Central Bank Fines Fund Management Company : a reminder of importance of robust Delegate Oversight
On 30 September 2021, the Central Bank issued a press release noting that it had reprimanded and fined Sarasin Funds Management (Ireland) Limited (the “Firm” or “SFMIL”) €385,000 in respect of four admitted breaches of investment funds regulations which occurred between 25 May 2017 and 2 March 2018.
The Central Bank’s investigation commenced following a disclosure in August 2017 by the Depositary, in accordance with its statutory reporting obligation, about an advertent breach of investment restrictions. The Central Bank’s findings were in respect of:
Advertent Investment Restriction Breaches
The Central Bank found that the Firm’s appointed Investment Manager, while conducting a merger of two funds managed by the Firm (the “Merger”), and while acting as a delegate of the Firm, deliberately breached certain investment concentration restrictions which the Firm (and by extension its delegates) are obliged to comply with under relevant fund regulations.
Governance and Oversight of Delegates Breaches
The Central Bank found that the Firm’s governance, oversight and monitoring of its delegates was deficient:
- the Firm was not consistently receiving all delegate reports and other information mandated under its own procedures to oversee its delegates. In relation to the advertent breach, both the exception control mechanism and the escalation control mechanism failed. The Board only learned of the advertent breach of investment restrictions 8 weeks later, on 1 September 2017.
- the Board confirmed during its quarterly board meetings that it had received certain delegate reports which it had not in fact received.
- the Designated Director for monitoring compliance went on sabbatical from 1 June 2017 until 27 September 2017. The Firm had no alternate Designated Director for monitoring compliance in place until 17 August 2017.
- in the context of the Merger, the Board was aware of the potential difficulties in transferring some of the assets from one fund to another and therefore should have been aware that this could expose the Firm to regulatory and investment risks. The Firm failed to tailor its oversight and monitoring programme appropriately in respect of the Merger and in particular did not follow up with the Investment Manager as to the progress of the Merger at any point between its approval and completion.
The Central Bank’s Director of Enforcement and Anti-Money Laundering, commented as follows on the findings:
“Each fund management company is authorised by the Central Bank on the basis of its business plan, which sets out how the Board will meet its legal and regulatory obligations. Regardless of any delegation of its functions, a fund management company remains responsible for compliance with its regulatory obligations.
The Central Bank expects Boards and designated directors to proactively challenge the activities and scrutinise the actions taken by their delegates, to be able to adequately oversee and monitor their delegates at all times, and to tailor their governance, oversight and monitoring programme appropriately when risks arise. SFMIL failed in this regard.
The Firm did not seek updates from its delegate on the progression of the merger of two funds, despite the merger’s attendant risks.
More generally, the Firm and its delegates were not following the reporting and communication procedures outlined in the Firm’s own business plan.
The Board did not challenge its delegates’ failure to provide it with adequate information and did not act to correct these deficiencies.
It is a particularly troubling finding of this investigation that the Board had confirmed on a number of occasions in the minutes of its own meetings that it had received certain delegate reports when in fact it had not. This falls well below the level of challenge and scrutiny required of the Firm to meet its regulatory obligations.
Effective compliance with the regulatory requirements placed on fund management companies is key to ensuring good governance, effective management and good organisation for the protection of investors, the integrity of the market and to promote systemic stability. Compliance by the industry with these requirements will continue to be an area of focus for the Central Bank.”
There are without doubt very important lessons for fund boards arising from this investigation, not least the importance of ensuring that Boards of fund management companies follow the processes and procedures set out in their Business Plans/Programmes of Operation. These documents set out the governance framework within which fund management companies operate and in structures where tasks are delegated, Boards must ensure that there are robust governance and delegate oversight procedures in place and that these are rigorously followed in practice. The findings reflect many of the items identified by the Central Bank in October 2020 following its thematic review of how fund management companies had implemented its Fund Management Company Guidance (commonly referred to as CP86) and is another reminder that fund management company boards need to continually evaluate and critically assess their day to day arrangements to ensure the full and effective embedding of all aspects of CP86.