d irectors and conducting officers duties

Directors and Conducting Officers duties

Michèle Eisenhuth, Partner, Arendt & MedernachJérôme Wigny, Partner, Elvinger, Hoss & Prussen

ALFI/IFBL/ILA Seminar – 20 & 21 March 2012

2

Table of contents

I. General principles

II. Funds directors

III. Conducting officers

VII. Liability

IV. Consequences of the recent financial crisis and corporate governance (CSSF Circular 11/512)

V. New UCITS IV requirements: CSSF Regulation 10-4 / CSSF Circulars 11/508 and 11/512

VI. Remuneration policies

3

I. General principles

Appointment by the general meeting of shareholders mandate given by simple majority of votes cast in the general

meeting exception: cooptation until the following general meeting

Conditions competence – determined at board level good reputation and integrity availability and independence (to act in the best interest of the

company and not a shareholder or the promoter) possibility to nominate a legal person (representative) minimum of three directors no condition as regards nationality or residence

4

I. General principles (ctd.)

Management of the company

to undertake everything necessary or useful to achieve the company’s objective (Law of 1915, art. 53)

powers reserved to the general meeting

→ by the law→ by decision of the shareholders: the board of directors has

general powers, whereas those of general assembly are only residual

5


Rules governing the mandate appointment (Civil Code, art. 1984 ss.)

→ mandate, i.e. a power given by one person to another to do a specific task in his name

→ agreement: written or oral; agreement of the appointee is needed (explicit or tacit)

→ normally no remuneration

revocation (Civil Code, art. 2003 ss.)

→ fixed term→ deceased or incapacitated→ dissolution of the company→ decision of the general meeting (ad nutum); no justification is

necessary→ resignation (not at an inconvenient moment for company; notification

of the company); no justification is necessary

6


Rules governing the mandate (ctd.) authority (Civil Code, art. 1987 ss. and 1998 ss.)

→ general authority, management and administration of the company→ the principal is bound by the acts of the agent→ collegiality (no individual power)

delegation (Civil Code, art. 1994)

→ no individual responsibility of the agent if he was authorised to sub-delegate to a specific representative

→ incurs responsibility if not authorised or was authorised without specification of the identity of the representative (he will be responsible for his choice)

→ no general delegation→ obligation to supervise

7


Rules governing the mandate (ctd.) no personal obligations (Law of 1915, art. 58)

liability

exceptions: limitations cannot be opposed to third parties (Law of 1915, art. 53§3)

→ whether limitations mentioned in the articles of association or stemming from a decision of the general assembly, even if published

→ except if it can be shown that the third party had knowledge of the limitations

ultra vires→ the company remains liable for the acts of its board of directors,

even if those exceed the object of the company→ except if it can be proven that a third party had knowledge (or could

not ignore) that the act exceeded the object of the company)

8

II. Funds directors

Legal provisions (Law of 2010, art. 129 (5))

“ … of sufficiently good repute and have sufficient experience, also in relation with the type of UCI concerned.”

Prior authorisation from the CSSF copy of passport CV (dated and signed) declaration of honour (CSSF template) excerpt of criminal record / affidavit

9

II. Funds directors (ctd.)

General obligations under UCITS IV

determine the fund’s strategy, risk profile and targeted investors (distribution policy)

determine investment policies and investment restrictions approve prospectus / simplified prospectus / KIID choose ManCo (if any) and other services providers and approve

relevant contracts delegate the management (supervision) designate the minimum two conducting officers approve the risk management process with the conducting officers

new requirements of CSSF Circular 11/512 approve the compliance by the ManCo, the self-managed UCITS, with

the new UCITS IV requirements (see below)

10

II. Funds directors (ctd.)

Discharge of their obligations

act in the best interests of the fund cf. UCITS IV new rules of conduct

regularly assess compliance with Code of Conduct principles and new UCITS IV requirements (see below)

allocation of duties between them

information obligation (escalation procedure), receipt of regular reports

regular meetings (legal minimum: 1; best practice for a fund: 3-4)

detailed agenda: documents received well in advance; detailed minutes and follow-up from previous meeting(s)

11

III. Conducting officers

UCITS IV provisions

substance: one conducting officer located in Luxembourg

continuous supervision of delegated functions

Regulatory conditions: CSSF Circulars 03/108 and 05/185

sufficient good repute and appropriate experience

prior authorisation from the CSSF: copy of passport, CV (dated and signed) and excerpt of criminal record/affidavit + declaration of honour (CSSF template)

12

III. Conducting officers (ctd.)

Self-managed UCITS / UCITS designating a ManCo

*Majority of promoter representatives on the BoD may conflict with corporate governanceprinciples

min. 2 conducting officers 1 BoD 1 oversight level promoters BoD* EUR 300.000.- initial capital restricted scope of activity

min. 2 conducting officers 2 BoD 2 oversight levels promoters BoD*+? ManCo capital based on all AUM extended scope of services several UCITS + non-UCITS UCITS IV ManCo passport

13


Conducting officers may be: directors, managing directors, general managers, employees of the promoter

“Four eyes principle” at least two persons acting jointly

Conducting officers the board of directors’ watchdog

Independent frame of mind: the conducting officers may, in the best interests of the shareholders, provide instructions to the services providers or propose to the board to withdraw a mandate in case of wilful misfeasance or mismanagement

14


Oversight and governance duties – agents of the board

conduct the fund’s day-to-day activities

with the board, classifies the fund: UCITS IV subjective classification

assess with the board, the matching between the fund’s strategy, investment policies and the risk profile of the targeted investors

overview the compliance with the investment strategy and policies

define, continuously assess and overview the risk management process (independent from the fund management) cf. new requirements of CSSF Circular 11/512

monitor accounting and analytical reports

15


Oversight and governance duties – agents of the board (ctd.)

liaise with services providers and supervise their activities

with the board, oversee distribution network, KIID, KYC/AML policies, market timing prevention as well as fair valuation procedures and practices

keep abreast of legal/regulatory requirements and fund industry issues

report to the board & others (CSSF, auditors, etc.)

Etc.

16

IV. Consequences of the recent financial crisis and corporate governance

Board members have a fiduciary duty towards the fund’s investors

Until recently: only a few rules of conduct imposed by UCITS III (e.g. Law of 2002, art. 85 and 86) as well as derived from MIFID for ManCo exercising additional activities (Law of 2002, art. 77 (4)) new rules of conduct imposed by UCITS IV (see below)

Alfi Code of Conduct – September 2009

In the context of the recent market conditions, it is strongly advisable that all sensitive decisions (esp. those related to credit risk/liquidity risk, valuation, etc.) be taken by the fund’s board

17

Focus on and measures to be taken by the board to ensure appropriate:

investor protection: right to exit the fund and to be treated equally (e.g. to avoid that only illiquid assets remain in the fund in case of massive redemptions)

risk assessment: crisis revealed new types of risks: specific credit risk, counterparty risk, liquidity risk, valuation risk, operational risk continuous assessment of the risks to respond to the potential changing risk landscape

fund and risk management: fund’s board/conducting officers to develop guidelines with regards to adequate management / pricing and rating of fund assets

IV. Consequences of the recent financial crisis and corporate governance (ctd.)

18

Focus on and measures to be taken by the board to ensure appropriate: (ctd.)

compliance with new requirements of CSSF Circular 11/512: calculation of the global exposure on a daily basis, specific disclosures in the fund’s prospectus / annual report (e.g. level of leverage), etc.

transparency in the sales documents of the investment policy and the associated risks + appropriate provisions in case of extreme or abnormal market conditions


19

Focus on and measures to be taken by the board to ensure appropriate: (ctd.)

portfolio liquidity and adequate valuation: board/conducting officers to put in place escalation procedure for liquidity and valuation problems (e.g. contingency plans for funds facing massive redemption requests + pricing committee )

adequate training of distribution network (KYC/AML policy, delivery of KIID, etc.)

product quality management: to ensure that products sold correspond to investors’ expectations and risk profile in accordance with the new UCITS IV requirements

enhanced role of compliance officers / new internal audit function (see requirements of UCITS IV below)

management of conflicts of interest (cf. ALFI Code of Conduct + new requirements of UCITS IV - see below)


20

CSSF Regulation 10-4, art. 10: increased obligations for ManCos to monitor implementation of principles set forth in the directive

CSSF Circular 11/508 Scope

– ManCos– Self-managed SICAVs (to a certain extent)

Organisational requirements

Head of office of a ManCo (Law of 2010 Law, art. 102(1)e))sufficient human and technical resources, including to control

the activities undertaken by its delegatesno letter box entity (substance)

V. New UCITS IV requirements

21

CSSF Circular 11/508 (ctd.)

Organisational requirements (ctd.)

General requirements in terms of procedures and organisation (CSSF Regulation 10-4, art. 5) (P)

precise and clear manual of procedures to be complied with by delegate in case of delegation of part of its

functions by the ManCo

Resources (CSSF Regulation 10-4, art. 6) (P) skilled staff members with the necessary expertise for the discharge of its

tasks by the ManCo and for efficient monitoring of the delegated activities

Complaints handling (CSSF Regulation 10-4, art 7) one staff member responsible possibility to delegate this requirement applies to self-managed SICAVs

V. New UCITS IV requirements (ctd.)

22



Electronic data processing and accounting procedures (CSSF Regulation 10-4, Art. 8, 9, 15 and 16)

suitable electronic systems permitting a timely and proper recording of each portfolio transaction and subscription or redemption orders

adequate accounting procedures to ensure that all assets and liabilities can be identified and valued in a correct manner

possibility to delegate

Control by senior management and supervisory function (CSSF Regulation 10-4, art. 10)

New distinction btw “senior management” and “supervisory function” Ultimate responsibility for ensuring compliance with legal and regulatory

obligations applicable to self-managed SICAVs ?


23



Permanent compliance function and internal audit function (CSSF Regulation 10-4, art. 11 and 12) (P):

cannot be undertaken concurrently by the same individual possibility to delegate

Permanent risk management function (CSSF Regulation 10-4, art. 13) (P)

possibility to delegate BUT appropriate monitoring by a risk manager officer

cannot be undertaken concurrently by the same individual responsible for the compliance function

this requirement applies to self-managed SICAVs

Personal transactions (CSSF Regulation 10-4, art. 14) written procedures to record all personal transactions


24



Conflicts of interest (P)

Conflicts of interest policy (CSSF Regulation 10-4, art. 18 and 22) (P) recording of situations which may give rise to a conflict of interest


Strategies for the exercise of voting rights (CSSF Regulation 10-4, art. 23) effective strategy to be set up for determining how and when voting rights

attached to instruments held in the managed portfolio are to be exercised to the exclusive benefit of the UCITS concerned


25


Rules of conduct (CSSF Regulation 10-4, art. 25 to 32)

→to act in the best interests of the UCITS and their unitholders

→to comply with due diligence requirements when executing investment decisions

→to comply with best execution principle when executing orders for the UCITS

→to comply with reporting obligations when handling subscription and redemption orders


26



Rules of conduct (CSSF Regulation 10-4, art. 25 to 32) (ctd.)

→to comply with new inducement requirements:→fees, commissions and non-monetary benefits paid to or by the

UCITS or a person on behalf of the UCITS;→fees, commissions and non-monetary benefits paid to or by a third

party or a person on behalf of such third party;→existence, nature, amount must be clearly disclosed to the

UCITS prior to the provision of relevant service;→designed to enhance the quality of the service and not impair

management company’s compliance with duty to act in best interests of UCITS;

→proper fees e.g. custody costs, settlements and exchange fees, regulatory levies, legal fees etc.

these requirements apply to self-managed SICAVs

27


Risk management (CSSF Regulation 10-4, art. 42 to 50)

→ New CSSF Circular 11/512 market and counterparty risks operational and liquidity risks any other risk that may be material for the UCITS managed

to calculate the UCITS’ global exposure at least on a daily basis to disclose specific information in the UCITS’ prospectus and annual

report (level of leverage, etc.)

these requirements apply to self-managed SICAVs


28

European initiatives

EC Recommendation (2009/384/EC) dated 30 April 2009

→ Remuneration policies in the financial services sector (for all financial undertakings having their registered office or their head office in the EU)

CRD III Directive (2010/76/EU) of 24 November 2010 (Not applicable to UCITS and their Mancos)

→ Applicable to credit institutions and investment firms within the meaning of MIFID; aims at translating the principles contained in the foregoing recommendation into legally binding requirements

VI. Remuneration policies in the financial sector (ctd.)

29

European initiatives (ctd.)

Consultation paper of the European Commission dated 14 December 2010 on the UCITS depositary function and on UCITS managers’ remuneration

rationale of remuneration policy for UCITS managers:→new products and techniques make UCITS more vulnerable →level playing field between credit institutions and investment firms (CRD

III), alternative investment fund managers (AIFMD) and UCITS managers consistent remuneration policies across all financial services to avoid migration of more risky practices into the UCITS sector

scope: UCITS fund managers: →ManCos→self-managed SICAVs


30

European initiatives (ctd.)

Consultation paper of the European Commission dated 14 December 2010 on the UCITS depositary function and on UCITS managers’ remuneration (ctd.)

categories of staff whose professional activities may have a material impact on the risk profile of a managed UCITS in particular: senior management, including board of directors, persons carrying out supervisory or risk management functions and any employees receiving total remuneration that take them into the same remuneration bracket as senior management

To apply the principle of sound remuneration policy in accordance with the principle of proportionality (size, internal organisation, nature, scale and complexity of activities)

Feedback statement: Remuneration rules should be adjusted to the UCITS model (≠ credit

institutions / AIFM) Substantial portion of variable remuneration paid out by units/shares is not

suitable in a UCITS environment


31

VI. Remuneration policies in the financial sector (ctd.) European initiatives (ctd.) AIFMD (2011/31/EU) dated 8 June 2011

→ Remuneration policy to be put in place→ scope: categories of staff including senior management, risk takers, control

functions and any employees receiving total remuneration that takes them into the same remuneration bracket as senior management and risk takers, whose professional activities have a material impact on the risk profiles of the AIFMs/AIFs they manage

→ rules derive from EC Recommendation 2009/384/EC→ proportionality principle

CRD IV (Not applicable to UCITS and their Mancos)→ On 20 July 2011, the Commission adopted a legislative package to strengthen

the regulation of the banking sector. The proposal replaces the current Capital Requirements Directives (2006/48 and 2006/49) with a Directive and a Regulation and constitutes another major step towards creating a sounder and safer financial system. The Directive governs the access to deposit-taking activities while the Regulation establishes the prudential requirements institutions need to respect.

32

Luxembourg initiatives: regulatory framework

CSSF Circular 10/437 implementing EC Recommendation (2009/384/EC)

scope: → all “financial undertakings” subject to the CSSF’s prudential supervision

which shall include a) credit institutions, b) investment firms, c) managers of pension funds and of collective investment schemes;

→ persons who are members of the administrative and management bodies of the financial undertakings and staff whose professional activities have a material impact on the risk profile of the financial undertakings

Establishment of a remuneration policy by the board of directors of funds especially when staff receive a variable remuneration


33


Luxembourg initiatives: regulatory framework (ctd.)


ceiling of the variable component postponement of the main fraction of a significant premium contractual allowances should reflect the actual performance “welcome bonus” limited to the first year withholding partial or total of premiums “clawback” when fraud

34

VI. Remuneration policies in the financial sector (ctd.) CSSF Circular 10/496 applicable to credit institutions and branches

of credit institutions originating from non-EU MS : Not applicable to UCITS or their Mancos

CSSF Circular 10/497 applicable to investment firms and branches of investment firms originating from non-EU MS, and modifying CSSF Circular 07/290 on capital ratios requirements for investment firms and management companies : Not applicable to UCITS or their Mancos

CSSF Circular 11/505 detailing the application of the principle of proportionality when establishing and applying remuneration policies that are consistent with sound and effective risk management as laid down in CSSF Circulars 10/496 and 10/497: Not applicable to UCITS or their Mancos

Law dated 28 October 2011 implementing Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies and amending the amended law of 1993 in respect of remuneration policies: Not applicable to UCITS or their Mancos

35

VII. Liability

Civil liability

Mismanagement (Law of 1915, art. 59§1) contractual liability

→ mandate→ negligence (act or omission; damage; causation (i.e.

damage caused by negligence)

only as regards the shareholders

exception: Civil Code, art. 1166 (action oblique)→ if the company is passive → the creditor has to act with the goal of safeguarding

his interests→ if he succeeds, payment to the company

36

VII. Liability (ctd.)

Civil liability (ctd.)

Mismanagement (Law of 1915, art. 59§1) (ctd.)

no action in favour of minority shareholders

individual liability

exoneration→ no negligence in exercise of management functions

(reference to a normally prudent person; best effort obligation)

→ discharge given by the general assembly

scope of indemnification

37


Civil liability (ctd.)

breach of statutes or the Law of 1915 (Law of 1915, art. 59§2)

→ contractual liability as regards shareholders→ liability in tort as regards third parties→ joint liability (Civil Code, art. 1200)

Limited exoneration (performance obligation)→ the director has to provide information of the violation at the next

general meeting→ discharge (only binding as regards the company)

scope of indemnification

Criminal liability (Law of 1915, art. 162 to 173)


Criminal liability of legal entities

A specific regime on criminal liability regarding legal entities has beenintroduced in Luxembourg by a law dated 3 March 2010

Scope of the lawThe Law provides that a legal entity might be criminally liable when acrime (“crime”) or a misdemeanour (“délit”) has been committed in itsname and in its interest by one of its legal corporate bodies or bystatutory or de facto managers/directors (“dirigeants de droit ou defait”).


Criminal liability of legal entities (ctd.)

Concurrent liabilitiesA legal entity might be held liable for criminal offence without

prejudice to the personal criminal liability incurred by directors/managers of the said legal entity.

Sanctions → fines→ special seizures/attachments→ exclusion from public contracts bids→ dissolution and liquidation

40

Contact us

Michèle Eisenhuth Partner at Arendt & Medernach Tel : +352 40 78 78 638 Email : [email protected]

Jérôme Wigny Partner at Elvinger, Hoss & Prussen Tel: +352 44 66 44 0 Email: [email protected]

mailto:[email protected]

mailto:[email protected]

d irectors and conducting officers duties

Documents

general authority

general powers

general assembly

general principles ctd

general meetingexception

general principlesappointment

general meeting ad nutum

mandate ctd