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New Voluntary Corporate Governance Code for the Funds Industry

AUTHOR(S): Elizabeth Grace, Anne-Marie Bohan, Tara Doyle, Michael Jackson, Shay Lydon, Dualta Counihan, Joe Beashel
PRACTICE AREA GROUP: Asset Management and Investment Funds
DATE: 14.12.2011

The finalised corporate governance code (the “Code”) for the Irish funds industry was published today, 14 December 2011. The Code was prepared in response to an invitation to the Irish Funds Industry Association (“IFIA”) by the Central Bank in April 2010 to formulate an appropriate code for Irish investment funds.  Michael Jackson served as a member of the steering group established by the IFIA to develop the Code. A draft of the Code was circulated for comment on 13 June 2011 and the consultation closed on 24 June 2011. The finalised Code does not contain significant changes to the draft Code.

The Code will apply to Irish authorised investment funds and Irish authorised management companies.  Although the Code is voluntary, its adoption is strongly recommended by the IFIA.  It operates on a "comply or explain" basis so that, where the board of any company decides not to comply with any provision of the code, the reasons for non-compliance should be set out in its directors' report or on its website.  The Code becomes effective from 1 January 2012 and a transitional period of 12 months will apply.

The Code represents a codification of existing practice combined with what is seen as best international practice.  The vast majority of the requirements set out in the Code are therefore already being complied with by Irish authorised funds, but boards of funds and management companies will have to review the Code and consider whether to adopt it in full.

Composition of the Board

There are a number of new requirements in respect of the composition of the board.  The board must have:

a minimum of three directors; 
a majority of non-executive directors; and 
at least one independent director.  

Independent Directors

The Code provides criteria to be considered in determining if a director is independent. Prior to the introduction of the Code, the only substantive requirement in this regard was that there be two Irish-resident directors (this requirement remains). While these directors tended to be independent of the fund promoter as a matter of practice, this was not a formal requirement. The requirement in the Code that at least two directors be “reasonably available to meet the Central Bank at short notice, if so required” is also likely to be met by having two Irish-resident directors.

The Code also requires that at least one director should be an employee of the promoter or investment manager, to ensure that there is a good balance of skills and expertise on the board. An independent director may not be an employee of any service provider firm receiving professional fees from the fund.  The frequently asked questions (“FAQs”) relating to the Code clarify that an independent director of a management company can also qualify as an independent director of a fund to which the management company provides management services where the promoter of the fund and the management company are related or affiliated entities.


No numerical restriction

The Code does not introduce a numerical restriction on the number of directorships which may be held but requires that each director shall have sufficient time to devote to the role of director and associated responsibilities. Funds should specify at the outset and on a periodic basis the time commitment it expects from each director.  Directors are required to disclose to the board their other time commitments.

There is a rebuttable presumption that no more than eight non-fund directorships may be held. Where a director holds in excess of eight non-fund directorships, he will be required to explain in the director’s report that the holding of such directorships does not impact the director’s time available to fulfil his role and functions as director of the fund. For the purposes of this requirement, non-fund directorships shall not include group directorships.



A further new requirement is that the board must ensure that all directors receive sufficient training to enable them to discharge their duties. 


Review of Board Composition 

There should be an informal annual review of the board membership and a formal review every three years.



The Code requires that a non-executive chairman be appointed to the board. This represents a new requirement for non-UCITS funds. The chairman should be reviewed at least once every three years.



It is recommended that board meetings take place at least quarterly (depending on the nature, scale and complexity of the fund or management company). For non-UCITS funds, the Code provides that the board could meet less frequently if it believes this is justified, but this must be disclosed in the “comply or explain” statement in the annual report.

Directors are expected to attend and participate at meetings and an attendance schedule should form part of the annual informal board performance review process. The FAQs which accompany the Code clarify that directors who reside abroad may attend via telephone or video conference but would be expected to attend at least one meeting per year in person.


Conflicts of Interest

The Code requires conflicts of interest to be taken into account in making appointments to the board, that there be documented procedures for dealing with conflicts, and an annual review of compliance with these procedures. If there are ongoing conflicts impacting on the ability of the board to act in the best interests of shareholders, the board should consider changing its membership.



The Code specifies that, while the board may delegate all or part of the management of the fund to third parties (eg investment management, administration, distribution), the board cannot abrogate its responsibility for functions delegated.


Reserved Powers

It is recommended that the board establish a formal schedule of matters specifically reserved to it for decision, which should be updated regularly.


Review of Board Performance

There should be a review of the overall board’s performance and that of individual directors annually, with a formal documented review taking place at least once every three years.



The financial crisis has led to heightened scrutiny and the Central Bank has prioritised the development of corporate governance codes for the financial services sector. The development of a tailored corporate governance code for the funds industry is consistent with the Central Bank’s risk-based approach to regulation and recognises that the funds sector poses a different risk profile than that of banks or insurance companies. While the Code for the most part codifies existing practices, boards will need to conduct a detailed review of its provisions to determine whether it ought to be adopted in full or, where it is decided not to comply with a provision, to establish clear reasons for non-compliance which can be set out in the directors’ report or on the fund’s/management company’s website.  Many boards will already have conducted this review in light of the circulation of the draft Code in June 2011. As mentioned above, the final Code does not contain substantial amendments to the draft Code.

A copy of the Code and the FAQs is available here.

If there are any particular aspects of the Code which you would like clarification or advice on, please get in touch with your usual Asset Management and Investment Funds Group contact or any of the contacts listed at the top of this article. 



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