may delegate all r part f the management f the fund t third parties and the Cde make specific reference t investment management, administratin and distributin as examples f management functins that may be delegated; the Cde utlines under what cnditins the Bard can delegate; the Bard shall be respnsible fr mnitring the perfrmance f such delegates and must have mechanisms in place t d s; specific reference is made t the fact that the delegates shuld prvide reprts t the Bard n at least a quarterly basis.

5 (ix) Risk Management, Audit, Cntrl & Cmpliance The Cde als utlines in detail the specific respnsibilities f the Bard in the areas f: External Audit Cmpliance Identificatin, Mnitring and Management f Risks Internal Cntrl Attribute t Finán Breathnach, Partner, Investment Funds and Regulatin, Masn Hayes+Curran. Finán is Head f Masn Hayes+Curran's investment funds and regulatin unit and is a partner in the financial services department f Masn Hayes+Curran. Fr mre infrmatin, please cntact Finán at r The cntent f this article is prvided fr infrmatin purpses nly and des nt cnstitute legal r ther advice. Masn Hayes+Curran ( is a leading business law firm with ffices in Dublin, Lndn and New Yrk. Cpyright Masn Hayes+Curran All rights reserved