Independent Investment Fund Directors

Independent Investment Fund Directors Date: October 11, 2023 Presented by: Professor Blanaid Clarke McCann FitzGerald Chair of Corporate Law (Trinity College Dublin) Review of role and responsibilities of Independent Non-Executive Directors (INEDS) of Irish funds and management companies. - What is the Irish Central Bank's (CBI) expectations of INEDs? - "Welfare watchdog" role assisting its investor protection agenda - An additional procedural safeguard for investors performing a signaling or information role to allow investors make informed choice - Is substantive challenge focused on processes and frameworks rather than outcomes? Accountability under the new Senior Executive Accountability Regime  The Board should comprisemajority a of NEDS, and at least INED who would not be an employee, partner, significant shareholder or director of a service provider firm, or provides personally of services receiving professional fees (other than directorships fees) from the Fund or Management Company.  At least two of its directors (one of which must beINED) an arereasonably available to meet the CBI at short notice, if so required.  "While at law all directors owe a duty to act independently having regard to the interests of the Fund and its investors collectively, independent directors represent an additional layer of oversight of the activities of a Fund or Management Company.  The independent directors shall have a knowledge and understanding of the investment objectives, the regulation of collective investment schemes, policies and outsourcing arrangements to enable them to contribute effectively. European Union (Alternative Investment Fund Managers) Regulations 2013 - Board of authorized AIFM is responsible for: Capital and Financial Management; Operational Risk Management; Fund Risk Management; Investment Management; Distribution; and Regulatory Compliance. - Independent Chair or an independent director must perform an "organization effectiveness" role in the AIFM. - Reasons forresignations communicated to CBI - where an AIFM manages AIFs which are in distress, CBI expects that directors will not resign "if this is not in the best interests of the AIFM or, more importantly, if this is not in the interests of the unitholders of those Alternative Investment Funds" CP86  Directors should beattentive to their duties and dedicatesufficient time to their discharge.  Board shouldexercise skill, care and diligence in its continuing oversight of delegates. To this end the board should receive and be satisfied with periodic reports from the delegates.  There should beopenness, engagement, co-operation and dialogue between board and delegates.  All directors should havegood a understanding of all relevant aspects of the investment manager's business and policies . This might require site visits and/or meetings with senior management, in addition to the regular presentations and reports.  Board requires support and resources forproactive monitoring of developments between board meetings , assessing which if any require the immediate attention of the board, and arranging any necessary action.  Re regulatory compliance; boards should provide input, should constructively challenge proposals where they see fit.  Directors should have time for oversight functions and their to meet ultimate responsibility for compliance with all regulatory obligations.  Director for Organizational Effectiveness is responsible for ongoing review of the effectiveness of the organizational arrangements of the company, reporting to the board, inter alia: - Suggesting proposals to improve board effectiveness and ensuring agreed actions are implemented; - Reviewing board composition and organizing periodicboard effectiveness evaluations; - Overseeing how well the decisions taken by the fund management company and the arrangements for the supervision of delegates are working in the interests of investors. INEDS Directors and in particular INEDs, must be able to demonstrate that they are satisfi delegates are managed. Key elements that INEDs must demonstrate: 1. Challenge: As an INED, it is imperative that you hold the board and senior management to account. You must embrace your responsibility to challenge and to ask the hard questions concerning the quality of information or reporting to the board, the strategic direction of the firm, the culture that prevails, the emerging risks to the business model. 2. Independence: INEDs must maintain their independence to perform their distinct role a source of strength by providing robust challenge and independent counsel. 3. Diversity: reducing groupthink, enhancing risk management and reducing overconfidence Directors need to consider: Sustainable Finance; Cyber Security; Compliance, Risk an Internal Audit; Liquidity Management; Outsourcing; Benchmarks; and Brexit CBI Fund Management Guidance (CP86)- Thematic Review  Need toevidence board approval of the launch of sub-funds.  Where the board approves the investment fund / strategy just prior to launch, the CBI expects e" vidence of robust discussion and challenge by the board in relation to proposed new fund strategies/structures and their attendant risks".  The Board should be involved early in the process, for instance when first formulating the investment strategy of a new fund or prior to the submission of a fund application to the CBI.  Underperformance by Director for Organizational Effectiveness - Needevidence/records of meetings with Designated Persons which should be at least quarterly - Need evidence of ongoing consideration of conflicts of interest and personal transactions - Need formal reporting to the Board especially re resource evaluation (and rationale for conclusions).  Governance and Culture trends identified: - Majority of fund management companies have no CEO - Board Rotation - 2/3 fund management companies had at least one INED with tenure >5yrs and 28% had at least one >10 years - Board Diversity - only 16% directors roles held by women Central Bank (Individual Accountability Framework) Bill 2021 A Senior Executive Accountability Regime allowing CBI to prescribe: - Specific responsibilities for persons carrying out senior executive functions (SEF) (includes non- executive directors) - Statements of Responsibilities for persons in SEFs Management responsibility maps for in-scope regulated financial services providers (RFSPs). Duty of Responsibility of persons performing SEFs