Transcript Slide 1

Directors and Conducting Officers duties
Michèle Eisenhuth, Partner, Arendt & Medernach
Jérôme Wigny, Partner, Elvinger, Hoss & Prussen
ALFI/IFBL/ILA Seminar – 20 & 21 March 2012
Table of contents
I.
General principles
IV.
II.
Funds directors
V.
III.
Conducting officers
VI.
VII. Liability
2
Consequences of the recent financial
crisis and corporate governance (CSSF
Circular 11/512)
New UCITS IV requirements: CSSF
Regulation 10-4 / CSSF Circulars
11/508 and 11/512
Remuneration policies
I. General principles
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
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
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
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I. General principles (ctd.)

Rules governing the mandate
 appointment (Civil Code, art. 1984 ss.)
→
→
→

revocation (Civil Code, art. 2003 ss.)
→
→
→
→
→
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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
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
I. General principles (ctd.)

Rules governing the mandate (ctd.)
 authority (Civil Code, art. 1987 ss. and 1998 ss.)
→
→
→

delegation (Civil Code, art. 1994)
→
→
→
→
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general authority, management and administration of the company
the principal is bound by the acts of the agent
collegiality (no individual power)
no individual responsibility of the agent if he was authorised to subdelegate 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
I. General principles (ctd.)

Rules governing the mandate (ctd.)
 no personal obligations (Law of 1915, art. 58)

liability

exceptions:


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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)
II. Funds directors
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
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
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)
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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)
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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)
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III. Conducting officers (ctd.)

Self-managed UCITS






min. 2 conducting officers
1 BoD
1 oversight level
promoters  BoD*
EUR 300.000.- initial capital
restricted scope of activity
/
UCITS designating a ManCo








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
*Majority of promoter representatives on the BoD may conflict with corporate governance
principles
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III. Conducting officers (ctd.)
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
III. Conducting officers (ctd.)

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
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III. Conducting officers (ctd.)

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.
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IV. Consequences of the recent financial crisis and
corporate governance
16

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
IV. Consequences of the recent financial crisis and
corporate governance (ctd.)

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
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IV. Consequences of the recent financial crisis and
corporate governance (ctd.)

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
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IV. Consequences of the recent financial crisis and
corporate governance (ctd.)

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)
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V. New UCITS IV requirements

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 delegates
no letter box entity (substance)
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V. New UCITS IV requirements (ctd.)

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
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V. New UCITS IV requirements (ctd.)

CSSF Circular 11/508 (ctd.)
 Organisational requirements (ctd.)
 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 ?
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V. New UCITS IV requirements (ctd.)

CSSF Circular 11/508 (ctd.)
 Organisational requirements (ctd.)
 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)
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 written procedures to record all personal transactions
V. New UCITS IV requirements (ctd.)

CSSF Circular 11/508 (ctd.)
 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
 this requirement applies to self-managed SICAVs
 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
 this requirement applies to self-managed SICAVs
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V. New UCITS IV requirements (ctd.)

CSSF Circular 11/508 (ctd.)
 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
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V. New UCITS IV requirements (ctd.)

CSSF Circular 11/508 (ctd.)
 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.
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 these requirements apply to self-managed SICAVs
V. New UCITS IV requirements (ctd.)

CSSF Circular 11/508 (ctd.)
 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
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VI. Remuneration policies in the financial sector (ctd.)


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
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VI. Remuneration policies in the financial sector (ctd.)

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
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VI. Remuneration policies in the financial sector (ctd.)

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)
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 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
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.
31
VI. Remuneration policies in the financial sector (ctd.)

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
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VI. Remuneration policies in the financial sector (ctd.)
 Luxembourg initiatives: regulatory framework (ctd.)

CSSF Circular 10/437 (ctd.)






33
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
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
34
 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
VII. Liability

Civil liability

35
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
VII. Liability (ctd.)

Civil liability (ctd.)

36
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
VII. Liability (ctd.)

Civil liability (ctd.)

breach of statutes or the Law of 1915 (Law of 1915, art. 59§2)
→
→
→

Limited exoneration (performance obligation)
→
→


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contractual liability as regards shareholders
liability in tort as regards third parties
joint liability (Civil Code, art. 1200)
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)
VII. Liability (ctd.)

Criminal liability of legal entities
A specific regime on criminal liability regarding legal entities has been
introduced in Luxembourg by a law dated 3 March 2010
 Scope of the law
The Law provides that a legal entity might be criminally liable when a
crime (“crime”) or a misdemeanour (“délit”) has been committed in its
name and in its interest by one of its legal corporate bodies or by
statutory or de facto managers/directors (“dirigeants de droit ou de
fait”).
VII. Liability (ctd.)

Criminal liability of legal entities (ctd.)

Concurrent liabilities
A 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
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]
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