knowledge 11 January 2017 |

Central Bank Finalises Guidance for Fund Management Companies

Background

As set out in our previous briefing (here), in early 2014, the Central Bank began examining ways of enhancing the effectiveness of FMCs.¹ In June 2015 the Central Bank announced that it intended to reduce the number of “designated persons’ roles” to six specific managerial functions for both Alternative Investment Fund Managers (“AIFMs”) and UCITS Managers and to introduce a new organisational effectiveness oversight function. It also indicated that it intended to publish guidance for FMCs. It subsequently published the first three Parts of the Guidance in November 2015, dealing with delegate oversight, organisational effectiveness, and directors’ time commitments.

In June 2016 the Central Bank published a consultation on, among other things, new rules relating to the location of directors/designated persons and record keeping requirements. The consultation included drafts of the final three Parts of the Guidance, dealing with managerial functions, operational issues and procedural issues. This was the Central Bank’s third consultation on the issue of FMC effectiveness (“Third Consultation”). See our related briefing here.

On 19 December 2016 the Central Bank published its Feedback Statement to its Third Consultation (“Feedback Statement”), setting out the final version of the new rules, as well as its final Guidance. Details of the transitional arrangements applicable to the new rules and the Guidance are set out in the Central Bank’s UCITS and AIFMD questions and answers (“Q&A”), both of which were updated on 19 December 2016. 

New Rules

As mentioned, the Central Bank is adopting two new rules relating to a) the location of directors/designated persons, namely, the “effective supervision requirement”, and b) the retrievability of records, both of which are subject to transitional arrangements. The new rules will be included in the amended Central Bank UCITS Regulations² and in the forthcoming Central Bank AIF Regulations.³

Effective Supervision Requirement

The purpose of the new location rules is to ensure that the Central Bank is well-positioned to exert effective supervisory influence over a firm and its management.

Under the new rules, a management company must conduct a preponderance of its management in the EEA and at least half of its directors and at least two of its designated persons must be resident in the EEA. In addition, in the case of a management company with a PRISM⁴ rating of Medium Low or above, three directors (or two directors and one designated person) must be resident in Ireland. A management company with a PRISM rating of Low must have two directors resident in Ireland.

The new effective supervision requirement is more flexible than that initially proposed by the Central Bank, which would have required an FMC to have at least two thirds of each of its directors and designated persons in the EEA.

A number of responses to the Third Consultation raised concerns about the possible impact of the proposed effective supervision requirement on the Irish funds industry following Brexit. In its Feedback Statement, the Central Bank details the factors which are relevant to its assessment of the extent to which an FMC is subject to effective Central Bank supervision. These factors suggest that should the UK decide to leave the EEA, the Central Bank may still consider that it can effectively supervise and influence an FMC that has directors/designated persons that are located in the UK even if it does not have the requisite number of directors/designated persons in the EEA.

Retrievability of Records

A management company must keep all of its records in a way that makes them immediately retrievable in or from Ireland. As set out below, the Guidance provides further details as to the meaning of “immediately”.

The Guidance

The Guidance contains six parts, as follows: Part I – Delegate Oversight; Part II – Organisational Effectiveness; Part III – Directors’ Time Commitments; Part IV – Managerial Functions; Part V – Operational Issues; and Part VI – Procedural Matters.

According to the Central Bank, the Guidance is designed to ensure FMCs’ compliance with their regulatory obligations and to “allow the Central Bank to carry out its engagement model without undue constraint”. Divergence from the Guidance will not be a regulatory breach, however the Central Bank will refer to it when considering whether an FMC has complied with its regulatory obligations.

Regarding the most recently published parts of the Guidance, points to note include the following:

•  Designated Persons: an individual may be appointed as both a director and a designated person. However, in such instances, he or she must receive two separate letters of appointment and the Central Bank will look to receive a copy of each designated person’s letter of appointment as part of the FMC’s authorisation process. A designated person must be sufficiently senior and should normally have experience and expertise in the managerial function he or she is managing.
• Retrievability of Records: the Central Bank will consider records to be immediately retrievable for the purpose of the retrievability of records rule where: a) documentation requested before 1pm is provided to it on the same day, and b) documentation requested after 1pm is provided to the Central Bank before noon on the following day on which the Central Bank is open for business.
•  Dedicated email address: each FMC must maintain a designated email address for Central Bank communications. Among other things, the FMC must ensure that the address is checked at least daily for communications from the Central Bank. 

Transitional Arrangements

In sum, the Central Bank’s work on FMC effectiveness has resulted in new rules on a) the streamlining of managerial functions; b) the organisational effectiveness role; c) the effective supervision requirement; and d) record retrievability (collectively, “Rules”). It has also resulted in the Guidance, Parts I - III of which were published on 1 November 2015, and Parts IV - VI of which were published on 19 December 2016.

Both the Rules and the Guidance are subject to a number of transitional arrangements, with the exception of Part VI (Procedural Matters) of the Guidance which reflects existing FMC Guidance. The applicable transitional arrangements depend on whether the relevant FMC was authorised a) before 1 November 2015; b) between 1 November 2015 and 30 June 2017 (inclusive); or c) after 30 June 2017.

FMC authorised before 1 November 2015:

•  the Rules apply from 1 July 2018;
• Part I (Delegate Oversight) and Part III (Directors’ Time Commitments) of the Guidance apply from 4 November 2015;

• Part II (Organisational Effectiveness) of the Guidance applies from the date the relevant FMC appoints a person to the Organisational Effectiveness Role (eg, 1 July   2018 at the latest);

• Parts IV (Managerial Functions) and Part V (Operational Issues) of the Guidance dealing with the retrievability of records apply from 1 July 2018; and
• Part V (Operational Issues) of the Guidance dealing with the dedicated email address applies from 30 June 2017.

FMC authorised between 1 November 2015 and 30 June 2017:

• the rules on managerial functions and the performance of the organisation effectiveness role apply from the FMC’s date of authorisation;
• the rules relating to effective supervision and record retrievability apply from 1 July 2018;
• Parts I (Delegate Oversight) and III (Directors’ Time Commitments) of the Guidance apply from the FMC’s authorisation date;
• Part II (Organisational Effectiveness) applies from the date that the FMC appoints a person to the Organisational Effectiveness Role; and
• the arrangements for Parts IV (Managerial Functions), and V (Operational Issues) are as for an FMC authorised before 1 November 2015.

FMC authorised after 30 June 2017:

• will only be authorised if it complies with the effective supervision and record retrievability rules;
• an FMC that is an AIF must comply with Part V (Operational Issues) of the Guidance in order to be authorised, a UCITS must comply with Part V (Operational Issues) from its date of authorisation;
•  must comply with the rules on managerial functions and organisational effectiveness role from the date of authorisation as well as Parts I (Delegate Oversight), III (Directors’ Time Commitments) and IV (Managerial Functions) of the Guidance; and
•  Part II (Organisational Effectiveness) applies from the date that the FMC appoints a person to the Organisational Effectiveness Role.