•     The separation of the job of designated Person (DP) from that of Non-Executive Director (NED)
•     The re-organisation of the key managerial functions for Undertakings for Collective Investment in Transferable Securities (UCITS) and Alternative Investment Fund Managers (AIFMs)
•     Parameters being placed on the professional and time commitments for FMC directors in terms of “aggregate professional time commitments”
•     An increase in emphasis on overseeing particular management areas including risk management and distribution

The guidance note is 42 pages long - proof of the seriousness that the Central Bank is now placing on these matters.

Implications for investment funds that lack management companies

Boards and promoters at these firms will have to consider the following.

• Managerial Functions – the number of functions will be reduced to six but are much more detailed. Risk represents two of the six items, proving its importance – there will be a requirement for a risk appetite statement and a 'risk framework.' Distribution is new and requires analysis and implementation. The DP for risk cannot be the same person as the DP for investments. The Central Bank requires DPs to have the skills and time to do these specific jobs and information about this must be written down somewhere. The allocation of DP functions may now be more complex than was historically the case. DPs must have demonstrable experience in the areas that they oversee.
• 'Designated Person' jobs – when anyone oversees any of the managerial functions he must have a contract in place (with the FMC) which, among other things, describes his job and the amount of time to be dedicated to it. This will also apply to NEDs who do these jobs.
• Composition of the board – a number of requirements will have a direct effect on the composition of a FMC board. These include: the requirement to have an independent director (who is not responsible for any of the six managerial functions) responsible for organisational effectiveness; the requirement to keep a record of the rationale for the board’s composition; the capacity, willingness and expertise of directors in becoming DPs for managerial functions; and a clear setting-down of directors’ full professional time commitments.
• So-called 'director time commitments' – the Central Bank is going to scrutinise any director with more than an annual aggregate professional time commitment (and the funds he sits on) to a greater degree than before. It wants to ensure that the number of directorships any individual has is 'moderate.' If any director has more than 20 directorships and an aggregate annual time commitment of more than 2,000 hours, he will be considered to be 'highly risky.' After 1st January 2016, any investment funds that have directors in this category will be subject to extra regulatory scrutiny and will become likely candidates for Central Bank thematic reviews. Boards of FMCs will be required to keep clear records of directors’ aggregate annual time commitments and to be satisfied that every director has enough time to fulfil his/her role (on the board).
• Risk Management – this is now separated into two separate managerial functions, fund risk management and operational risk management. Although it is acceptable for a DP to perform more than one managerial function (one individual can perform both fund risk management and operational risk management functions), he cannot perform managerial functions in relation to risk and investment management. The guidance also states that the board of a FMC should confirm its risk appetite and that of its underlying funds and identify and mitigate the applicable risks (i.e. develop a 'risk framework' specific to the FMC). Risk should be appropriate to the fund, the FMC and the underlying funds. Risk polices should include clear procedures for reporting to the board and considering breaches of any limits. A bald reliance on the risk management functions of the FMC’s delegates is not enough.
• Distribution – the guidance note requires the board to approve a detailed distribution strategy and says what this should include. These recommendations relate to the determination and assignment of tasks for the proposed distribution strategy and to the need for effective controls. The guidance note explains that the board should also receive and be satisfied with regular reports regarding distribution. It should examine these reports if anyone thinks that there is a conflict with the prospectus. In addition, it should examine marketing material if (i) it believes that such material contains significant elaborations relating to the investment approach and (ii) if there is a risk that the marketing material conflicts with the prospectus.

* Carne Group provides governance services to the fund management industry. Its website is at www.carnegroup.com