Key Note Speaker: Gareth Murphy, Director of Markets Supervision at Central Bank of Ireland

We would like to thank Gareth Murphy, who delivered the key note address to open Funds Congress 2013. His comments focused on a number of key challenges the fund management is currently facing, of pertinence to both allocators and investment managers. The full transcript of his speech can be viewed here.

In summary:

The primary objective of the Funds Congress was to provide investment with a list of actions they should consider. This, we believe, was achieved:

1. The asset management industry must engage in the political process and agenda at both an individual firm level as well as at industry associate level. Regulatory reforms are being directed by politicians at a European level, and this has a huge influence on how regulators will implement this agenda in practice.
2. The asset management industry should examine other industries, such as insurance, and how they influence politicians and regulators. Asset managers claim an unlevel  playing field with other product providers. How do these other sectors engage with government?
3. Managers are losing touch with end investors as more products are sold through distributors. Distributors who control shelf space also control what goes on it.
4. Be prepared for the implications of the European Financial Transaction Tax, EIMR, central clearing of OTC derivatives, etc.

In addition, our panel of regulators raised the following:

• Start implementing your AIFM solutions. Detailed regulations may be uncertain, but time is short and applying best efforts is reasonable. Those filing later will face longer queues. As a fund management business you do not want to be in a position where you can’t sell products because you are awaiting authorisation.
• Key themes for ongoing supervision include Conflicts, Governance, AML, Product Suitability and Consumer Outcomes, Risk Management and responsibility over outsourcing of functions.

There were many other action points covered in the course of the day. Speaker slides can be accessed here.

In Conclusion:

Be Informed. Be Prepared. Be Ready.

We would also like the thank Paul Freeman, who chaired the morning panel as well as all the other speakers and panelists. In addition thanks are due to Michael Collins of the FCA, Grainne McEvoy of the Central Bank of Ireland, and Jean-Marc Goy of the CSSF.

Amongst the issues covered by the speech are the economic background informing current pan-European funds regulation, other important macro factors like the ageing population and an overburdened pensions system, and other regulatory/fiscal initiatives that impact the funds industry, like the Financial Transaction Tax. The speech also touched on ongoing regulatory and distribution developments in an ever more complex landscape for asset managers.

There was plenty of interest for delegates to take away from this speech, and you can view the full text of Gareth’s speech here.

One area under close scrutiny is fund directorships. Investors are asking if a limit on directorships per person should be imposed.

The Cayman Islands Monetary Authority, known as CIMA, last month outlined its proposals to create its first public database of funds domiciled on the islands and their directors. The regulator, which looks after the world’s leading offshore jurisdiction, home to almost 10,000 funds,  has asked accountancy firm Ernst & Young to carry out an anonymous online poll on the optimum number of directorships.

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The British overseas territory, which wants to shed its reputation for clandestine financial activity, is introducing sweeping reforms that will make public the names of thousands of previously hidden companies and their directors.

In proposals sent to Caymans-based hedge fund businesses and seen by the Financial Times, the islands’ powerful monetary authority, CIMA, has outlined plans to create a public database of funds domiciled on the island for the first time. The database will also list funds’ directors, pending an ongoing consultation process due to close in mid-March.

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A free-to-attend conference in central London for asset management professionals. Hear about the latest developments and trends in global funds management from industry experts.

Why attend?

The Funds Congress is a great opportunity to hear from some of the leading executives and influencers in global asset management, both long only and alternative. At this year’s Fund Congress we are hosting a series of insightful panel discussions covering the topical and relevant issues affecting investment management firms in 2013, from FATCA to AIFMD, from managing conflicts of interest to managing investor relations.

Back by popular demand, this year’s Funds Congress has been extended to broaden the topic menu and includes an afternoon session. There will also be an opportunity to network with peers over lunch and drinks.

Come and hear what the experts have to say about the hot button issues that will be affecting your business this year.

On the agenda:

• Political risks for the asset management industry
• The regulatory challenge for 2013
• Capitalising on distribution opportunities
• Product development in a changing world
• Taxation for fund managers
• Secrets of good investor relations

Who will be there?

• Paul Freeman, Managing Director, BlackRock
• Ed Harley, Head of Department (Asset Management Supervision), Financial Services Authority
• Robert Shearman, Managing Director, Legg Mason
• Shoqat Bunglawala, Head of Product Development, Goldman Sachs Asset Management
• Gareth Murphy, Director of Markets Supervision, Central Bank of Ireland
• Christopher Goodeve-Ballard, Head of Operational Due Diligence, Aon Hewitt
• Jeremy Soutter, Global Head of Product Development, Ignis Asset Management
• Stuart Martin, Partner, Dechert
• Michelle Scrimgeour, Group Risk Director, M&G Investments
• Warren Tonkinson, Head of Distribution, Skandia / Old Mutual
• John Donohoe, CEO, Carne Group
• Donard McClean, Managing Director, UBS
• Adam Fairhead, Managing Director, HSBC

To register your place, please email Cindy Turner at Carne Group. We look forwards to having your company.

Carne Group, the global fund governance specialist, welcomes the consultation initiative and the decision by the Cayman Islands Monetary Authority (CIMA) to enhance and clarify corporate governance standards as they pertain to the large and flourishing Cayman Islands funds community.

The proposals include the extension of the current Statement of Guidance on Corporate Governance to all registrants, including registered mutual funds “to reinforce fundamental corporate governance standards expected from entities regulated and supervised by the Authority”.  The draft Statement of Guidance has also been enhanced to clarify the role and duties of Cayman Islands fund directors in accordance with existing common law principles and international supervisory standards. CIMA has requested input as to whether the Statement of Guidance should apply across all sectors of the financial industry or should be tailored to relevant sectors.

The proposals also include a public database to facilitate due diligence, and increase transparency.

CIMA also proposes the extension of the Companies Management Law to apply to all directors, irrespective of their location. In particular, CIMA is proposing that directors with 6 or more appointments should be pre-approved and licensed. This brings sole practitioner individuals into the regulatory framework, and pre-approves employees of license-holders who act as directors. Those with fewer than 6 appointments must at least register with CIMA if any of the appointments relate to a regulated entity. This registration will apply to the typical ‘investment manager director’, who often sits on the board of a fund which he also manages.

CIMA has also commissioned an anonymous online survey through Ernst & Young which will focus on certain issues, including the hot-button issue of whether limits should be imposed on the number of appointments.

Finally, CIMA indicates in its consultation paper that there will be further future consultation regarding the use of corporate directors as opposed to individual directors, but that they welcome the industry’s initial thoughts on the subject.

Said Peter Heaps, Managing Director, Carne Cayman Islands: “These proposals represent a significant step forward for the Cayman Islands, as they will substantially enhance the levels of regulatory oversight of corporate governance in Cayman funds. They will help to bring the Cayman Islands funds regime more closely into step with accepted governance norms elsewhere in the world, enhancing this jurisdiction’s credibility and helping CIMA to provide a better investor protection framework.”

Roisin Cater, Principal with Carne Cayman Islands, added: “This consultation process comes partly thanks to the efforts of allocators, fund managers and other stakeholders, who have been lobbying CIMA for these changes for some time. CIMA is now formally seeking feedback on its proposals and we would urge industry participants, including investors in Cayman funds, to take the time to provide this. These changes will help the Cayman Islands to maintain its position as the domicile of choice for hedge funds, and its continued success as a leading international financial centre.”

The CIMA consultation paper and Statement of Guidance can be found here: http://www.carnegroup.com/document-library

In addition, should any industry participants or other stakeholders wish to submit their opinions via Carne Group, we will be collating responses from our clients to send to CIMA at the earliest available opportunity. (The consultation period will end on 18^th March, 2013.) Please contact Stuart Fieldhouse, Director of Research, if you would like to submit any comments.

Regulators are increasingly keen on scrutinizing how fund managers address conflicts of interest. Norm Champ, then-Deputy Director of the SEC’s Office of Compliance Inspections and Examinations, spoke about conflicts at a May 2012 seminar held at the New York City Bar Association. The SEC has indicated that it intends to scrutnize fund managers’ handling of conflicts of interest during “presence examinations” of newly-registered managers to be conducted in the next two years.

In addition, the FSA has expressed its own concerns with asset managers’ handling of conflicts of interest by penning a “Dear CEO” letter to asset managers identifying areas where it has particular concerns. Moreover, regulators have initiated enforcement actions to address conflicts of interest that were not appropriately managed, handled and documents.

Read more…

We are pleased to now be able to offer an ONR System Administrator Service. Carne will be able to:

• Act as a named ONR System Administrator.
• Co-ordinate delegates responsible for filing each return (Investment Manager, Administrator, Custodian / Trustee, Auditor, Lawyer, etc.)
• Arrange for access to the ONR System for each delegate.
• Issue timely reminders to delegates of filing deadlines and monitor filings made.

It should be noted that the System Administrator will only be one element of the ONR System and the Fund will also need to develop procedures to ensure that accurate and timely reporting is submitted to the Central Bank across the various areas required. The quality and timeliness of reporting will be one of the key factors the Central Bank will be looking at when reviewing Funds. Carne can also provide further assistance and services in this regard.

Please note that a response to the Central Bank to identify the system administrator is required by 17th December 2012.

If you would like Carne to provide this service, please contact Sarah Murphy on +353 1 489 6815 or by email at sarah.murphy@carnegroup.com

The UK’s Financial Services Authority has issued a circular following a review of asset management firms’ enforcement of internal conflicts of interest policies[1]. The review, conducted between June 2011 and February 2012, identified that many firms had failed to establish an adequate framework for identifying and managing conflicts of interest. This included breaches of rules governing the use of customer commissions, the fair allocation of trades between customers and the identification and client reporting of trading errors.

Principle 8 of the FSA’s Principles for Businesses requires that a firm must manage conflicts of interest fairly, both between itself and its customers, and between a customer and another customer. Funds, and their Boards of Directors, as customers of investment managers, can  have an important role to play in helping investment managers to demonstrate that a robust conflicts culture exists across their business, while also representing the interests of the Fund(s)’ investors.

Amongst the FSA’s findings were:

• Some firms did not allocate trades between clients in an equitable manner, or could not show that cross-trading was always in the interest of customers. This is particularly critical from the perspective of client funds and their Boards of Directors.
• Some firms, particularly in the hedge funds sector, were too reliant on contractual limitations to avoid the identification and client reporting of trading errors to customers.
• There were often no adequate controls covering purchase of research and/or trade execution services on behalf of clients.

The FSA said it planned a second round of thematic visits on this subject and will use responses received to inform its selection of firms for follow up assessment visits. Both the FSA and SEC have pointed to the identification and proper management of conflicts as “a core requirement” for asset managers under current regulations in recent rulings.

The role Fund Boards can play in managing conflicts of interest

The FSA has clearly outlined for customers of investment management firms, including Funds, what it now expects in terms of established conflicts of interest procedures. Funds – and their Boards of Directors – will need to ensure they are being provided with the correct information by investment managers, but they also have a role to play in helping investment managers fulfil these requirements.

As clients of investment managers, Fund Boards should be enquiring about conflicts of interest policies at the manager level, how they are managed and how they are reported to the Fund Directors.

Fund Boards should be actively involved with managers and can assist by demonstrating that both the Fund and its investment manager take conflicts seriously and that they are managed properly.

Fund Boards can help to demonstrate a culture of transparency that will benefit the investment management firm. Their documented processes can provide further evidence that the investment manager is honouring conflicts of interest policies established at the firm level.

In short, Fund Boards can help to play an important partnership role with investment managers to ensure they continue to serve the interests of fund investors and meet regulatory expectations.

The letter notes how the inspections have revealed a significantly lower level of compliance than the Central Bank expected, and thus prompted the CBI to issue the letter to all regulated companies. The letter also outlines how the CBI expects companies to act where they identify similar shortcomings in their own anti-money laundering and counter terrorist financing (“AML / CTF”) processes.

The key take-aways from the letter are as follows:

• It is imperative that the company has adequate documentation in place to clearly demonstrate how the Board of Directors and Senior Management oversee the AML/CTF process. This is particularly important for funds where a delegated model is in place. The AML/CTF process must be continually reviewed by the Board and Senior Management of the company. The Board and Senior Management are responsible for compliance with the CJA 2010.
• There needs to be documentary evidence and procedures in place to clearly demonstrate compliance with the CJA 2010.  Any shortcomings in these procedures should be addressed by companies as a matter of priority.
• Companies need to keep fully up to date on changes to AML / CTF requirements both at local Irish level and internationally.
• The main control failures identified from the inspection were:
• • Delays in implementing procedures to ensure compliance with CJA 2010
  • Where the AML / CTF process was  delegated an adequate oversight programme was not in place
  • There was no documentary evidence of how and why companies had applied the risk based approach. The CBI will seek documentary evidence of how the Board and Senior Management satisfied itself that an appropriate risk based approach has been implemented.
  • Material gaps in AML / CTF procedures:  Again the importance of being able to clearly demonstrate how compliance with the CJA 2010 has been achieved is stressed in the letter.  The Board and Senior Management must oversee these procedures continually for appropriateness and effectiveness.
  • Lack of training:  the letter specifically noted the lack of AML / CTF training for Directors and Senior Management.
  • Failures in the Customer Due Diligence process (“CDD”):  Procedures for identifying customers were not compliant with the CJA 2010, in particular controls around verification of customer identity prior to establishing a relationship and providing a service.  Also, where reliance was placed on a third party to complete part of the CDD process, companies had failed to satisfy the conditions outlined in Section 40 of the CJA 2010.  In practice, letters of reliance / undertaking did not contain the necessary declarations as stipulated in the CJA 2010.   These letters are very common in the funds industry.
  • Delays in filing suspicious transaction reports.

• The Central Bank said it will continue to carry out these themed inspections.
  Directors and Senior Management need to fully understand the implications of non-compliance which include criminal and civil penalties.

Recommendations for Fund Boards

Carne has been working closely with its clients to ensure that Fund Boards meet the stipulated requirements of the CJA 2010. Each Board should have an AML policy in place outlining clearly how the Board ensures compliance with the CJA 2010. The policy should cover the following areas:

• Details of the types of investors in the funds and the distribution channels used.
• Assessment of the AML / CTF risks for the fund.
• A list of the key parties to the fund and their respective responsibilities for ensuring compliance with the CJA 2010.
• Demonstrate how the Board oversees each of the parties / delegates, including reporting received and the frequency of same. This should also include details of the due diligence carried out by, or on behalf of, the Board, of the AML / CTF process in place at the administrator, in order to ensure compliance with the CJA 2010 and other changes to local and international AML regulations.
• Ongoing training.
• The role of the Money Laundering Reporting Officer (MLRO).
• Procedures for blocking subscription and redemption activity from investors where Customer Due Diligence (CDD) has not been completed.
• PEP screening and approval process

Carne would be pleased to discuss general and specific AML / CTF requirements for Irish-domiciled Funds. For more information, please contact Teddy Otto at teddy.otto@carnegroup.com or +353 1 489 6820.