Fund Management Entity (FME) Governance: Best Practices and Regulatory Requirements
Fiduciaries: Definition and Appointment
Fiduciaries hold a pivotal role in the governance of a Fund Management Entity (FME). In the case of a fund incorporated as a company, the Board of Directors comprises fiduciaries. For an LLP, it is the Designated Partners, and for a Trust, it includes Trustees and the board of a Trustee company. FMEs appoint these fiduciaries before filing a scheme document with the Authority.
Ensuring Business Continuity
Registered FMEs must maintain a Business Continuity Plan (BCP) that identifies procedures regarding emergency situations or significant business disruptions. It is vital for FMEs to update their BCP annually, or whenever significant changes occur in their operations, structure, business, or location.
Risk Management Essentials
Effective risk management is crucial for FMEs. They must establish adequate internal procedures and controls to protect clients, investors, and their assets while ensuring proper risk management. These controls should extend to all types of businesses engaged by the FME, including any outsourced activities.
Cyber Security and Resilience
A robust cyber security and resilience framework is mandatory for registered FMEs. This framework should accord with the requirements specified by the Authority from time to time.
Adhering to the Code of Conduct
The Code of Conduct, as specified in the Third Schedule of the Regulations, must be followed by every FME, its fiduciaries, KMPs (including Principal officer, Fund Managers, and Designated Compliance Officer).
Advertising and Marketing Efforts
The Regulations prescribe an Advertisement Code within the Fifth Schedule. FMEs must comply with this code when advertising their schemes.
Investment Committee: Responsibilities and Compliance
FMEs may choose to constitute an Investment Committee to make investment decisions for their schemes. If established, all responsibilities applicable to the FME and Fund Managers under Regulations must be complied with by the members of this Investment Committee as well.
Audit Requirements for Scheme Accounts
Each scheme launched by an FME must have its annual statement of accounts audited by an independent auditor with no association with the FME. The fiduciaries appoint the auditor, who then submits their report to the fiduciaries. This report becomes a part of the Annual Report for the schemes.
Pursuing Other Activities
While FMEs primarily engage in activities specified under the Regulations, they may pursue other business activities upon receiving prior approval from the Authority. For FMEs operating in the form of branches in an IFSC, they must inform the Authority within fifteen (15) days if such approval is required from the sectoral regulator in its principal place of operations.
Authority Inspection of FMEs
Under certain circumstances, the Authority may undertake inspections of FME books, accounts, records, documents, infrastructure, procedures, or systems for any purpose. They may also investigate the affairs of schemes and activities under the Regulations. Such inspections can arise from the Authority’s own initiative or upon receipt of information or complaints from investors, clients, or other market participants. The primary objective of these inspections is to ensure regulatory compliance and protect the interests of investors and the financial market in IFSC.
In conclusion, clarity and active engagement with regulatory requirements lay the foundation for effective FME governance. By adhering to these guidelines and ensuring a steadfast commitment to responsible practices, FMEs can continually promote transparency, integrity, and investor confidence.
Advertising and Marketing Protocol
The successful operation of a FME also hinges on compliant and effective advertising and marketing. According to the Fifth Schedule of the Regulations, all FMEs need to align their promotional activities with the Advertisement Code. Ignoring this mandate may lead to infringements and potential penalties. Thus, mastering the art of regulatory-compliant promotion is indispensable for FMEs.
Establishing an Investment Committee: A Prudent Choice
In some scenarios, FMEs may choose to instate an Investment Committee. This group shoulders the responsibility of making crucial investment decisions for the schemes. Members of the committee must abide by the same responsibilities that the Regulations impose on the FME and Fund Managers. Regardless of whether an Investment Committee is formed, it’s vital to ensure comprehensive compliance with regulatory standards at all levels of operation.
Scheme Accounts: Moving Beyond the Standard Audit Requirements
Every scheme that an FME launches must undergo a yearly audit of its accounts. The audit—conducted by an independent auditor not in any way connected to the FME—provides an unbiased account of the scheme’s financial health. This auditor’s report informs the fiduciaries and forms a key component of the scheme’s Annual Report. In this way, audits ensure transparency, foster trust, and provide valuable business insights.
Expanding the Activities of FMEs: Understanding the Limits
Though primarily involved in activities detailed in the Regulations, FMEs might sometimes pursue additional business interests. However, they must seek prior approval from the Authority before branching out. FMEs operating as branches in an International Financial Services Centre (IFSC) have to be extra vigilant. When required, they must inform the Authority of any new activities outside IFSC within 15 days of commencement. Moreover, if the sectoral regulator at their primary place of operations necessitates any approvals, it’s paramount that FMEs adhere to those requirements.
Authority Inspection: Maintaining Compliance and Enhancing Trust
The Authority maintains the right to inspect an FME’s business operations, records, and schemes. Whether initiated through a complaint or the Authority’s own discretion, this inspection verifies compliance with the Regulations. By reviewing the maintenance of account books, records, and documents, it ensures the Regulations are followed rigorously. The inspection also checks that proper internal control systems and safeguards are in place.
In cases where complaints are received, or if the Authority suspects irregularities, inspections may be carried out. The objective is always to protect investors and maintain robust financial markets in IFSC.
Ensuring seamless governance of FMEs necessitates understanding and adhering to multiple regulatory provisions. It’s indeed a complex process that requires coordination between various stakeholders. Yet, with firm commitment and ample regulatory forethought, it’s possible to foster a strong and compliant FME, thus projecting trust and security among your clients and investors.
