The Central Bank's investigation into five sub-funds identified four breaches of S.I. No. 352/2011 - European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011 and two breaches of S.I. No. 420/2015 - Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Undertakings for Collective Investment in Transferable Securities) Regulations 2015.
The enforcement action arose from the Central Bank's themed review into potential closet indexing of 2,550 Irish authorised UCITS, which followed the European Securities and Markets Authority published research in 2016 highlighting the alleged practice of "closet indexing". Closet indexing involves an investment policy, which indicates that the fund operates an active strategy, while (i) the fund's performance in reality adheres closely to a benchmark and therefore implements an investment strategy, which requires less input from the investment manager and/or (ii) charges management fees in line with those of funds that are considered to be actively managed.
The Central Bank investigation found that for varying periods between July 2011 and December 2018 the UCITS management company in question failed in its obligations to both investors and to the Central Bank, by not including in the investment policy outlined in the relevant prospectuses and KIIDs the required information on an index-tracking strategy, together with the index being tracked.
Seána Cunningham, the Central Bank's Director of Enforcement and Anti-Money Laundering, commented as follows:
"Transparency around the investment policy or strategy of a fund is a critical element in investor protection. Fund management companies ... are responsible for ensuring prospectuses and key investor information documents issued in respect of funds they manage contain information necessary for investors to be able to make informed decisions regarding the investments proposed to them. The requirements for accurate prospectuses and key investor information documents are an essential part of the UCITS regulatory framework.
One of the key features of any sound regulatory system is ensuring that firms and their products meet the appropriate standards in order to enter the financial services industry in the first instance. Effective gatekeeping by the Central Bank relies on accurate and complete information being submitted by firms seeking fund authorisation, as part of the assessment of their applications and in ongoing supervision."
The Central Bank set the fine at €168,000, but reduced its sanction by 30% in accordance with its settlement discount scheme.
This latest enforcement action from the Central Bank has again drawn attention to broader issues around the accuracy and effectiveness of disclosures to fund investors to enable them make an informed judgement of the relevant investment, (and, in particular, of the risks attached) and the legitimate expectations of investors in respect of the services provided by the fund manager.
Please refer to our advisory from July 2019, which outlined the findings of the Central Bank's themed review of closet indexing.
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