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Investment Governance A new, rewarding but challenging frontier

EELCO FIOLE, CO-FOUNDER and MANAGING PARTNER, ALPHA GOVERNANCE PARTNERS

Investor protection and the focus on governance: from a slow start to the centre of attention

In the face of the continuous growth of assets and investment management over the coming years, no stone remains unturned and now even the world of governance is getting exciting. With or without the Paradise Papers exposé, regulators internationally are looking into how investment governance can be strengthened, as investors and creditors strengthen their due diligence efforts. IOSCO, the international body that brings together the world’s securities regulators, and the standard setter for the securities sector, has already, over 10 years ago, documented that their regulatory focus is on investor protection. We have increasingly seen that national regulators are actively pursuing this agenda, with implicit or explicit coordination through, for example, the European Securities and Markets Authority (ESMA), as well as other bodies and bilaterally. New but untested regulatory developments have been, and are now, reshaping the investment industry as we know it, and the end of that is not in sight. As regulators exercise their supervisory role, some of them may like to think that non-executive directors of collective investment vehicles (funds for short) may be their representatives at the very spot where the investment rubber meets the road, namely portfolio management and trade execution, given that fund directors oversee the operation of the fund. What needs to be remembered however, is that the concept of corporate governance – a set of mechanisms, processes and relations by which corporations are controlled and directed – only partly and quite differently applies to the typical fund management setting. While a fund vehicle is a legal entity aimed at holding investments and liabilities, having its own board of non-executive directors, it is by no means an integrated firm with sales, production, researchand other departments. As a result, overseeing fund structures may prove more demanding than overseeing integrated corporate structures, and typical agency solutions may fall short in the fund setting. Of course, the board should be composed such that complementary skills and experience are present. The fund vehicle does not have its own staff, which a board of directors can hire or fire, and contracts all functions out to service providers, such as a fund administrator, a custodian bank, a transfer agent, external legal counsel, and others, and of course with the main function of investment management contracted out to an investment manager: the service provider with the most power and the highest economic interest in running the fund well in terms of investment performance and asset size. In practice, fund directors have indirect influence only.

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