DECREE. No. 194/2011 Coll. of 27 June 2011 on More Detailed Regulation of Certain Rules in Collective Investment PART ONE FUNDAMENTAL PROVISIONS

Transcription

1 DECREE No. 194/2011 Coll. of 27 June 2011 on More Detailed Regulation of Certain Rules in Collective Investment Pursuant to Article 139 (2) of Act No. 189/2004 Coll., on Collective Investment, as amended by Act No. 188/2011 Coll., (hereinafter the Act ), the Czech National Bank stipulates the following to implement Article 9 (6), Article 23a (2), Article 26 (3), Article 27 (8), Article 28 (11), Article 30a (4), Article 35a (6), Article 35b (5), Article 49b (7), Article 55 (5), Article 74a (8), Article 75 (3), Article 82 (4), Article 89, Article 100d (2) and Article 100o (2) of the Act: PART ONE FUNDAMENTAL PROVISIONS Section 1 Subject of Regulation This Decree implements the relevant regulations of the European Union 1) and stipulates in more detail a) prudential rules for a management company or investment fund pursuant to Article 9 (6) and Article 74a (8) of the Act; b) rules for the asset management of a collective investment fund pursuant to Article 26 (3), Article 27 (8), Article 28 (11), Article 49b (7), Article 55 (5) and Article 82 (4) of the Act; c) rules for the conduct of business by a management company or investment fund pursuant to Article 75 (3) of the Act; d) publication of information pursuant to Article 89, Article 100d (2) and Article 100o (2) of the Act; and e) special provisions on a master standard fund and feeder standard fund and their depositaries and auditors pursuant to Article 23a (2), Article 30a (4), Article 35a (6) and Article 35b (5) of the Act. 1) Commission Directive 2007/16/EC of 19 March 2007 implementing Council Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) as regards the clarification of certain definitions. Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (recast), as amended by Directive 2010/78/EU of the European Parliament and of the Council. Commission Directive 2010/43/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards organizational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company. Commission Directive 2010/44/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards certain provisions concerning fund mergers, master-feeder structures and notification procedure. 1

2 Section 2 Definition of Terms For the purposes of this Decree, the following definitions shall apply: a) compliance means a continuous control of compliance with the duties of a management company or investment fund pursuant to the Act, other legal regulations and the internal regulations of the management company or investment fund, including the statute, and pursuant to contractual relations with the managed funds and depositaries; b) information system means a functional whole that is to ensure the obtaining, processing, transmission, sharing and storing of information in any form; c) organizational department means a person or group of persons that has been entrusted with the performance of a certain activity of a management company or investment fund; d) operational risk means the risk of loss resulting from inadequacy or failure of internal processes, the human factor or systems of a management company or investment fund, or resulting from external facts, including the legal risk and documentation risk and the risk resulting from inadequacy or failure of procedures for trading, settlement and valuation performed on behalf of a collective investment fund; e) repurchase operation means a transfer of securities in return for funds, with a concurrent obligation to accept such securities as at a stipulated date at an amount equal to the original funds plus interest; repurchase operation also means a sale with a concurrent agreement to repurchase or to provide a loan of securities hedged by funds; f) reverse repurchase operation means an acquisition of securities in return for funds, with a concurrent obligation to transfer such securities as at a stipulated date at an amount equal to the transferred funds plus interest; reverse repurchase operation also means a purchase with a concurrent agreement to repurchase or to accept a loan of securities hedged by funds; g) repurchase transaction means a repurchase operation or a reverse repurchase operation; h) liquidity risk means the risk of loss of the ability to meet financial obligations at the time of their maturity, or the risk of loss of the ability to finance assets, including the risk that it might be impossible to sell, liquidate or close a position in the assets of a management company or investment fund with limited expenses within a reasonably short period of time, which might thus jeopardize the ability of a collective investment fund to meet its obligation to repurchase unit certificates; i) counterparty risk means the risk of loss resulting from the fact that the counterparty to a transaction fails to meet its obligations prior to the final settlement of the financial flows within the scope of the transaction; j) autonomous investment fund means an investment fund that has made no management agreement in respect of its assets; k) market risk means the risk of loss resulting from changes in market prices, interest rates and currency exchange rates, including the risk resulting from fluctuations of the market value of positions in the assets of a management company or collective investment fund caused by changes of market variables such as, in particular, of interest rates, currency exchange rates, prices of shares and commodities or of creditworthiness of the issuer; l) recognized standard means recommendations and standards issued by the European Securities and Markets Authority or by the European Commission; m) equity capital means own resources of a collective investment fund that are calculated as a sum total of the fair value of the assets resulting from the investment activities of the collective investment fund and the value of the other assets of the collective investment fund determined pursuant to the legal regulation on accounting, minus a sum total of the 2

3 fair value of the liabilities resulting from the investment activities of the collective investment fund and the value of the other liabilities determined pursuant to the legal regulation on accounting; n) public special fund means a special fund that collects money from the public; and o) highly liquid asset means such an asset the liquidation of which takes not more than 5 business days and the price achieved corresponds to the fair value of the asset. PART TWO PRUDENTIAL RULES Chapter I Prerequisites for Due Corporate Governance Section 3 Principles and Procedures for Management [Re: Article 74a (2)(a)(1) of the Act] (1) A management company or autonomous investment fund shall ensure that the requirements stipulated for the system of governance, for the procedures of a management company or autonomous investment fund for compliance therewith and for the procedures to be followed when performing other activities are reflected in the organizational rules and other internally stipulated principles and procedures (hereinafter the internal rules ) of the management company or autonomous investment fund and within the regulated consolidation group. A management company or autonomous investment fund shall define a procedure to be followed when adopting, amending, implementing and applying the internal rules. (2) In order to fulfil the prerequisites for due corporate governance through application of due procedures, a management company or autonomous investment fund shall select and reflect in the internal rules the recognized standards selected by it. A management company or autonomous investment fund shall regularly verify whether the internal rules and the recognized standards selected by it are still up-to-date and appropriate to the scope, nature and complexity of its activities. (3) A management company or autonomous investment fund shall ensure that all internal rules, approval and decision-making processes and control activities are retrospectively reconstructible. Compliance with this requirement is also enabled by a system for keeping of information, which a management company or autonomous investment fund shall implement and maintain. Section 4 Ensuring the Performance of Certain Activities by a Third Party [Re: Article 74a (2)(a)(1) of the Act] (1) If any activity that is not covered by Article 78 of the Act and that would or may otherwise be performed by an management company or autonomous investment fund is being ensured for the management company or autonomous investment fund on a contractual basis by a third party (hereinafter the outsourcing ), such a fact shall not absolve the management company or autonomous investment fund from its responsibility for any of its outsourced activities. 3

4 (2) A management company or autonomous investment fund shall ensure that, in relation to the conclusion or use of outsourcing, a) the outsourced activities are in compliance with the applicable legal regulations, with the statute of a collective investment fund and with internal rules, and the possibilities are not restricted in respect of their control by the management company or autonomous investment fund, the fulfilment of information duties with respect to the Czech National Bank, the exercise of supervision, including a potential control of facts that are subject to supervision at the outsourcing provider, and the performance of an audit of the financial statement and other verifications stipulated by legal regulations; b) the prerequisites for the due and prudential performance of the activities of a management company or autonomous investment fund are not jeopardized; c) the rights of a collective investment fund, investors or the owners of securities issued by a collective investment fund are not jeopardized; and d) rules shall be defined for the control of outsourced activities, including a potential control of facts relating to the outsourcing at the outsourcing provider. Section 5 Organizational Structure [Re: Article 74a (2)(a)(2) of the Act] (1) A management company or autonomous investment fund shall stipulate the job content of the organizational departments so as to enable efficient communication and cooperation at all levels and to support the due, efficient and prudent management and performance of other activities. (2) A management company or autonomous investment fund shall ensure that powers and responsibilities are stipulated for the organizational departments at all levels so as to enable the due compliance with procedures for the identification and management of conflicts of interest (Sections 17 to 19). (3) A management company or autonomous investment fund shall, independently of its own trading in the assets of a collective investment fund, carry out a) valuation of the assets and liabilities of the collective investment fund, and calculation of the current value of a security issued by the collective investment fund; b) control of congruence of information with the actual status, and procedure to rectify any incongruities identified (reconciliation) in respect of transactions concluded in financial markets; c) risk management; d) approval and control of compliance with the limits for risk management; and e) preparation of quantitative and qualitative information on risks for the board of directors of the management company or autonomous investment fund (hereinafter the board of directors ). (4) A management company or autonomous investment fund shall ensure independence of internal control and prevent conflicts of interest in ensuring all control mechanisms. 4

5 Board of Directors Section 6 [Re: Article 74a (2)(a)(2) of the Act] The board of directors shall ensure a) creation and evaluation of a system of governance, and permanent maintenance of its functionality and efficiency; b) adequate information and communication in performing the activities of a management company or autonomous investment fund; c) definition of the overall strategy, including sufficiently specific prerequisites, principles and objectives for its fulfilment; d) functioning of a system of internal control; e) definition of rules formulating the ethic principles and expected models of behaviour and conduct of persons with whose aid a management company or autonomous investment fund performs its activities, and their enforcement; f) definition of principles for the management of human resources, including principles for the selection, remuneration, evaluation and motivation of persons with whose aid a management company or autonomous investment fund performs its activities; and g) definition of requirements for the knowledge and experience of persons with whose aid a management company or autonomous investment fund performs its activities, the manner of proving the required knowledge and experience, and the manner of verifying whether the knowledge and experience of such persons is still appropriate to the nature, complexity and scope of the activities performed by them. Section 7 (1) The board of directors shall approve and regularly evaluate a) the overall strategy; b) the organizational structure; c) the risk management strategy; d) the information system development strategy; e) principles of the internal control system, including the principles for preventing potential conflicts of interest, and principles for compliance activities; and f) security principles, including security principles for the information system. (2) The board of directors shall approve a) investment objectives and the manner of investment of a collective investment fund; b) a set of limits to be used by a management company, particularly with respect to a collective investment fund managed by the management company, or by an autonomous investment fund in order to reduce risks, always including the market risk, operational risk, concentration risk, liquidity risk and counterparty risk; and c) the statute and the subject of internal audit, personnel and technical background to ensure its performance, and a strategic and periodical plan of internal audit. (3) The board of directors shall, at least once a year, evaluate the overall functionality and efficiency of the system of governance, and ensure potential measures to rectify any inadequacies identified in this manner. 5

6 (4) The board of directors shall duly and timely evaluate regular reports as well as any extraordinary findings, including findings submitted to it by the auditor 2), by the supervisory authorities or some other sources. Based on such evaluations, the board of directors shall adopt adequate measures that are to be implemented without undue delay. Section 8 Supervisory Board [Re: Article 74a (2)(a)(2) of the Act] (1) The supervisory board of a management company or autonomous investment fund (hereinafter the supervisory board ) shall supervise whether the system of governance is functional and efficient, and evaluate this at least once a year. Within the scope of fulfilling this duty, the supervisory board shall also regularly discuss issues relating to the overall strategy of the management company or autonomous investment fund, or relating to the investment objectives and manner of investment of a collective investment fund, and relating to the steering of risks to which the management company or collective investment fund are or might be exposed. (2) The supervisory board shall take part in the strategy-making, planning and evaluating of internal audit and compliance activities. (3) The supervisory board shall issue a previous statement on a proposal of the board of directors to entrust a natural person or legal entity with the performance of internal audit or compliance activities, and to recall such a person or entity. If more natural persons than one ensure the performance of internal audit or compliance activities, the supervisory board shall only issue a statement on a proposal to entrust or recall their managing employee. Section 9 System of Internal Communication [Re: Article 74a (2)(a)(2) and Article 74a (4)(h) of the Act] (1) A management company or autonomous investment fund shall ensure that the relevant organizational departments have up-to-date, reliable and comprehensive information available for their decision-making and other stipulated activities. (2) The board of directors shall, without undue delay, be informed of a) all facts that might to a significant extent adversely affect the financial standing of the management company or collective investment fund, including the effects of changes to the internal and external environment; and b) all instances of exceeded limits that jeopardize compliance with the accepted degrees of market risk, counterparty risk and other significant risks taken, including liquidity risk. (3) The board of directors shall, at least once a year, be informed of a) compliance, internal audit and risk management activities, particularly with an indication of whether appropriate remedial measures have been adopted in case of inadequacies; b) compliance with the rules relating to the manner of investment of a collective investment fund, and the concentration risk; c) the degree of market and operational risk, counterparty risk and liquidity risk taken; d) the overall degree of risks taken; and 2) Act No. 93/2009 Coll., on Auditors and Amendments to Certain Acts (Act on Auditors), as amended by Act No. 227/2009 Coll., and by Act No. 139/2011 Coll. 6

7 e) compliance with the capital requirements (Article 69 and Article 70 of the Act). Control and Security Measures in Processing and Record-Keeping of Information Section 10 [Re: Article 74a (2)(a)(2) and Article 74a (2)(c)(3) of the Act] (1) A management company or autonomous investment fund shall a) stipulate the conditions for access of persons with whose aid the management company or autonomous investment fund performs its activities to the information system and to the information recorded therein, the scope of access rights and the process for their setting, including the manner of decision-making about the scope of access rights of individual persons, and of decision-making about their changes; b) stipulate the conditions under which information relating to the transactions executed and services provided shall be input into the information system, and under which permitted changes thereto may be made, and conditions for the disposal of such information, and ensure easy traceability of the original content and of any modifications made; c) ensure protection of the information system against damage and against access and any interventions by unauthorized persons; d) ensure the possibility to reconstruct information in the case of damage to information or to the information system; and e) ensure that the information and records are made accessible to the Czech National Bank, including backups pursuant to subparagraph d) above, so as to enable the Czech National Bank to reconstruct from them easily all the key phases of processing of every transaction executed while managing the assets of a collective investment fund and to identify their original content before any corrections or changes. (2) A management company or autonomous investment fund shall stipulate a) rules for the use of communication equipment, at least by reserving certain telephone lines or, as the case may be, other communication equipment for the activities relating to the transactions executed and services provided, including the communication between the management company or autonomous investment fund and the depositary, another person pursuant to Article 78 of the Act, and an outsourcing provider pursuant to Section 4, and for the recording of communication on such telephone lines or, as the case may be, other communication equipment; b) requisites of the record pursuant to subparagraph a) above, which shall be at least the date and time of communication, information on the entity 3) of the sender and recipient, if such information is available, and the content of the message transmitted; the management company or autonomous investment fund shall ensure a possibility to make full abstracts of the records of communication on the reserved telephone lines or, as the case may be, other communication equipment, and a possibility to make printouts from the recording equipment. (3) A management company or autonomous investment fund shall store the records pursuant to Section 15 (1) and Section 16 (1) at least for a period of five years from the moment of executing a transaction or giving an orderorder; this shall also apply to an entity whose authorization to perform the activities of a management company or investment fund has been withdrawn or has ceased to exist, as well as to its legal successor. A management 3) Article 2 (1)(m) of Act No. 189/2004 Coll., on Collective Investment, as amended by Act No. 188/2011 Coll. 7

8 company or autonomous investment fund shall store the records of communication pursuant to paragraph 2 above and the documents and information necessary for the monitoring of compliance with the limits stipulated by legal regulations for a period of at least five years. Section 11 (1) A management company or autonomous investment fund shall implement and maintain a system for the creation, control and transmission of information to the Czech National Bank so as to provide such information in an up-to-date, reliable and comprehensive manner. (2) A management company or autonomous investment fund shall implement and maintain internal control mechanisms to ensure the completeness and correctness of all the calculations, information, statements and other information provided to the Czech National Bank on a regular basis or upon its request. (3) A management company or autonomous investment fund shall ensure that the process for the creation and provision of information to the Czech National Bank pursuant to paragraph 2 above is retrospectively reconstructible. Section 12 Rules for the Handling of Claims and Complaints Lodged by Investors [Re: Article 74a (2)(a)(3) and Article 74a (4)(f ) of the Act] A management company or autonomous investment fund shall a) create, implement and maintain efficient and transparent procedures for the due, gratuitous and prompt handling of claims and complaints lodged by the owners of collective investment securities; b) make the rules for the handling of claims and complaints accessible to the owners of securities issued by a collective investment fund free of charge and in a manner allowing for remote access; and c) keep records of any claims and complaints received from the owners of securities issued by a collective investment fund, and of any measures adopted on the basis thereof. Section 13 Personal Transactions [Re: Article 74a (2)(a)(3) and Article 74a (4)(c) of the Act] (1) In order to protect inside information pursuant to Article 124 of the act that regulates undertaking on the capital market and in order to prevent conflicts of interest, particularly among the persons referred to in Article 74a (1)(b) of the Act, a management company or autonomous investment fund shall a) identify persons with a special relationship to the management company or investment fund pursuant to Article 74a (5) of the Act, and other persons pursuant to Article 74a (4)(c) of the Act, who 1. perform activities that may give rise to a conflict of interest; 2. have obtained or can obtain inside information; or 3. have access to other confidential information on a collective investment fund or on its transactions; 8

9 b) adopt measures to prevent a person pursuant to subparagraph a) above from concluding a personal transaction pursuant to Article 74a (4)(c) of the Act where, in doing so, 1. s/he might use inside or other confidential information, or such information might be disclosed in an unauthorized manner; or 2. some other duty of the management company or autonomous investment fund stipulated by the law might be breached; c) ensure that a person pursuant to subparagraph a) above does not incite or prompt some other person to conclude a transaction beyond the scope of performance of his/her working duties, if 1. s/he were not authorized itself to conclude a personal transaction pursuant to subparagraph b) above; or 2. information on an unsettled transaction of a collective investment fund or of some other client might be used in this transaction; d) adopt measures to prevent every person with a special relationship to the management company or investment fund pursuant to Article 74a (5) of the Act from disclosing information or opinions to some other person beyond the scope of usual performance of his/her working duties, if s/he is aware or, in usual circumstances, should be aware that this person might 1. use the provided information to conclude a personal transaction pursuant to subparagraph b) or pursuant to items (1) or (2) of subparagraph c) above; or 2. incite or prompt another person to conclude a transaction referred to in item (1) above; e) ensure that persons with a special relationship to the management company or investment fund pursuant to Article 74a (5) of the Act are informed of restrictions in relation to their personal transactions; f) ensure that the persons referred to in subparagraph a) above notify them of any personal transaction without undue delay; in the case of a third party through whom the management company or autonomous investment fund performs its activities (outsourcing provider), the management company or autonomous investment fund shall require that this third party keeps records of personal transactions concluded by a person with a special relationship to the management company or investment fund and, upon request, provides these records to the management company or autonomous investment fund without undue delay; and g) keep records of 1. notified or otherwise determined personal transactions pursuant to subparagraph f) above; and 2. any authorizations or prohibitions to conclude personal transactions. (2) The rules pursuant to paragraph 1 above shall not apply to personal transactions a) executed within the scope of managing the assets of a person with a special relationship to the management company or investment fund pursuant to Article 74a (5) of the Act, provided that no prior communications on the transaction have taken place between the portfolio manager and the person with a special relationship to the management company or investment fund; or b) in securities issued by a standard fund or some other collective investment fund that invests under a comparable principle of risk spreading and that is subject to supervision in a Member State of the European Union, unless the person with a special relationship to the management company pursuant to Article 74a (5) of the Act is involved in the management of the assets of such a fund. 9

10 Section 14 Principles for the Exercise of Voting Rights [Re: Article 74a (2)(a)(3) and Article 74a (4)(g) of the Act] (1) A management company or autonomous investment fund shall implement adequate and efficient principles for the exercise of voting rights associated with the managed shares or similar securities representing a holding in a company or some other legal entity so as to exercise such rights exclusively for the benefit of the collective investment fund concerned. (2) The principles referred to in paragraph 1 above shall include procedures for a) monitoring of significant events in the company or some other legal entity; b) exercising of voting rights in accordance with the investment objectives and the manner of investment of the given collective investment fund; and c) preventing or managing conflicts of interest resulting from the exercise of voting rights. (3) A management company or autonomous investment fund shall make a comprehensive description of the principles referred to in paragraph 1 above accessible to the owners of securities issued by a collective investment fund in a manner allowing for remote access, and shall ensure that the details on the exercise of voting rights are gratuitously accessible to the owners of securities issued by a collective investment fund upon their request. Section 15 Record-Keeping of Issuance, Subscription and Repurchasing of Unit Certificates Issued by a Unit Trust and Foreign Standard Fund [Re: Article 9 (2)(a) and Article 74a (2)(a)(3) of the Act] (1) A management company shall, immediately after receiving an orderorder, make a record of the details on the orderorder in the register pursuant to Article 9 (2)(a) of the Act. (2) The record pursuant to paragraph 1 above shall, if the nature of the matter allows, contain the following information a) the firm or corporate name and registered office of the unit trust or foreign standard fund; b) information on the person giving the order to issue, subscribe or repurchase; c) information on the person receiving the order to issue, subscribe or repurchase; d) the date and time of receipt of the order; e) terms and means of payment associated with the order; f) the type of the order; g) the date of execution of the order; h) the number of issued, subscribed or repurchased unit certificates or securities issued by the foreign standard fund; i) the unit price at which a unit certificate or security issued by the foreign standard fund was issued, subscribed or repurchased; j) the total price at which unit certificates or securities issued by the foreign standard fund were issued, subscribed or repurchased; and k) the gross value of the order including the surcharge associated with the issuance or subscription of a unit certificate or security issued by the foreign standard fund, or the net value of the order after deducting the deduction associated with the repurchasing of unit certificates or securities issued by the foreign standard fund. 10

11 Section 16 Record-Keeping of Transactions Relating to the Managed Assets of a Collective Investment Fund and Foreign Standard Fund [Re: Article 9 (2)(b) and Article 74a (2)(a)(3) of the Act] (1) A management company or autonomous investment fund shall immediately make a record of the details on an order and executed transaction in the register pursuant to Article 9 (2)(b) of the Act. (2) The record pursuant to paragraph 1 above shall, if the nature of the matter allows, contain the following information a) the firm or corporate name and registered office of the collective investment fund or foreign standard fund; b) identification details on the investment instruments or other assets that were the subject of the order and executed transaction; c) the quantity of investment instruments or other assets; d) the type of the order or executed transaction; e) the price of the order or executed transaction; f) in relation to the order: the date and time of its submission and information on the person to whom the order was submitted; g) in relation to the executed transaction: the date and time of decision on its execution and the date and time of its execution; h) information on the person who submitted the order or executed the transaction; i) if the order was recalled, reasons for its recall; and j) in relation to the executed transaction: information on the counterparty and the execution venue. Section 17 Identifying and Managing Conflicts of Interest [Re: Article 74a (1)(b) and Article 74a (2)(a)(3) of the Act] (1) If a management company or autonomous investment fund is a member of a business group pursuant to Article 74a (1)(b)(5) of the Act, it shall identify and manage conflicts of interest pursuant to Article 74a (1)(b) of the Act also with respect to all predictable circumstances that may give rise to a conflict of interest as a consequence of the structure of the business group and the lines of business of its members. (2) If it is not possible to reliably prevent an adverse impact of a conflict of interest on the interests of a collective investment fund in spite of measures adopted pursuant to Article 74a (1)(b) of the Act, the board of directors shall be informed immediately so that it can take measures necessary to ensure that a management company or autonomous investment fund in all circumstances acts in the best interest of a collective investment fund. (3) Concurrently with informing the board of directors pursuant to paragraph 1 above, a management company shall communicate information on the nature or source of a conflict of interest to the owner of securities issued by a collective investment fund or, in the case of a managed collective investment fund that is a legal entity, to this fund only. An autonomous investment fund shall communicate such information to the owner of securities issued by a collective investment fund. 11

12 (4) A management company or autonomous investment fund shall provide the owner of securities issued by a collective investment fund with information pursuant to paragraph 3 above on a durable medium 4) in a manner and to an extent that reflects the nature of the owner of a security issued by the collective investment fund and that allows the owner to properly take into account the conflict of interest relating to the activities of the management company or autonomous investment fund. Section 18 Identifying Conflicts of Interest [Re: Article 74a (1)(b) and Article 74a (2)(a)(3) of the Act] (1) When identifying and assessing conflicts of interest in relation to its activities, a management company or autonomous investment fund shall take into consideration whether a person pursuant to Article 74a (1)(b) of the Act a) can make a financial gain, or avoid a financial loss, at the expense of the collective investment fund; b) has an interest in the outcome of a service provided to the collective investment fund, or in the outcome of a transaction executed on behalf of the collective investment fund, that is different from the interest of this fund; c) has a motivation to favour the interest of the collective investment fund over the interests of some other collective investment fund; d) carries on business in the same field as the collective investment fund; and e) receives or will receive from a party other than the collective investment fund a charge, remuneration or non-monetary benefit pursuant to Article 75 (2) of the Act (hereinafter the inducement ) in relation to a service of the collective investment fund, and such an inducement does not constitute a usual consideration for the provided service. (2) Further, a management company or autonomous investment fund shall always a) in relation to the specific services and activities provided by the management company or autonomous investment fund or some other party on its behalf, identify the circumstances that may give rise to a conflict of interest that represents a material risk of damage to the interests of the collective investment fund (hereinafter the material conflict of interest ); b) particularly specify the binding procedures and measures to manage material conflicts of interest; and c) keep up-to-date records of the provided services that have given or may give rise to a material conflict of interest. Section 19 Managing Material Conflicts of Interest [Re: Article 74a (1)(b) and Article 74a (2)(a)(3) of the Act] (1) A management company or autonomous investment fund shall ensure that persons with a special relationship to the management company or investment fund that are involved in the provision of services with which a material conflict of interest is associated perform their activity with a degree of independence that is appropriate to the nature, scope and complexity of the activities of the management company or autonomous investment fund and of the business group pursuant to Article 74a (1)(b)(5) of the Act to which it belongs, and that 4) Article 15e of Act No. 256/2004 Coll., on Business Activities on the Capital Market, as amended by Act No. 230/2008 Coll. 12

13 is appropriate to the materiality of the risk of damage to the interests of the collective investment fund. (2) The procedures for managing material conflicts of interest that will lead to ensuring independence pursuant to paragraph 1 above shall include, depending on the circumstances of a specific situation, a) efficient procedures to prevent or control the exchange of information among persons with a special relationship to the management company or investment fund, provided that the risk of a conflict of interest is associated with such information and provided that the exchange of information might harm the interests of the collective investment fund; b) independent control of persons with a special relationship to the management company or investment fund who are involved in the provision of services for the collective investment fund and whose interests, or interests of the persons for whom they perform an activity, might be in mutual conflict; c) prevention of any direct link between the remuneration of a person with a special relationship to the management company or investment fund who predominantly performs a certain activity and the remuneration or income of some other person with a special relationship to the management company or investment fund who performs a different activity, provided that a conflict of interest might arise in relation to these activities; d) such measures that prevent the possibility of exercising any unauthorized or unjustified influence over the manner in which a person with a special relationship to the management company or investment fund ensures the provision of services; e) measures that will prevent a person with a special relationship to the management company or investment fund from being involved in the provision of a service, provided that this might jeopardize the due management of conflicts of interest, or such measures that will ensure control of this activity so as to avoid the due management of conflicts of interest being jeopardized; and f) other suitable measures, should the measures adopted pursuant to subparagraphs a) to e) above fail to ensure the necessary degree of independence pursuant to paragraph 1 above. Chapter II Risk Management System [Re: Article 74a (2)(b) of the Act] Section 20 (1) A management company, with regard to the risks associated with its activities and the risks to which the collective investment fund managed by the management company is exposed, or an autonomous investment fund shall implement and maintain a risk management system so as to provide an undistorted picture of the degree of risks taken. (2) A management company, with regard to the risks associated with its activities and the risks to which the collective investment fund managed by the management company is exposed, or an autonomous investment fund shall set up a risk identification process so as to ensure that any new and yet unidentified risks are identified in relation to all activities and at all levels of management and organization. (3) When managing risks, a management company or autonomous investment fund shall take into account all significant risks and risk factors to which the management company or collective investment fund are or might be exposed. The management of risks shall take into 13

14 account internal and external factors, including the future business strategy of the management company, of the collective investment fund managed by the management company or of the autonomous investment fund, the effects of the economic environment and cycle, and the effects of the regulatory environment. The management of risks shall also take into account the quantitative and qualitative aspects of risks, the realistic possibilities of their management, and the expenses and revenues resulting from risk management. Section 21 (1) In its risk management strategy, a management company, with regard to the risks associated with its activities and the risks to which the collective investment fund managed by the management company is exposed, or an autonomous investment fund shall stipulate the following, in particular, a) a definition of the risks to which the management company, the collective investment fund managed by the management company, or the autonomous investment fund is or might be exposed; b) principles for assessing materiality in risk management; c) principles for managing individual risks, always including the market risk, operational risk, liquidity risk, concentration risk and counterparty risk; d) methods for managing risks, always including the market risk, operational risk, liquidity risk, concentration risk and counterparty risk; e) the accepted level of risk undertaken, always including the market risk, operational risk, concentration risk and counterparty risk; f) principles for drafting and amending a contingency plan for the event of a liquidity crisis; g) principles for defining the permitted products, currencies, countries, geographical areas, markets and counterparties; and h) conditions, content and deadlines for the submission of reports on risk management to the board of directors or, as the case may be, also to the supervisory board. (2) A management company or autonomous investment fund shall ensure that all persons with whose aid it performs its activities and whose activity has an impact on risk management are acquainted with the approved strategy to the necessary extent and act in accordance with this strategy and with the procedures and limits stipulated therein. (3) A management company or autonomous investment fund shall inform the Czech National Bank without undue delay of all significant changes to the risk management system. Section 22 Risk Management Procedure of a Standard Fund and Public Special Fund (1) When managing the risks of a standard fund and public special fund, a management company or autonomous investment fund shall a) implement procedures to measure risks, so that the risks and their impacts on the risk profile of the collective investment fund are accurately measured on the basis of credible and reliable information, and ensure that the procedures to measure risks are documented in an appropriate manner; b) ensure compliance with the limits for an open position 5) and for the counterparty risk in accordance with Sections 37 and 40; 5) Article 2 (1)(q) of Act No. 189/2004 Coll., as amended by Act No. 188/2011 Coll. 14

15 c) if appropriate, carry out regular back testing for the purpose of controlling the validity of methods for risk measurement, including the value-at-risk (VaR) method or other models for risk measurement; d) if appropriate, carry out regular stress testing and scenario analyses for the purpose of capturing the risks resulting from potential changes of market conditions that might have an adverse impact on the collective investment fund; e) implement and maintain a documented system of limits to reduce the risks for every collective investment fund, taking into account all the risks that might be of crucial importance to the collective investment fund, and in accordance with the risk profile of the collective investment fund; f) ensure that the current degree of risk is in accordance with the system of limits aimed to reduce the risks of the collective investment fund as referred to in subparagraph e) above; and g) create, implement and maintain appropriate procedures that, in the event of an actual or expected breach of the limits aimed to reduce the risks of the collective investment fund, will ensure a timely adoption of remedial measures. (2) A management company shall employ such procedures to manage the liquidity risk of a standard fund and public special fund as ensure that the fund is able at any time to fulfil its duties pursuant to Article 12 (1) of the Act. If appropriate, an management company or public autonomous investment fund shall carry out stress testing that makes it possible to assess the fund s liquidity risk in extraordinary circumstances. (3) A management company or autonomous investment fund shall ensure that, in terms of liquidity, the manner of investment and the risk profile of a standard fund or public special fund are appropriate to the rules for repurchasing stipulated in the fund s statute, articles of association or prospectus. Chapter III Rules of Internal Control Section 23 Fundamental Provisions [Re: Article 74a (2)(c) of the Act] (1) A management company or autonomous investment fund shall implement and maintain rules of internal control that are to be applied at all levels of management and organization. (2) A management company or autonomous investment fund shall ensure that control activities are part of its routine, usually day-to-day activities and include, in particular, a) control along the line of management; b) appropriate control mechanisms for individual processes, particularly including a control of compliance with legal and internal rules and limits, a control of approval and authorization of transactions exceeding the stipulated limits, a control of the course of activities and transactions, verification of transaction details, verification of outputs of the risk management systems and methods used, regular reconciliation; and c) physical control; the physical control shall be aimed, in particular, at restricting access to tangible assets, investment instruments and other financial assets and at doing a regular stocktaking of assets. 15

16 Section 24 Compliance [Re: Article 74a (2)(c)(2) of the Act] (1) A management company or autonomous investment fund shall implement and maintain principles and procedures for compliance activities that are aimed, in particular, to ensure a) compliance of the internal rules with legal regulations; b) mutual compliance of the internal rules; and c) compliance of all activities with legal regulations and the internal rules. (2) A natural person performing compliance activities must not be involved in the performance of the activities of a management company or autonomous investment fund. (3) A management company or autonomous investment fund shall ensure an ongoing control of compliance with the legal duties and duties resulting from its internal rules. (4) A management company or autonomous investment fund shall perform compliance activities so as to also ensure that a) the board of directors is informed of all identified instances of material non-compliance; b) the board of directors is informed of any prepared or new legal regulations and recognized standards relating to the activities of the management company or autonomous investment fund; and c) the board of directors is provided with other useful information relating to compliance activities, particularly on whether appropriate remedial measures have been adopted in the case of any instances of material non-compliance identified. (5) A management company or autonomous investment fund shall stipulate principles and procedures for compliance activities so as to cover all its activities in a comprehensive and interconnected manner. Section 25 Internal Audit [Re: Article 74a (2)(c)(1) of the Act] (1) A management company or autonomous investment fund shall ensure that the performance of internal audit is independent of all its executive activities. (2) A natural person performing internal audit must not be a member of the board of directors, of the supervisory board or any other elected body of an management company or autonomous investment fund. (3) A management company or autonomous investment fund shall ensure that the following aspects are subject to internal audit, in particular, a) compliance with the prudential rules of the management company or autonomous investment fund; b) compliance with the stipulated principles, objectives and procedures of the management company or autonomous investment fund; c) risk management systems and compliance with the rules of internal control; d) financial management and valuation; e) completeness, conclusiveness and correctness of bookkeeping; 16

17 f) reliability of accounting, statistical and other information, including information provided to bodies of the management company or autonomous investment fund; and g) functionality and security of the information system, including reliability of the system for the preparation and submission of statements to the Czech National Bank. (4) When performing internal audit, a management company or autonomous investment fund shall ensure that the following activities are always performed a) preparation of a risk analysis, at least once a year; b) preparation of a strategic and periodic plan of internal audit; c) creation and maintenance of a system aimed to monitor remedial measures ordered on the basis of internal audit findings; and d) evaluation of the functionality and efficiency of the system of governance, at least once a year. (5) The organizational department performing internal audit shall inform the board of directors and supervisory board of any facts identified. PART THREE RULES FOR THE ASSET MANAGEMENT Chapter I Investment Instruments in which a Standard Fund May Invest [Re: Article 26 (3), Article 27 (8)(c) and Article 28 (11) of the Act] Section 26 Investment Securities (1) The reference to an investment security in which a standard fund may invest shall be understood as a reference to an instrument a) as a consequence of the holding of which the standard fund may incur a loss the amount of which shall not exceed the amount paid for it; b) the liquidity of which does not compromise the ability of the standard fund to comply with the obligation to repurchase unit certificates at the request of a unit holder 6) ; c) the price of which can be reliably determined, which in the case 1. of an investment security pursuant to Article 26 (1)(a) and (b) of the Act means that an accurate, reliable and regular price is available, which is either a market price or a price determined in a manner independent of the issuer of this investment security; 2. of an investment security pursuant to Article 26 (1)(i) of the Act means that its valuation is made on a periodic basis and is derived from information provided by the issuer of the investment security or from a professional analysis of investment opportunities; d) for which adequate information is available, which in the case 1. of an investment security pursuant to Article 26 (1)(a) and (b) of the Act means that regular, accurate and complete information on the security or on the structure of the security is available to participants in the market; 6) Article 12 of Act No. 189/2004 Coll., as amended. 17