For understandable reasons it is usually the investment manager who is the public face of a fund, after all it will be their choice of stocks and analysis of macroeconomic conditions that will help to decide whether an investor makes an attractive return or not.
However, behind the scenes, it is the authorised fund manager that carries the regulatory responsibilities for operating the fund and it is they who are accountable to the Financial Conduct Authority.
The most common fund structure in the UK is the open-ended investment company and the authorised fund manager for an OEIC is called the authorised corporate director.
Key points
• The authorised corporate director has ultimate regulatory responsibility for a fund and is accountable to the FCA
• The director acts as an independent steward protecting the interests of investors in a fund
• The director oversees the investment manager to ensure the fund is run in accordance with its stated objectives and with FCA rules and principles
Protecting investors’ interests
The role of the authorised corporate director is an essential one in protecting the best interests of every investor in the fund; the director acts as an independent steward ensuring that the investment team, and those marketing and distributing the fund, are doing what they should.
While in larger fund groups the director role will often be performed in-house, many investment boutiques, wealth managers and independent financial advice companies running their own funds prefer to appoint an independent host director company to do the job.
That leaves the investment boutique or adviser company, known as the fund’s ‘sponsor’, free to concentrate on investment management, marketing and distribution.
The FCA’s expectations of the authorised corporate director are considerable and properly fulfilling such an important fiduciary duty for investors requires significant resources and breadth of expertise.
Investment manager oversight
What has made headlines recently is the authorised corporate director’s role in providing oversight of the investment manager, although the responsibilities are much wider than this.
Overseeing the investment manager means ensuring that the fund is being managed in accordance with its stated investment objectives and policies.
Also, that it remains within its investment and borrowing powers and complies with FCA regulations in areas such as the 10 per cent limit on unlisted holdings in a undertakings for collective investment in transferable securities portfolio.
The director must facilitate and ensure proper valuation of all holdings – listed and unlisted.
They must check the fund is only investing in eligible assets and, where it is included in an Investment Association sector, that it is being managed in accordance with sector requirements.
Ensuring the investment manager is complying with all of these requirements and, if they are not, having the necessary relationship with them to intervene effectively, requires a host director company to not only have resources, but the authority that comes with expertise and experience.
Fund liquidity
The authorised corporate director’s responsibilities are not restricted to overseeing the investment manager.
The difficulties around the Woodford Equity Income fund have also highlighted the importance of fund liquidity – how quickly stocks held can be sold at a price reflecting their value, or, to put it another way, how fast the portfolio can be converted into cash.
The director is the independent steward of the fund and thus has responsibility for the monitoring and management of liquidity.
When commentators focus on fund liquidity they will often only refer to market data such as average trading volumes and ‘time to sell’ forecasts.
The director will study these figures, but they are likely to only form part of a more sophisticated liquidity analysis.
Liquidity monitoring and management should, in our view, be a comprehensive and ongoing process. This may begin with examining portfolio diversification, including the average size and maximum size of individual holdings.
The director is likely to study how much of a fund is held by each individual investor and the effect on liquidity if major holders took their money out.
They would also look at the companies that are involved in, or influence, the distribution of a fund – including advice companies, discretionary managers and fund ratings agencies – to assess the liquidity implications if they change their view on the fund.
In addition, they are likely to analyse historic data about fund flows and stress test the fund to calculate liquidity in different market conditions.
Marketing of the fund
In terms of how the fund is promoted, the director must ensure that the fund is being marketed correctly and to its intended audience.
They may review marketing documents, including factsheets, for regulatory compliance and appropriateness for the intended audience.
The director will also arrange for the production of all documents required by the regulator, including the prospectus, key investor information document, supplementary information document and application forms.
Wide-ranging responsibilities
They will carry out due diligence, on an ongoing basis, on all providers of services to the fund, including the fund sponsor.
The authorised corporate director’s role includes monitoring fund performance and the trading activities of the investment manager.
The director is also responsible for fund administration, overseeing the fund administrator where this function is outsourced. This includes checking the fund’s net asset value is being calculated accurately and passed correctly to data providers.
It is also the director’s role to ensure that all the necessary legal agreements and documentation are in place and up to date.
The director has the responsibility for agreements with investment platforms and they have strict capital adequacy requirements, in some cases backing themselves further with public indemnity insurance cover, so that they have the strength and stability to match their levels of responsibility.
In addition, the director will liaise with the FCA on behalf of the fund and also with the depositary – the institution that has responsibility for safeguarding the fund’s assets.
Finally, the director has the important role of assisting fund sponsors to understand and keep up to date with regulatory change, know what is required of them and take the actions necessary to comply.
Anyone familiar with the financial services industry will be aware that the pace of regulatory change is significant, so again this can be demanding in terms of expertise and resources.
Fund sponsors will want to be certain their ACD is capable of handling this level of regulatory change.
For example, the remedies announced by the FCA after the Asset Management Market Study introduced a number of new requirements for funds and authorised corporate directors.
These include steps to ensure fund objectives and benchmarks are clear, the introduction of value assessments and new requirements for independent representation on authorised corporate director boards.
While the full extent of the director’s responsibilities will not always be apparent to those not directly involved, the role has never been more important.
The director’s independent stewardship of funds is fundamental to protecting the best interests of investors.
Wayne Green is joint managing director of Investment Fund Services Limited
