Funds corporate governance – the regulator’s expectations

I was recently reading an excellent article by Tim Morgan, Chair of the Jersey Funds Association, concerning the increasing importance of governance in the funds arena and how managers are responding to the scrutiny being placed upon them by investors.

It is undeniable that investor demands and expectations are key drivers in the focus on governance.  However, the Jersey regulator has also left funds and their managers in no doubt regarding the importance it attaches to effective governance, as set out in the JFSC’s Codes of Practice.  Effective governance is a core element in funds and their service providers demonstrating that they are well organised and controlled.

Both funds and their managers are subject to specific regulatory requirements through bespoke Certified Funds and Fund Services Business Codes of Practice as well as the AML/CFT Handbook.  The sections on governance in both Codes are very similar and funds and managers must both clearly evidence that they:

• are directed by suitably qualified and experienced people
• have clearly apportioned the responsibilities of the directors, senior management and other employees (e.g. job descriptions or role profiles)
• have clearly defined procedures in place
• have undertaken a comprehensive business risk assessment to include the ways the identified risks are monitored and controlled
• receive accurate and reliable management information and reporting, including compliance reporting
• regularly review their corporate governance arrangements, including an internal or external review of the board’s effectiveness 

The AML/CFT Handbook sets out similar requirements and is also specific in expecting the board to assess the effectiveness of relevant systems and controls and to take prompt action to address any deficiencies.

The governing body of the fund may be able to obtain some assistance from their service providers, including the manager, in meeting their own regulatory requirements.  However, they cannot abdicate responsibility and must exercise their own sound oversight of the governance framework.

That’s all very well, but how can you demonstrate good governance?  The key, and I’m sure this will come as no surprise, is comprehensive record keeping, which would include detailed board minutes.  It is a regularly repeated adage, but if you can’t evidence that something took place, (for example, board scrutiny of the Compliance Officer’s report), there is a general assumption that it didn’t happen.  The absence of evidence is often regarded as evidence of absence.

The funds must also not lose sight of the fact that their governance arrangements must be specific to themselves and not absorbed into that of the manager or administrator.  Therefore, each fund should have its own bespoke documentation, including an assessment of risk, policies and procedures and documented compliance arrangements.

Often, it is the manager or administrator that provides the compliance resources to the fund, including the Key Person roles of Compliance Officer, Money Laundering Compliance Officer and Money Laundering Reporting Officer.  A common failing is the administrator not adequately recognising that the funds have their own compliance and regulatory obligations, that are separate to those of the administrator and thinking that a “one size fits all” compliance framework is acceptable.  The funds must subject the Key Persons to scrutiny and challenge and ensure that they are receiving adequate compliance support, through regular reports from Compliance on monitoring activity, breaches, complaints and relevant regulatory developments, amongst other things.

Funds and their governing bodies should also ensure that they are vigorous in the monitoring and oversight of their service providers, in particular the manager and administrator, who are likely to be responsible for the majority of the fund’s operational aspects.  When things go wrong, it is often failings of the manager or administrator that have been significant contributory factors.

An effective way of ensuring that funds’ governing bodies don’t lose sight of their far-reaching responsibilities is to capture them in procedures as well as including them in a standing board agenda.  Each fund should have regular governance related meetings to focus on relevant matters such as compliance, risk management, oversight of service providers and policies and procedures.  Then ensure that board discussion and decision making are comprehensively evidenced in the board minutes!

Returning to Tim’s article, the current focus on good governance should not be seen as a reaction to meet the expectations of investors (and regulators), but an approach that can only have a positive and lasting benefit across the industry.