On 14 December 2011, the Irish Funds Industry Association issued a Corporate Governance Code (the "Code") for Irish Investment Funds and their Management Companies. It simultaneously issued a Frequently Asked Questions document ("FAQ"), to complement the Code and support its introduction.
The introduction of the Code arises from an invitation from the Central Bank of Ireland (the "Central Bank") to the funds industry in 2010 to develop such a code, as part of a process of introducing corporate governance codes for the many sectors of the financial services industry in Ireland. A steering group within the industry was established to lead the project, which involved significant consultation with the Central Bank.
1. Application
The Code will apply to Irish authorised investment funds
and Irish authorised management companies. Although the Code is
voluntary in nature, its adoption is strongly recommended by the
industry and the Central Bank. The Code comes into effect on a
"comply or explain" basis. This means that where a Board
decides not to apply any provision of the Code, it should set out
its reasons why in the Directors' Report accompanying the
annual audited financial statements or alternatively publish its
reasons through a publicly available medium (e.g. a website)
detailed in the annual report.
2. Timing
The Code will be effective from 1 January 2012, with a
transitional period of 12 months until 1 January 2013. The FAQ
states that for Funds or Management Companies with financial
year-ends of 31 December, the first statement of compliance will be
included in the financial statements of 31 December 2012. For
financial year-ends of 30 June, the first statement of compliance
will be included in the financial statements of 30 June 2013.
3. Main Implications of Adopting the Code
We are satisfied that the vast majority of the
requirements set out in the Code are already being complied with by
the Irish authorised funds and management companies we advise.
However, over the coming months, Boards will need to review the Code and consider whether to adopt it. Obviously, the practical implications of adopting the Code will need to be understood by each director. Accordingly, the following is a summary of the principal practical implications of adopting the Code in full, in terms of processes to be implemented and documented, which may or may not be in place at the moment:
(i) the Board will need to specify on a periodic basis, as appropriate, the time commitment it expects of each director;
(ii) directors will be required to disclose to the Board any concurrent directorships held on other authorised funds, management companies and/or related entities which supply services to such schemes;
(iii) directors will also be required to disclose to the Board their other time commitments, including those devoted to any directorships of non-Irish funds;
(iv) the Board will need to satisfy itself that directors have sufficient time to fully discharge their duties;
(v) in considering director appointments, the Board will be required to assess, and document its consideration of, possible conflicts of interest;
(vi) the Board will also be required to document its procedures for dealing with such conflicts and must review compliance with those procedures annually;
(vii) the Board will be required to formally review Board membership at least once every three years;
(viii) the Chairman of the Board will be required to be reviewed at least once every 3 years;
(ix) the overall performance of the Board will be required to be reviewed annually, together with the performance of individual directors, with a formal documented review taking place once every three years;
(x) a schedule of directors' attendance at Board meetings will be required to form part of the annual informal Board performance review process;
(xi) the Board will be required to establish a documented "conflict of interest" policy for its members and where conflicts arise, the Board must ensure they are noted in the minutes;
(xii) the Board will be required to establish a formal schedule of matters specifically reserved to it for decision, which schedule must be documented and updated in a timely manner;
(xiii) the Board may establish committees, which will be required to have documented terms of reference evidencing all authorities delegated to them and detailing their functions, membership, reporting lines, meeting frequency, voting rights and quorums;
(xiv) the company will be required to detail in its annual report its compliance with the Code and explain any deviation, or alternatively publish the information through a publicly available medium (e.g. a website) detailed in the annual report;
(xv) the Board must ensure that internal control procedures of delegates are being monitored to ensure that they are effective;
(xvi) the Board will be required to ensure that there are appropriate processes and systems in place to monitor and manage risks identified by it or its delegates at all times.
The above is a summary only of what we see as being the most likely practical implications of adopting the Code. We would recommend that the directors review the Code in detail and formally consider the Board's current practices to identify any deficiencies.
4. Other Key Provisions
The other key provisions contained in the Code can be
summarised as follows:
(i) Composition of the Board
"three directors is recommended as the minimum size
for the Board;
"the majority of the Board must consist of non-executive
directors and there must be at least one independent
director;
"an independent director will not be an employee, partner,
significant shareholder or director of any service provider firm
receiving professional fees from the fund;
"it is strongly recommended that at least one director be an
employee, director or partner of the promoter or the investment
manager;
"a minimum of two directors on the Board must have Irish
residency;
"if any director has in excess of eight non-fund directorships
it raises a rebuttable presumption that that director's
time available is impacted – this must be explained in
the "comply or explain" statement referred to
above;
"before being appointed, a new director needs to demonstrate
to the satisfaction of the Board that he or she meets the Central
Bank's fit and proper standards; and
"appointments to the Board require the prior approval of the
Central Bank and any departure from the office of director, along
with the reason(s) for departure, should be made known to the
Central Bank.
(ii) Chairman
"a non-executive Chairman, who will lead the Board, encourage
critical discussions, challenge mindsets and promote effective
communication, must be appointed to the Board.
(iii) Independent Directors
"independent directors must be identified clearly in the
annual report;
"they must have a knowledge and understanding of the
investment objectives, policies and outsourcing arrangements to
enable them to contribute effectively.
(iv) The Role of the Board
" the Board is responsible for the effective and prudent
oversight of the company;
" it is ultimately responsible for ensuring that risk and
compliance is properly managed on behalf of the Fund/Management
Company and the Code sets out how this responsibility might be
discharged;
" it may delegate to committees or third parties, must have
mechanisms in place for monitoring the exercise of delegated
functions but cannot abrogate responsibility for those
functions.
(v) Appointments
" the Board is responsible for appointing all directors and
for ensuring they are adequately trained to discharge their
duties.
(vi) Meetings
" the Board must meet as often as is appropriate to discharge
its duties but should normally meet quarterly;
" detailed agendas must be circulated in advance and detailed
minutes must be prepared afterwards;
" all directors should attend all meetings;
" ongoing conflicts of interest may necessitate a change in
Board membership.
(vii) Committees
" the Code outlines some details governing the manner in which
Committees of the Board conduct their business.
(viii) Delegates
" the Board may delegate all or part of the management of the
Fund/Management Company to third parties and the Code makes
specific reference to investment management, administration and
distribution as examples of management functions that may be
delegated;
" the Code outlines under what conditions the Board can
delegate;
" the Board shall be responsible for monitoring the
performance of such delegates and must have mechanisms in place to
do so;
" specific reference is made to the fact that the delegates
should provide reports to the Board on at least a quarterly
basis.
(ix) Risk Management, Audit, Control &
Compliance
" The Code also outlines in detail the specific
responsibilities of the Board in the areas of:
- External Audit
- Compliance
- Identification, Monitoring and Management of Risks
- Internal Control
5. Conclusion
Rather than introducing a completely new corporate
governance regime, the Code represents a re-statement of
obligations that already apply to Irish domiciled Funds and
Management Companies. It largely outlines a set of principles and
guidance which codify existing practice and it combines this with
what is seen as best international practice. The requirements
outlined in the Code are stated to be the minimum recommended
requirements that a Fund or Management Company should meet in the
interest of promoting strong and effective governance. As stated
above, albeit that it is a voluntary Code, the expectation from the
industry and the Central Bank is that all Funds and Management
Companies will adopt it. In doing so, the practical implications
set out above will need to be considered.
To read the full Investment Funds Update December 2011/ January 2012, please click here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
