Fitness And Probity - Practical Implications For Funds
15 December 2011
The Central Bank of Ireland (the “Central Bank”) published its final Guidance on Fitness and Probity Standards on 23 November 2011. The Guidance clarifies some important aspects of the regime as it applies to the Investment Funds sector. The new regime came into effect on 1 December 2011.
1. KEY DEVELOPMENTS
(i) Extension of Deadline to Complete Due Diligence on In Situ PCFs
The deadline by which regulated financial service providers (“RFSPs”), including investment funds, must provide a written confirmation to the Central Bank that they are satisfied that the persons in Pre-Approval Controlled Function (“PCFs”) roles are compliant with the Fitness and Probity Standards (the “Standards”) and that the firm has obtained each person’s written agreement to abide by the Standards, has been extended from 31 December 2011 to 31 March 2012.
Accordingly, the due diligence which must be carried out to substantiate this confirmation, will not need to be completed until 31 March 2011.
The requirement to submit to the Central Bank by 31 December 2011, a list of all individuals performing PCFs as at 1 December 2011 still applies, however.
(ii) Due Diligence to be Undertaken
The Central Bank has acknowledged that there is a distinction to be drawn between individuals in PCFs who are in situ as at 1 December 2011 and new appointments to PCF roles, in the context of the standard of due diligence expected to be undertaken to verify their compliance with the Standards. The RFSP must exercise its own judgement on a case by case basis, taking into account the relevant individual’s experience and length of service in the role. Specifically, the Central Bank has conceded that the requirement to obtain a reference will not apply where the person has performed the same PCF or Controlled Function (“CF”) in the RFSP for at least one year as at 1 December 2011.
(iii) Previously Approved Directors Taking on New Directorships
The Central Bank has confirmed that, under the new regime, the new online Individual Questionnaire must be completed for all appointments to the Boards of all investment funds with effect from 1 December 2011. Therefore, albeit that an individual may be currently approved by the Central Bank (under the old regime) as a director of an investment fund, he or she must undergo the approval process under the new regime for any new directorships of investment funds that he or she takes on from 1 December 2011 onwards.
For Qualifying Investor Funds (“QIFs”), directors who would have provided a declaration accompanying an application for authorisation of a QIF are now required to complete the on-line Individual Questionnaire at least 5 working days in advance of filing a new QIF application.
(iv) Outsourced Functions
Outsourcing to Regulated Entities
The Guidance confirms that where a CF or PCF is outsourced to a regulated entity, the regime will not apply to the individual performing the function on an outsourced basis, provided there is a written agreement in place between the RFSP and the service provider. This means that, in respect of investment funds operating on the delegation model basis, the Standards will not now apply in circumstances where services are provided to the fund company, on an outsourced basis, by a regulated entity (eg its fund administrator, custodian or regulated investment manager or distributor.)
A “regulated entity” in this context means any entity regulated either by the Central Bank or by an authority anywhere in the world that performs functions that are comparable to the functions performed by the Central Bank.
Outsourcing to Unregulated Entities
Where a PCF is outsourced to an unregulated entity, there must be a written agreement in place between the parties and that agreement must identify the individual or individuals who will perform the outsourced PCF function. The person performing the PCF must also be compliant with the Standards and the appointment of that individual to the PCF must be approved in advance by the Central Bank.
Where a CF is outsourced to an “unregulated entity”, the unregulated entity must be able to identify the individual who will perform the CF and assess whether that person is compliant with the Standards. The entity must also obtain the person’s agreement to abide by the Standards.
(v) Company Secretary
The position of Company Secretary has been removed as a PCF.
2. PRACTICAL IMPLICATIONS FOR INVESTMENT FUNDS
(i) By 31 December 2011
By 31 December 2011, each investment fund in Ireland must identify its PCFs in situ as at 1 December 2011 and provide the Central Bank with a list of the individuals performing those PCFs.
(ii) What are the PCFs for Irish Investment Funds?
For Irish investment funds structured as companies, operating on the delegation model basis, the only PCFs that are subject to regime, in our view, will be:-
• each director; and
• (if the fund is a UCITS self-managed investment company) a Designated Person, if any, to whom a director has delegated the performance of a management function, where the Designated Person is not an employee of a regulated entity.
(iii) By 31 March 2012
By 31 March 2012, the fund must carry out an internal due diligence process to confirm compliance with the Standards by persons performing PCFs.
The extent of such due diligence in respect of in situ PCFs still needs to be determined. However, we would suggest that a fund company would require the following from each director:-
• confirmation (or otherwise) that his or her biographical details set out in the most recent Prospectus of the fund are true and correct;
• a response in writing to questions set out in Section 5.1 to 5.21 in the new Individual Questionnaire;
• confirmation that he/she is capable of performing the function of a non-executive director of the company and has adequate time to perform that function, having regard to other directorships/responsibilities that he/she may have; and
• confirmation that he/she is aware of the Standards, that he/she complies with those Standards and agrees to abide by them.
Any non-standard responses or disclosures by a director would necessitate further engagement by the fund company with the relevant individual to determine whether he/she is compliant with the Standards.
We would also suggest that the fund company should independently carry out the following steps:-
• check the website of the Central Bank and those of other regulatory authorities (where available) to confirm whether the director has been subject to any sanction or other regulatory action;
• check the website of the Companies Registration Office in Ireland to determine whether any restrictions or disqualification orders have been made in respect of the director; and
• check publicly available sources to determine whether a judgment debt has been registered against the person in Ireland. Where the director has lived outside Ireland for more than 6 months in the previous 5 years, the director should provide a check from a publicly available source in relation to judgment debts from that other jurisdiction.
The content of this article is provided for information purposes only and does not constitute legal or other advice. Mason Hayes & Curran (www.mhc.ie) is a leading business law firm with offices in Dublin, London and New York.
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