“Asset managers are nowadays at risk of missing out on mandates if they cannot demonstrate that their governance and oversight measures are robust,” said Bill Prew, CEO of independent fund oversight provider INDOS Financial in a recent investment market commentary.
“The current combination of intense global regulatory and institutional investor pressure is requiring more asset managers to enhance their internal operational processes and fund governance practices.”
Governance is now a key regulatory pressure-point. The EU is widely seen as being the bellwether on governance reform, having introduced the Alternative Investment Fund Managers Directive (AIFMD) in 2014, but individual EU member states have also legislated on governance. For example, the Central Bank of Ireland (CBI) recently pushed through the CP86 framework, which requires that managers appoint at least two, independent resident directors to their boards. Elsewhere, the UK’s Senior Managers & Certification Regime (SMCR) imposes strict accountability requirements on financial institutions including asset managers and their boards.
Meanwhile, the US Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (OCIE) regularly issues risk alerts outlining its concerns following routine examinations of investment advisers. Its most recent alert warned about the conflicts of interests at private funds, identifying examples of preferential client treatment and erroneous fee and expense practices.
“This blunt OCIE briefing should serve as a reminder to private funds that improvements are needed in their governance and compliance processes,” said Prew.
Similarly, offshore fund centres are taking meaningful action on the issue of fund governance. The Cayman Islands Private Funds Law – introduced in August 2020 – subjects private equity firms to added regulatory registration requirements and depositary provisions largely mirroring the AIFMD.
“In this new regulatory environment, institutional investors are being highly selective when making their investment decisions,” said Prew. “Simply having a solid performance track record is not enough to win mandates. Investors want assurances that fund houses have best of breed operational and compliance processes in place, including strong governance best overseen by an independent depositary.”
