Investment Breach Monitoring and NAV errors come under the regulatory spotlight as the Central Bank of Ireland issues CP130
On the 9th September 2019 the Central Bank of Ireland (the “CBI”) published its Consultation Paper 130 on the regulatory framework that it proposes for investment fund errors (“CP130”). The purpose of introducing a regulatory framework for investment fund errors is to ensure that there is a consistency of approach in dealing with fund errors and investment breaches including the reporting of said breaches to the CBI.
Under CP130 the CBI proposes that when a fund error occurs, that error is appropriately identified, assessed and corrected. The focus of the Framework is that errors are “Appropriately Rectified” and how this is ensured will depend on the type of error. Furthermore the Framework will consist of both guidance and rules. Should the rules be incorporated into legislative framework as a “prescribed contravention” then the CBI could impose fines for breaches under its sanctions regime.
Errors are defined under the Framework as follows:
- A Net Asset Value (“NAV”) Calculation Error;
- An Investment Breach Error;
- A Fee Overpayment Error; and
- A Control Breach Error, which may indicate issues with the management of the Fund and do not fall into categories 1,2 or 3.
Depositaries are required to ensure that the error has been “Appropriately Rectified” by the ManCo. Fund Management Companies (“ManCos”) are responsible for ensuring that an error is “Appropriately Rectified” under CP130. In terms of CP130 ManCos includes:
- a UCITS management company;
- an authorised AIFM;
- a self-managed UCITS investment company; and
- an internally managed AIF.
Timeliness of error identification and action is a key component of CP130. Once an error has been identified it must be corrected without delay. The materiality of the error must be assessed by both the ManCo and depositary. CP130 proposes both quantitative and qualitative criteria for assessing materiality. An error may pass the quantitative thresholds for materiality, and then it will need to be assessed in the context of qualitative factors which may ultimately lead to the error being deemed material.
The proposed quantitative thresholds will vary depending on the type of investment fund as follows:
- Money Market Funds (MMF) – 0.1% of NAV
- Other Investment Funds – 0.5% of NAV
The Central Bank has indicated that qualitative thresholds will likely examine the adequacy of the controls in place and the duration of the error. The circumstances in which the error took place includes whether there is a series of errors, a recurring error, or an error as a result of certain actions of the ManCo.
Under existing legislation, the CBI must be notified by the ManCo of any breach of the Irish UCITS/AIFM Regulations, regardless of the materiality of that breach. Under CP130, it is proposed that the CBI must be notified of material errors only.
The CBI is examining the inter-play of these rules with existing laws and regulations. For example, Regulation 77 of the UCITS Regulations 2011 contains provisions to assess inadvertent breaches. The CBI has invited industry to confirm whether the concepts of advertent and inadvertent breaches are well understood noting the overlapping and sometimes conflicting rules and guidance.
The CBI is proposing the introduction of an obligation on ManCos to notify investors of any material error found. The ManCo will be obliged to either report errors to the depositary or report any material error which has not been reported by the depositary to the CBI. As per current UCITS requirements the ManCo and the depositary will be required to maintain a written record of all errors that occur. This will be a new requirement in respect of depositaries for AIFs.
A payment to return the affected fund or investor to the position had an error not arisen is the payment of redress referred to in CP130. Even if the actions of delegates cause the error, responsibility lies with the ManCo to ensure that errors are appropriately rectified and with the depositary to verify that this is the case. The CBI is seeking feedback on the payment of redress limits with a view to agreeing new limits.
The CBI has requested that stakeholders provide their responses on CP130 to firstname.lastname@example.org by 9th December, 2019.