Fund governance in the spotlight

Fund governance in the spotlight

Fuelled by growing competition for institutional mandates and investor pressure, asset managers running both traditional and alternative strategies are strengthening their corporate governance practices.

In addition, regulators, including those in key offshore jurisdictions, – continue to introduce changes which enhance governance. Once deemed to be a peripheral issue for many asset managers, fund governance is now being taken very seriously.

Major markets ramp up the pressure on governance

Recent announcements by the European Commission suggest there is likely to be a stricter application of some of the Alternative Investment Fund Manager Directive (AIFMD) rules.

While caps on delegation have not materialised (thereby enabling non-EU managers to continue marketing into the EU through ‘Manco’ arrangements), it appears likely that firms leveraging the so-called ‘reverse enquiry’ route could face additional reporting requirements, as European Securities and Markets Authority (ESMA) looks to capture more information about managers who are adopting this ‘non-marketing’ approach.

Accordingly, this will require firms to ensure they have solid governance procedures in place to ensure they are not breaking any of the rules. Some firms – nervous about the implications of falling foul of some of AIFMD’s strict reverse enquiry provisions – might choose instead to build up definitive substance in the EU by appointing a Manco to manage an EU fund and avail themselves of the European marketing passport or by registering under NPPR to market non-EU funds.

The US has also recently proposed new rules designed to increase protection and transparency for investors in private funds. The Securities and Exchange Commission (SEC) is proposing, amongst other things, that private fund advisors provide regular transparency on the fees charged to investors.

The rules also prohibit certain types of charges and introduce restrictions to ensure preferential treatment is not granted to one investor over another. Some of the proposed rules will apply to all private fund advisors, regardless of whether they are SEC registered or not.

If they do come to fruition, these reforms will require alternative asset managers to implement changes to their governance and compliance procedures.

Offshore hubs make good governance a priority

Elsewhere, offshore fund jurisdictions have been introducing new rules which enhance fund governance.

Introduced in 2020, all private funds in the Cayman Islands must now register with the country’s regulator – Cayman Islands Monetary Authority (CIMA). Under the provisions, investment firms must:

  • appoint two fund directors
  • implement consistent valuation procedures
  • appoint a custodian to hold custodial fund assets in a segregated account
  • verify ownership and title of all other assets
  • monitor cash flows

CIMA’s rules broadly mirror some of the depositary requirements outlined in the EU’s Alternative Investment Fund Managers Directive (AIFMD) – albeit managers can perform these obligations in-house and do not need to appoint a depositary as they do in the EU.

Nonetheless, some CIMA-registered funds are now thinking about outsourcing some of these requirements to third parties to address potential conflicts of interest issues and enhance their fund governance model.

The application of these rules to private funds will help ensure the Cayman Islands continues to be an attractive domicile for funds, while simultaneously providing reassurance to end investors – many of whom will welcome the added oversight.

It’s all about governance

Once again, corporate governance and good operational process is in the spotlight.

Increasingly regulators and institutional investors are requiring firms to raise their standards focusing on key areas of perceived weakness.  Firms that prioritise governance tend to be stronger businesses, and this will ultimately help managers differentiate themselves from their peers.

INDOS Financial and the wider JTC Group have expertise and solutions which enhance the governance of asset managers and their funds, including third party management company services, depositary and private fund oversight and fund/company secretarial services.