Governance under AIFMD

Transcription

1 Governance under September 2011

2 Governance under The Alternative Investment Fund Managers Directive () subjects managers of alternative investment funds (AIFs) to compulsory regulation in the EU and will require significant modifications to the structures, strategies and operations of authorised fund managers (AIFMs) and the funds they manage. The will force AIFMs to review their governance and conduct of business frameworks to ensure that they have in place robust operational functions and documented internal systems of management and control to comply with EU standards, in particular in relation to conflicts of interest, liquidity and risk management (see Appendix 1 for more detail). One of the underlying aims of the is to require AIFMs to enhance their governance frameworks so that they are more accountable to regulators and investors. The seeks to improve overall transparency in the way AIFs are operated by AIFMs. Investors and regulators will want to see regular and clear evidence from you of good governance in action. On 13 July 2011, the European Securities and Markets Authority (ESMA) issued its first consultation paper (CP) on the possible Level 2 implementing measures of the, outlining its policy on AIFM operating requirements. ESMA is encouraging AIFMs to create robust governance frameworks, as opposed to imposing 'one size fits all' prescriptive rules. A sound framework will allow different types of AIFMs and AIFs to manage risks and operations generally with regard to their own particular strategies, without unnecessary intervention from ESMA. As far as possible, ESMA has tried to align operational requirements with existing provisions in the UCITS IV Directive (UCITS Directive) and the Markets in Financial Instruments Directive (MiFID). The deadline for responding to the ESMA consultation was 13 September 2011 and ESMA intends to submit its advice to the European Commission (EC) by 16 November The EC is expected to adopt Level 2 provisions in The governing body of an AIFM refers to the component of the governance structure with ultimate jurisdiction and power of direction. In corporate structures this is usually the board of directors but in other structures it may be an equivalent body. The governing body is distinct from senior management, who it directs, but some or all members of senior management may comprise the governing body. The governing body may also contain non-executive members. As such the board of directors and senior management of an AIFM will have a key role to play in meeting the governance requirements under. The and the CP have one major governance gap which has been remarked on by industry commentators and which needs to be considered. That gap is the lack of recognition of the roles of existing governance bodies at the fund level. The fails to recognise that many funds and other entities which will be classified as AIFs under the have governing bodies, whether boards, trustees, or partners, which have specific sets of responsibilities and fiduciary obligations. How these bodies will discharge their obligations given the pre-emptive assignment of responsibilities to AIFMs and some oversight responsibilities to depositaries remains to be seen. Role of the Board and Senior Management in Implementing the The governing body of an AIFM has responsibility for the allocation of functions internally so as to ensure that senior management and, where appropriate, the supervisory function, correctly implement the AIFM's obligations under the. Post-implementation of, the governing body will have an ongoing responsibility for monitoring compliance of the AIFM with its obligations under the. What will good governance look like under the? To meet governance requirements under the, the governing body of an AIFM should ensure that its senior management: PwC 1

3 Is responsible for the implementation of the general investment policy for each AIF managed, as set out, where relevant, in the fund rules, the instruments of incorporation, the prospectus or offering documents. Approves or oversees the approval of the investment strategies for each managed AIF and receives on a regular basis reports on the implementation of such strategies. Is responsible for ensuring that valuation procedures according to Article 19 of the are established and receives on a regular basis reports on the implementation of such valuation procedures. Is responsible for ensuring that the AIFM has a permanent and effective compliance function, even if this function is performed by a third party and receives reports on a regular basis on the implementation of such function. Ensures and verifies on a periodic basis that the general investment policy, the investment strategies and the risk limits of each managed AIF are properly and effectively implemented and complied with, even if the risk management function is performed by third parties and receives on a regular basis reports on the implementation of these areas. Approves and reviews on a periodic basis the adequacy of the internal procedures for undertaking investment decisions for each managed AIF, so as to ensure that such decisions are consistent with the approved investment strategies and receives on a regular basis reports on the implementation of these procedures. Maintains a functional and hierarchical separation between portfolio management and risk management functions. Approves and reviews on a periodic basis the risk management policy and arrangements, processes and techniques for implementing that policy including the risk limit system for each managed AIF. Is responsible for establishing and applying a remuneration policy in line with Annex II of the. Ensures that audited accounts for each AIF it manages are prepared and circulated and that information is provided on a timely basis to investors and regulators. The governing body of an AIFM should additionally ensure that its senior management and, where appropriate, its supervisory function assess and periodically review the effectiveness of the policies, arrangements and procedures put in place to comply with the obligations in the ; and take appropriate measures to address any deficiencies. Further, the governing body of the AIFM should ensure that their senior management, and where appropriate, its supervisory function, receives on a frequent basis, and at least annually, written reports on matters of compliance, internal audit and risk management indicating in particular whether appropriate remedial measures have been taken in the event of any deficiencies. What should AIFMs be doing now to prepare for? The governing bodies of AIFMs should be encouraging their senior management to foster the development of robust internal governance processes. In doing so they should stress the importance of governance, monitoring duties and oversight functions to ensure compliance with the requirements of. Strategic level reviews should be coupled with operational reviews of internal processes. There will be a need for additional operational resource and new methodologies to cope with the increased burden in this area as well as the increased disclosure and reporting obligations. Questions for discussion Who is your AIFM - have you correctly identified who the AIFM is in your structure? Do you have robust risk management, conflict identification, liquidity and leverage management processes? Can you produce information within the timeframes required by? Will you require more resources, both human and/or system resources? Do you feel you may need to outsource certain governance functions to ensure compliance with the operational requirements of? How robust do you think your current governance framework is? What will you need to change to meet governance requirements? What do you see as your biggest challenge to ensure compliance with governance requirements? PwC 2

4 PwC can help We can mobilise the broad range of expertise that you will need to assess and plan for, and can support you on the full range of activities required to implement across your business across Europe. We are experienced in evaluating the impact of regulatory change on organisations and conducting major change programmes. We can provide you with access to methodologies and tools that will help you: Understand the key requirements of ; Identify dependencies with other key regulations; Assess the impact of the new rules on your strategic priorities, products, distribution mechanisms and operations; Capture strategic opportunities, identify risks and minimise threats to your business; Implement enhanced and compliant processes and procedures; and Deliver sustainable change. Contacts Should you wish to discuss this in any further detail, please do not hesitate to contact: Laura Cox - Partner Tel: laura.cox@uk.pwc.com James Greig Partner Tel: james.greig@uk.pwc.com Amanda Rowland - Partner Tel: amanda.rowland@uk.pwc.com PwC 3

5 Appendix 1 Organisational requirements Article 18(1) of the requires AIFMs to comply with a number of organisational requirements. AIFMs must have: Adequate and appropriate human and technical resources; Adequate resources and procedures for running its business properly; Sound administrative and accounting procedures; Arrangements for protecting electronic data and for controlling how it is processed; Record keeping arrangements in respect of transactions involving the AIFs; Adequate internal control mechanisms, in particular for: personal account dealing rules for staff; the holding and management of investments for its own account; and for ensuring that the AIF invests in accordance with the AIF rules, instrument of incorporation, prospectus and relevant law. ESMA believes that organisational requirements should be applied in proportion to the nature, scale and complexity of an AIFM's business and the nature and range of its activities. AIFM will be under a general requirement to establish, implement and maintain decision-making procedures and an appropriate organisational structure, including a permanent compliance function and an internal audit function. The requirements to have effective compliance and internal audit functions apply irrespective of the size and complexity of the business. In line with the UCITS approach, the CP provides details of the roles and responsibilities of the AIFM's senior management and supervisory function. ESMA acknowledges that the roles and responsibilities of the senior management and supervisory function may differ in Member States according to the local (corporate) law. General principles applicable to AIFM The contains a broad set of general principles that the AIFM must comply with. Certain general principles apply to an AIFM both in relation to the way that its business is organised and controlled, and in relation to the way it conducts its business. Many of the principles will be familiar to firms already authorised and regulated by the FSA. The conduct of business principles applicable to an AIFM are set out in Article 12(1) and are as follows: It must act honestly, fairly and with due skill, care and diligence in conducting its activities; It must act in the best interests of the AIF, or the investors in the AIF and the integrity of the market; It must employ effectively the resources and procedures that are necessary for the proper performance of its business activities; It must take all reasonable steps to avoid conflicts of interest and, when they cannot be avoided, to identify, manage and monitor and, where applicable disclose, those conflicts of interest; It must comply with all regulatory requirements applicable to the conduct of its business activities; and It must treat all AIF investors fairly. ESMA's advice in this section covers various aspects that are likely to be familiar to you from the UCITS Directive and MiFID (i.e. due diligence requirements, reporting obligations, order handling, best execution and the acceptance of inducements). PwC 4

6 Conflicts of interest An AIFM is required to take all reasonable steps to avoid conflicts of interest and, when they cannot be avoided, to identify, prevent, manage and monitor and, where applicable, disclose those conflicts. This requirement is to prevent them from adversely affecting the interests of the AIF and the AIF's investors and to ensure that the AIFs it manages are fairly treated 1. In particular, pursuant to Article 14(1), the AIFM must take all reasonable steps to identify conflicts of interest between: The AIFM (including its staff, controllers and subsidiaries) and the AIF or AIF investors; One AIF (or its investors) and a second AIF (or its investors); One AIF (or its investors) and another client of the AIFM; The AIF (or its investors) and any UCITS fund also managed by the AIFM (or the investors in the UCITS fund); and Any two clients of the AIFM. An AIFM is required to operate effective organisational and administrative systems and controls to prevent such conflicts from adversely affecting the interests of the AIF (or investors). To the extent that such systems and controls are not sufficient for the AIFM to be reasonably confident that risks of damage to investors' interests will be prevented, it must disclose the general nature or sources of conflicts of interest to them in advance. ESMA is of the view that AIFMs should be required to establish, implement and maintain a conflicts of interest policy. ESMA's advice is based on MiFID and UCITS Directive Level 2 provisions and describes situations in which conflicts of interest arise. Risk management Pursuant to Article 15, an AIFM is required to take the following risk management measures: It must functionally and hierarchically separate risk management from portfolio management and from other operating units 2 ; It must implement adequate risk management systems to identify, measure, manage and monitor all risks associated with each AIF's investment strategy and to which each AIF is or can be exposed; It must follow a documented and regularly updated due diligence process for investment; It must ensure that each AIF's risk profile corresponds to its size, assets, strategy and investment objectives, including through the use of appropriate stress testing procedures; and It must review its risk management systems at least once a year and adapt them whenever necessary. ESMA's advice covers the establishment, organisation and responsibilities of a permanent risk management function, including requirements in respect of its reporting to senior management and its functional and hierarchical separation from other operating units. ESMA considers it appropriate for AIFMs to focus on and enhance governance frameworks which maintain robust controls, to ensure the risk profile disclosed to investors is aligned with the actual risk profile of the AIF. ESMA does not want to be too prescriptive in stating what risks are relevant for different investment strategies, or indeed on the specific construction of the portfolio stress tests that AIFMs may perform. The emphasis is on building the overall governance structure within AIFs which should allow AIFMs to identify and manage risks 1 (Directive 2011/61/EU) Article 12(1)(d) 2 Member States may disapply this requirement provided there are adequate safeguards against conflicts of interest so that the risk management is independent, the AIFM's risk management process is consistently effective, and the AIFM complies with the other requirements summarised below PwC 5

7 appropriately themselves, without unnecessary restrictions from ESMA. This is a much more proportionate way of dealing with the issue for AIFs. Liquidity management Pursuant to Article 16 of the an AIFM must (except in relation to unleveraged closed ended AIF): Adopt appropriate liquidity management procedures to ensure that the liquidity profile of each AIF's investments complies with the AIF's obligations; Ensure that each AIF's investment strategy, redemption policy and liquidity profile are consistent with each other; and Monitor each AIF's liquidity risk, by regular stress tests against both normal and exceptional liquidity conditions. Due to the diverse nature of AIF within the scope of, ESMA's advice in this area concentrates on general requirements rather than specific obligations, focusing on: The systems and procedures AIFMs should implement to ensure the liquidity profiles of the AIFs under their management comply with their underlying obligations; The content and frequency of stress tests to be performed by AIFMs (it is expected that a stress test should take place at least annually); and The circumstance under which the investment strategy, liquidity profile and redemption policy of each AIF managed by an AIFM can be consider consistent. PwC 6

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9 We accept no liability (including for negligence) to anyone else in connection with this document, and it may not be provided to anyone else PricewaterhouseCoopers LLP. All rights reserved. In this document, "PwC" refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom), which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.