Recently the Irish Funds Industry Association published a corporate governance code for the Irish funds industry. The code was developed against the backdrop of a request made by the Central Bank of Ireland for specific sectors of the financial services industry in Ireland to develop corporate governance codes to provide a framework for the operation of these businesses. A steering committee of the IFIA led the project to develop the code, consulting extensively with both industry and the Central Bank. This briefing summarises the key requirements of the code.

Application

Although the code is referred to as being a voluntary code it recommends that the requirements of the code are adopted by all Irish funds and Irish management companies, both UCITS and non-UCITS. To the extent that a board adopts the code but decides not to apply any particular provision of the code, the reasons for departing from the code's requirements must be specified either in the directors' report in the audited annual accounts or must be published through a publicly available medium (such as a website) which is referred to in the annual accounts. For these reasons it is expected that most Irish funds and Irish fund management companies will seek to implement the terms of the code. The main changes which will be required to be adopted by boards to reflect the new requirements are described below.

Scope

The aim of the code is to provide a framework for the organisation and operation of funds to ensure that funds operate efficiently and in the interests of shareholders. Rather than introducing a completely new corporate governance regime many of the code's requirements reflect existing corporate governance practices, particularly the practices and procedures required for UCITS funds by virtue of the UCITS IV Directive. There are some new requirements relating in particular to the constitution and operation of the board. Most boards would not currently comply with some of these requirements which will necessitate changes to the boards' practices. However, we believe that the adoption of the code should not prove too onerous for any board.

Timing of implementation

The Central Bank has accepted that there should be a transitional period of 12 months to allow boards to comply with the code and this should be sufficient time for any board to implement the new requirements. A review is expected to be carried out by the Central Bank within 18 months of the code's issue to assess its adoption.

Role of the Board

The code acknowledges that the board of the fund is the focal point for the governance of the funds. It is the board's responsibility to oversee the activities of the fund and many of the key requirements of the code relate to this role.

Board Constitution

The main recommendations in relation to the constitution of the board are as follows:

  • the board should have a minimum of three directors;
  • the majority of the directors should be non-executive (the term non-executive refers to a director who is not directly involved in the day-to-day discretionary investment management of a fund);
  • there should be at least one independent director (being a director unconnected with the promoter and/or any service providers and not providing any service to the fund, such as legal, audit or consultancy services);
  • there should be at least one employee of the promoter and/or investment manager appointed as a director;
  • at least two directors should be Irish resident; and
  • a non-executive permanent Chairman of the board should be appointed.

These requirements are intended to ensure that the board reflects the balance of skills needed to promote strong and effective oversight of a fund's activities. At least two directors should be available to meet the Central Bank on short notice if required.

Operation of the Board

The board should meet quarterly and a schedule of attendance at board meetings maintained. The board must consider the time commitments required of the board members both at the outset of the appointment of any directors and periodically thereafter to ensure that directors are able to devote the necessary time to fulfil their roles. Similarly, directors must disclose their time commitments to the board and particularly whether their holding of other directorships impacts on whether they can properly fulfil their role as directors. Obviously the nature, scale and complexity of the fund must be taken into account when considering the time commitments required. In this regard, the code provides a rebuttable presumption that a maximum of eight non-fund directorships may be held by a director without adversely affecting the director's ability to fulfil his or her role. It is however acknowledged that there may be exceptional or extraordinary items arising during the term of a director's appointment which may require the director to dedicate more time to managing the affairs of a fund. Procedures also need to be put in place to address any conflicts of interest that may arise through directors holding other roles and the way in which such conflicts are dealt with documented and reviewed annually.

Appointments and reviews

Each director should be formally appointed by way of a letter of appointment. A board performance review should take place annually with a more formal review of individual directors every three years. These reviews will need to be documented. The Central Bank also introduced on 1 December 2011 a new fitness and probity regime in relation to the appointment of directors which requires directors to demonstrate to the board and to the Central Bank that they meet the Central Bank's fit and proper standards. The code envisages that the directors will receive regular training in order to ensure that they are able to understand their statutory and common law duties and the nature of their role.

Committees

Many boards have committees in place to deal with matters such as audit and risk reviews. The code requires that where committees of the board are formed these committees have documented terms of reference dealing with matters such as the scope of their activities, quorum requirements and the frequency of meetings. The minutes of these committee meetings should be documented and forwarded regularly to the board.

Delegation and oversight

The code acknowledges the importance of the delegation of all or part of the management of a fund to third parties and requires mechanisms to be put in place for the monitoring of the exercise of such delegated functions as the board is responsible for the activity of all of its delegates. For UCITS funds this process of delegation and monitoring is already in place but it is likely that for non-UCITS funds additional processes and procedures will need to be put in place to meet these requirements. The code makes it clear that it is the board's responsibility for the keeping of proper accounts and the accounting records, the preparation of the audited financial statements and the half-yearly reports, compliance with legislation and regulatory requirements and the monitoring and managing of risk.

Conclusion

The boards of Irish funds and Irish management companies will need to review the code in detail in order to identify any gaps in their current practices and procedures against the requirements of the code. Some new policies and procedures are likely to be needed for all boards relating to the appointment of directors, the review of directors' performance and their training.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.