Monday, 21 March 2016

The critical role of the Compliance Officer in the governance framework for funds



In the offshore investment funds arena, the importance which is now attached to the exercise of proper oversight and control by the governance bodies of investment funds is stimulating debate as to how these governance responsibilities can be effectively supported.

The governance body of an offshore investment fund is typically non-executive in nature, in that it meets only periodically to review performance and conduct of service providers to whom the governance body has delegated responsibility for the discharge of day-to-day functions for the fund – investment management, risk management and fund administration, for example.  The governance body itself has no permanent secretariat or employees working for it.  As a consequence it is critically dependent upon the flow-back to it of good quality information and reports from the agencies and service providers who have been engaged on a full time basis to service particular aspects of the fund’s operations.

In this context the role of the Compliance Officer (CO) to the fund assumes considerable significance.  While the regulatory regime in Jersey does not specify any minimum time commitment that a CO must devote to their duties and leaves it open to each fund and their CO to craft a compliance monitoring programme which is appropriate to the needs of the fund, the CO is expected to be on permanent alert, even if not engaged on a continuous basis in the affairs of each fund that the CO provides services to.

The CO is in many ways the “eyes and ears” of the governance body of the fund.  The duty of the CO, on behalf of the governance body, is to keep the fund’s activities under surveillance between board meetings of the governance body and to report on the same at those periodic board meetings.

It is interesting to note that the description of the CO role in the Certified Funds Codes of Practice in Jersey is not limited solely to ensuring that the fund remains in compliance with applicable legal and regulatory rules but extends to ensuring appropriate monitoring of the operational performance of the fund and promptly instigating action to remedy any deficiencies in these arrangements.  While this latter provision should, arguably, not be interpreted as obligating COs to act beyond a monitoring role and to undertake supervisory duties akin to those attached to the role of fund directors, it does emphasise the critical link role that the CO plays in the governance arrangements.  The CO is a key dependency of the governance body.  This dependency necessitates a close working relationship between the governance body and the CO:  COs and fund governance bodies need to work closely together to formulate an agreed-upon approach to the CO role and the content of the compliance monitoring programme.

Historically, however, the CO appointed to an offshore fund has not necessarily been viewed as having this level of prominence in the governance framework.  This is due to the fact that CO services have typically been provided as an ancillary element within the fund administration “package” which the fund administrator offers to each fund.  The fund administrator agrees to provide personnel to act as the “key persons” to the fund including the CO and to arrange the provision of compliance resources to enable the fund to meet its compliance responsibilities under the Certified Funds Codes of Practice.  As a consequence there has been a tendency to view the CO role as something that is subsumed within the fund administration mandate and which is discharged at the level of the delegated functions conferred on the fund administrator.  The CO inhabits and largely operates within the confines of the fund administrator’s business operations; and the relationship between CO and governance body is reflected in the periodic “upstream” compliance reporting out of the administration silo.

What tends to be lacking in these arrangements is a clear recognition that to operate effectively the CO must sit, figuratively, not at the underlying level of the fund administrator but between the governance body of the fund and all of the principal service providers and agencies engaged for the fund.  This could be characterised as a “top down” rather than a “bottom up” approach and reflects the role of the CO office as one which operates in tandem with the governance body of the fund, exercising a monitoring oversight which extends outwards and downwards across all of the key service dependencies of the fund.

Inevitably there are time and resource constraints and fee strictures which in the past have militated against achieving the ideal compliance monitoring set-up.  But with the growing scrutiny to which fund directors and governance bodies are now being subject by both regulators and increasingly pro-active investors, there is now a need for fund governance bodies to engage more with their appointed COs to develop and evolve the CO role so that it can operate more effectively to support fund governance bodies and directors in the discharge of their fiduciary and regulatory responsibilities.

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