Further Implications For Irish Fund Management Companies Of The COVID-19 Pandemic – Finance and Banking


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Central Bank reporting

Last week the Central Bank contacted a number of Irish fund
management companies and requested that they provide certain
information to the Central Bank about how the COVID-19 pandemic may
be affecting their operations. For most Irish fund management
companies the information is to be provided to the Central Bank
every Monday by 4pm, and the first report was due on Monday 30
March. However, for those Irish fund management companies with a
medium low or higher PRISM rating the information may be required
to be provided to the Central Bank daily.

The following information was requested by the Central Bank:

  • Business continuity:
    any update and/or significant developments on business continuity
    arrangements;

  • Delegates: any
    issues with the oversight of delegates, including whether any
    alternative delegates are being considered;

  • Liquidity: whether
    any liquidity management tools are being considered, such as the
    use of a redemption gate or the temporary suspension
    provisions;

  • Valuation: any
    material issues relating to the pricing or valuation of
    securities;

  • Cybersecurity: any
    material issues to report in relation to emerging threats.

This request for information was made shortly after the issue by
the Central Bank of a questionnaire on the use of liquidity
management tools to all Irish UCITS management companies and AIFMs
which had to be completed and returned to the Central Bank by
Tuesday 31 March. The Central Bank is seeking to get as much real
time information about how Irish funds are operating in the current
COVID-19 environment in order to seek to fulfil its public mandate
role of protecting the interests of investors.

The Central Bank acknowledges in its email that firms are
operating in challenging times, with increased market volatility
and staff working remotely as a consequence of the COVID-19
pandemic.However, the Central Bank has requested that firms engage
with it at any early stage where issues may affect an Irish fund
and may have the potential to impact investors.

The board of an Irish fund management company, its senior
management and the designated persons should all be informed of the
need to provide information to the Central Bank. All of these
individuals must be communicating about how the fund is operating
currently and how investors may be impacted during this difficult
time.

Role of Designated Person

The role of the designated person is central to the proper
governance of an Irish fund management company and is brought into
sharp relief at this time. The Fund Management Guidance/CP86 states
that the designated person is responsible for monitoring and
overseeing the relevant managerial function assigned to him/her. A
description of the role of the designated person is in our briefing
which can be found
here
. In short, the designated person is the link between the
board of directors of an Irish fund management company and that
company’s delegates and other service providers. During this
COVID-19 pandemic the oversight role that a designated person has
assumed on a day-to-day basis is particularly more important. The
designated person should ensure that the policies and procedures
applicable to the Irish fund management company and its funds under
management are adhered to, that the directions of the board are
acted upon and also that the regulatory obligations are being
complied with.

From a practical perspective some important matters that a
designated person might consider in performing the role are set out
below. This list is not exhaustive but it may help a designated
person to focus on some key areas of concern. To the extent that a
designated person is appointed to an Irish fund management company
that is staffed, these issues relate to that staffed entity itself
as well as the fund management company’s delegates or service
providers.





DESIGNATED PERSON ROLE

OPERATIONAL RISK MANAGEMENT
AREAS TO CONSIDER
Business continuity How regularly are the service providers confirming
that the BCP arrangements are working? What plans are in place for
staff that may fall ill, such as, for example, portfolio managers,
board members or DP’s?
Outsourcing How is the outsourcing of various functions
affected by COVID-19 in certain countries, particularly non-EEA
jurisdictions, for example? Has the outsourced service provider
confirmed its business continuity plans are operating well?
Cybersecurity How are the service providers managing and
monitoring cyber risk, particularly with staff now operating
remotely? What, if any, particular issues are of concern, for
example phishing emails or the security of remote working devices,
such as laptops and video conference facilities?

Note: The Central Bank issued a letter to financial services
firms on the common failings it had identified in a recent thematic
inspection on matters relating to cybersecurity. This letter and
our briefing can be found
here
. The Central Bank requires that this letter be brought to
the attention of senior management by 30 April 2020. If an Irish
fund management company has not convened a board meeting before
that date it is important that the board needs to be made aware of
this communication separately and service providers should be asked
to carry out a gap analysis of its cyber management against the
recommendations issued by the Central Bank for the board to
consider and review.

 





DESIGNATED PERSON ROLE

FUND RISK MANAGEMENT
AREAS TO CONSIDER
Valuation/Settlement How are valuations affected by the closure of
certain markets? Is the investment manager or other valuation
service provider required to provide valuations of certain
securities and is it able to do so? Are securities which are traded
being settled on time?
KIIDs Have the SRRI ratings been checked given the
current volatility and are updates to the KIIDs required to be
filed with the Central Bank?
VaR How is the absolute or relative VaR calculation
affected by market volatility?  Does the VaR model need to be
recalibrated?





DESIGNATED PERSON ROLE

INVESTMENT MANAGEMENT
AREAS TO CONSIDER
Liquidity How is the liquidity of the underlying assets of
the fund affected by COVID-19? Has the board been provided with
regular updates on the changing nature of the liquidity profile of
the fund? Have there been any significant redemptions? How will
these redemptions be managed? What liquidity tools does the fund
have and what action would the board need to take for these to be
implemented?

Note: Board or board committee approval will be required to
implement certain liquidity management tools e.g. the redemption
gate or the temporary suspension provisions.

Hedging Is the share class currency hedging affected in the
current market conditions?
MiFID disclosure requirements Have the MiFID II notifications been made by the
investment manager where a fund’s value has decreased in value
by 10%?





DESIGNATED PERSON ROLE

REGULATORY COMPLIANCE
AREAS TO CONSIDER
Central Bank responses Has the fund management company responded to the
various requests for information from the Central Bank accurately
and on a timely basis?
Designated email address Are several individuals checking the designated
email address for these communications in case the usual recipient
falls ill and a Central Bank request for information is
missed?
Diversification Are the diversification limits (e.g. for UCITS the
“5/10/40 rule”) continuing to be complied with given the
market volatility?




DESIGNATED PERSON ROLE

CAPITAL & FINANCIAL MANAGEMENT
AREAS TO CONSIDER
Financial Statements Are the audits and preparation of the financial
statements for the most recent reporting period (e.g. 31 December)
progressing well with inputs being made from the usual teams?

Note: This is particularly important for those funds with a 31
December year end as the financial statements require board
approval and need to be filed with the Central Bank and made
available to shareholders by the end of April.

Valuation Is the valuation of securities causing any
difficulties with NAV calculations generally? Have any NAV
calculations been done incorrectly and/or late?

 





DESIGNATED PERSON ROLE

DISTRIBUTION
AREAS TO CONSIDER
Filings Are the regular filings in the local EU
jurisdictions (such as country supplements and financial
statements) continuing to be made?
AML How is the AML process being handled in the current
environment given the 4MLD requirement for AML documentation to be
provided upfront?
Communications How are the distribution teams managing in the
current environment? Is the communication by distributors with
investors consistent and accurate?

How to perform the role

The designated person would ordinarily perform this role in a
variety of ways, such as face-to-face meetings, telephone calls,
onsite visits of delegates and other service providers and gaining
access to service providers’ systems to check the fund’s
records. With a lockdown now in place in so many countries and the
risk of COVID-19 transmission, there is little or no ability for a
designated person to carry out onsite visits. Much of this work
will need to be carried out by the designated person remotely which
in and of itself may cause practical issues. It may be difficult to
schedule calls for timing reasons or to access the usual
information a designated person reviews in performing the function.
It may also be a more difficult environment for a designated person
to challenge any information provided.

It is important that the frequency of the monitoring and
oversight that may have been carried out to date is reconsidered in
the current circumstances, taking into account the nature, scale
and complexity of the fund management company and the particular
issues funds under management experience. The designated person
needs to make clear to delegates and other service providers what
information it will need and when. The designated person should
prepare, and the board should receive, written reports on a
periodic basis (which may be daily or weekly) on the particular
managerial function, even if the fund is continuing to operate
without any constraints or issues arising other than market
volatility. All senior individuals involved in a fund management
company must know on a real time basis how the current
circumstances are impacting the fund management company’s
business.

The designated person must also be able to evidence in writing
that the monitoring that has been carried out in order to
demonstrate compliance with his/her obligations.

Organisational Effectiveness

The role of the OE director in overseeing the effectiveness of
the board is equally important at this time. One of the roles
identified by the Central Bank for the OE director is to ensure
that the supervision of delegates is working in the interests of a
fund’s investors. Our briefing
here
describes the role of the OE director.

The OE director should be in regular contact with the relevant
Designated Person to ensure that the supervision of delegates is
being managed appropriately. The OE director may also want to
consider how any board meetings or general meetings will need to be
run remotely by telephone/video conference facilities in order to
ensure that the board and shareholder governance is operating
effectively. Committees of the board may need to be established to
ensure decision–making can be effected in circumstances where
a full board may be difficult to convene due to illness or due to
the location of the directors in jurisdictions which may have
potential adverse tax consequences for the fund.

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.

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