fund governance review 2017 · asset revolution 07 proposed fca changes to the governance of u.k...

FUNDGOVERNANCEREVIEW2017

D M S G O V E R N A N C E . C O M

01 EXECUTIVE SUMMARY

03 MANAGING REGULATORY RISKS

04 GOVERNING THE DIGITAL ASSET REVOLUTION

07 PROPOSED FCA CHANGES TO THE GOVERNANCE OF U.K AUTHORIZED FUND MANAGERS

08 MIFID

09 CENTRAL BANK OF IRELAND’S REFORMS – THE DMS RESPONSE

10 WHAT’S NEW AT DMS?

14 CAYMAN UPDATE

16 DMS INVESTMENT FUNDS SUMMIT 2018


We are pleased to present our 2017 Fund Governance Review.

Following a tumultuous 2016, there had been concerns over whether

worldwide political issues would continue to have an effect on the

markets in 2017. What is certain is that 2017 was a year of surprises

and political risk taking. General elections across Europe, a new U.S.

President together with drawn-out Brexit negotiations have continued

to cause ripples.

For the governance and compliance world, milestones such as

MIFID II and the FCA changes to the Governance of U.K. Authorized

Fund Managers have had a big impact, as had CP86 and the recent

Cayman Islands AML updates. DMS welcomes and fully supports

the proposed regulatory reform and policy changes which are set

to improve transparency and increase investor protection and both

DMS and its clients are well-placed to move forward following these

changes in legislation.

Undoubtedly one of the year’s top stories is the rise of crypto

currencies. In a year of soaring crypto currency prices and countless

initial coin offerings, it’s perhaps unsurprising that, over the course

of 2017, regulators worldwide stepped in to define how they would

oversee an uncertain environment.

Regulators from many of the world’s leading economies issued

investor alerts and cautionary statements making 2017 perhaps one

of the most significant years to date on the regulatory front.

At DMS, we saw increased growth activity during 2017 and in August

we opened second Asian office in Singapore in response to demand

for our client services in the Asia-Pacific region. We believe the key to

our continued success is our ability to, despite the changing world,

offer our clients a service that is high-quality, reliable and consistent.

EXECUTIVE SUMMARY

FUND GOVERNANCE REVIEW 2017EXECUTIVE SUMMARY

ANNE STORIECHIEF EXECUTIVE OFFICER


01


With the imposition of the CIMA Administrative Fines

Regime (“CAFR”) in 2018, regulated funds should become

more proactive when managing their regulatory risks.

While the implementation of the CAFR simply brings CIMA

in line with other international regulators, this unfamiliar

environment also brings new regulatory risks that should

now become a top fund governance priority among fund

operators.

CIMA has promulgated an extensive framework of financial

regulatory laws, regulations, statements of guidance,

industry alerts, for example, so there are numerous areas

of potential breaches where penalties can be imposed on

regulated entities. Fines range from a minimum of $6,250

for minor offenses to $1.25 million for serious offenses,

meaning the risk-reward exposure gap is large. The

imposition of a fine may have a significant impact on the

reputation, or even in the more serious cases, the financial

position of a fund.

Like other regulators operating under IOSCO standards,

CIMA conducts regular examinations of its regulated

entities including random and targeted sweeps on relevant

issues. These can be expected to increase in 2018 and

beyond. CIMA generally does not engage in aggressive

enforcement theories, but it does expect sound application

of its existing requirements.

Fund operators should ensure that an effective CIMA

compliance program that operates across all relevant

Cayman Islands legislation is implemented. Deadlines

and responsibilities under the Cayman Islands financial

regulatory laws need to be carefully monitored and met.

Some dates are fixed, others are floating and others may be

futuristic, or triggered by the activity of the regulated fund.

However, DMS recommends that fund operators maintain

a compliance calendar of critical responsibilities and

dates for their regulated funds and document compliance

against those responsibilities. Compliance should be well

documented not vague or generic or conflict with the

compliance manual.

DMS recommends the CIMA compliance calendar be

reviewed at each board meeting, vetted and approved

by the directors and senior management to address

any vulnerability. A comprehensive review should be

conducted at least annually by a qualified compliance

expert to give prudent advice and remediate corrective

action where necessary. This is one way that fund operators

can create long-term value and market differentiation.

While the fast-changing fund governance environment

demands ever-increasing oversight and presents new

challenges for funds with scarce resources or no resources

in the Cayman Islands, there are several smart ways to

reduce the regulatory burden and mitigate regulatory risk

using technology and outsourcing.

MANAGING REGULATORY RISKS

FUND GOVERNANCE REVIEW 2017MANAGING REGULATORY RISKS

03


One of the big stories in 2017 was undoubtedly Crypto

Currencies. Distributed ledger (DL) technology is the

foundation on which crypto-currencies are based and

Bitcoin, the most well-known of these, is an attempt to

solve the problem of storing and transferring value in a

digital, decentralized system.

There are over 1,300 crypto currencies in the market today

with a total market capitalization of $500bn+. With more

and more appearing each day, crypto currencies appear to

be the modern day gold rush. The amount of attention they

generate on a daily basis has created a good old-fashioned

“fear of missing out” amongst investors and consumers

alike. With this level of growth, crypto currencies have

found a place as an asset class in investment portfolios as

an alternative to the traditional alternative assets such as

real estate and commodities.

This has sparked the rise of crypto currency hedge funds.

Autonomous NEXT, a FinTech analytics firm, has counted

75 crypto hedge funds that have raised about $800 million

to date and who aim to raise $1.2 billion more in the near

future. The crypto funds strategies range from investing

in initial coin offerings, widely known as ICOs, which raise

money by selling investors digital tokens in exchange for

crypto currencies, to buying and holding traditional crypto

currencies such as Bitcoin, Ethereum and Litecoin.

Much has been made of Bitcoin’s volatility. Certainly,

compared to more established asset classes like equity

long short, the daily price moves can seem volatile. The

relative lack of breadth and depth in the Bitcoin market,

regulatory uncertainty and the presence of significant

players with the ability to shift market sentiment no doubt

also contribute to this sense of risk.

However, an observation of the daily historical volatility of

Bitcoin shows that, in general, its daily vol ranges between

4 and 7 and is not particularly shocking when compared to

many options markets. It is the vol of vol that is striking – with

sudden gap ups to 10, 20 or 40 that quickly recede. Until

recently, most of these shocks have been to the upside,

and as actual or short positions have been impossible until

recently, have not hurt anyone aside from a regretful seller.

As margin and shorting come into play, this vol of vol will

have greater potential impact, but should, if the market

develops gradually, recede in magnitude and frequency.

Cryptocurrencies seem to straddle the boundary between

commodity, security and currency. Earlier this year the

U.S. CFTC approved the first Bitcoin options exchange.

Subsequent to this announcement, the SEC issued an

investigative report which concluded that tokens offered

and sold by a “virtual” organization known as “The DAO”

were securities and therefore subject to the federal

securities laws.

GOVERNING THE MODERN-DAY GOLD RUSH

04 FUND GOVERNANCE REVIEW 2017GOVERNING THE MODERN-DAY GOLD RUSH

FUND GOVERNANCE REVIEW 2017GOVERNING THE MODERN-DAY GOLD RUSH

05


Many countries like Bangladesh, Bolivia, Thailand, and Vietnam (among many others) have tried to ban crypto currencies like Bitcoin, others such as China and South Korea have entirely banned ICOs. There are however some countries for example Australia, Russia, Japan, and Venezuela that have made Bitcoin an official legal tender and are currently regulating it.

Perhaps not unexpectedly, the surge in crypto currencies has led to an abundance of scams, prompting global regulators to warn investors of fraudsters. The U.S. SEC, U.K. FCA, Singapore MAS have all released statements warning investors of inherent risks involved with crypto currencies. As part of its effort to fight cybercrime and protect retail investors from cyber threats, the U.S. SEC announced the creation of a new cyber task force. Amongst other things, the unit will target ICOs and other violations involving distributed ledger

technology that go against SEC regulations.

Regulators globally have been working on determining

appropriate crypto currency regulations for several years,

however, it has only been the recent surge in crypto

currencies that have led them to dedicate a large amount

of resources to find the appropriate resolution.

One thing that the digital asset market currently lacks is a

vibrant community of service providers willing to engage

with it. While a few have taken on this business, many are

adopting a wait and see approach. DMS created a Digital

Asset Working Group to attempt to formulate SEC industry

best practices around DL strategies, including crypto.

The group includes representation from all parts of the

ecosystem including banking, auditor, administrator, legal,

tax, compliance and governance.

With all the unknowns, it seems firms can either wait for

regulatory clarity or make a good faith effort. DMS suggests

adopting the following stance:

• Select the most suitable jurisdiction to incorporate.

• Carry out in-depth due diligence on the trading

exchanges is pivotal as is ensuring all necessary

documentation is in place.

• Start with a simple approach of first ensuring

acceptance of fiat currency for subscriptions and

redemptions.

• Avoid crypto in-kind capital transactions.

• Clearly document all research and trading processes.

• Identify the most suitable key service providers.

• Clearly understand taxation responsibilities and

ensure correct documentation of them. Provide

sufficient oversight and governance.

DMS has led the creation of a Digital Assets Working

Group in an attempt to act as a clearinghouse for best

practices among service providers to these sorts of funds.

In addition, we are actively coordinating with U.S. and

global regulators to communicate these efforts and report

feedback on our efforts.



During the summer months of 2017, the Financial

Conduct Authority (FCA) published findings of its asset

management market study, leading to an announcement

of a series of remedies for the concerns it identified. (For

the full report, click here).

Of particular note for U.K. Authorised Fund Managers

(AFMs) were the findings of the final report which include

the requirement for AFMs to appoint a minimum of two

independent directors to their boards and for at least 25%

of the board to be independent, non-executive directors.

The FCA said they had, “listened carefully to the feedback

we received in response to our report last November” and

had, “put together a comprehensive package of reforms

that will make competition work better and help both

retail and institutional investors to make their money work

well for them”. The FCA also revealed that they believe

governing bodies should have a more defined role to

increase accountability and to work for a better outcome

on behalf of the investor.

DMS is able to provide AFMs with robust, institutional-

quality governance solutions, delivered by industry experts

and powered by the latest developments in FinTech and

RegTech. DMS delivers experienced and skilled fund

directors and governance solutions required to fulfil any

independent non-executive director role. We also provide

the necessary institutional support and reporting needed

to assist with discharging all legal and regulatory duties

and obligations.

We therefore welcome and fully support these proposed

regulatory reform and policy which will improve

transparency and increase investor protection. We have

always led the charge in European fund governance with our

AIFMs, UCITS Management Company and MiFID solutions

which recognise the importance of clear guidelines to

enable compliance with regulatory requirements.

FCA CHANGES TO THE GOVERNANCE OF U.K. AUTHORIZED FUND MANAGERS

FUND GOVERNANCE REVIEW 2017FCA CHANGES TO THE GOVERNANCE OF U.K AUTHORIZED FUND MANAGERS

07

https://www.fca.org.uk/publication/market-studies/ms15-2-3.pdf

MIFID II


08 FUND GOVERNANCE REVIEW 2017MIFID II


FUND GOVERNANCE REVIEW 2017CENTRAL BANK OF IRELAND’S REFORMS – THE DMS RESPONSE

When the Central Bank of Ireland’s CP86 comes into

full effect in July of this year, it will refine some key

management functions and will increase focus on effective

supervision and enhanced governance standards for

UCITS management companies, alternative investment

fund managers, self-managed UCITS and internally

managed alternative investment funds.

While the strengthening of governance within the Irish

funds industry is to be welcomed, the new requirements

will increase the regulatory burden in particular on self-

managed UCITS and internally managed alternative

investment funds.

At the heart of these reforms is the change in the description

of the role of the designated person (as it relates to the

discharge of each key management function). While this

has been a compulsory concept for UCITS since 2011 and

for AIFMs since 2013, it is the new enhanced focus on

designated persons in CP86 that gives the industry a clear

indication of the Central Bank’s expectations.

The reforms outline that the designated person role

is distinct from the role of a director, requiring day-to-day

involvement in operations and there is also a new focus on

the suitability of candidates who might fulfill the role.

Boards now face the challenge of considering each key

management function and of being sure they can reconcile

the answers to the following questions:

1. Who can assume the designated person role?

2. Who should assume the designated person role?

3. Who will the Central Bank expect to assume the

designated person role?

DMS is uniquely placed to respond to these challenges.

Our Central Bank authorized AIFM and UCITS Management

Company (DMS Investment Management Services) has

introduced a range of solutions to assist clients in complying

with the CP86 requirements. By utilizing the latest forensic

governance techniques and industry-leading technology,

we are able to provide the experienced and skilled

individuals required to fulfil any designated person role.

DMS Investment Management Services also provides

the necessary institutional support structure needed to

assist with discharging all legal and regulatory duties and

obligations.

Our team of experienced and industry-recognized

professionals has expertise in fund governance, risk

management, portfolio management, distribution, finance

and operations, regulatory compliance and reporting

requirements.

The DMS global infrastructure and its market insight means

we are best placed to support our clients’ business with

the Central Bank’s changes and guide them through the

evolving and ever increasing regulatory requirements.

CENTRAL BANK OF IRELAND’S REFORMS – THE DMS RESPONSE

09

MiFID II has been amongst the broadest of financial industry

legislations to come into play in the recent past. The scale

of these changes provides significant challenges to asset

managers and to their I.T. and data management systems,

complicating an already heavy compliance burden. The

challenge is greatest for those firms that are captured by

MiFID II in its entirety.

The European legal framework for investment managers

draws a distinction between investment managers that

provide “collective portfolio management” and would

typically be authorized under AIFMD or the UCITS Directive

in respect of that service, and those investment managers

that provide the service of individual portfolio management

and are typically authorized under MiFID as “investment

firms”. This latter category also covers investment managers

established in the EU that provide sub advisory services to

an AIFM (including AIFMs established outside the EU) or

a UCITS management company (or a self-managed UCITS

funds) and do not act as AIFMs or UCITS management

companies themselves.

DMS Market Access is an authorized MiFID investment

firm that sits alongside and works with DMS Investment

Management Services, (the AIFM and UCITS Man Co). This

allows DMS to provide flexibility and expertise when it

comes to providing MiFID solutions to our clients.

The scope of the legislation means that, now more than

ever, investment managers must think extremely carefully

about the solutions that are available to them and they

must choose a compatible vendor that understands the

complexities of their operations.

DMS Market Access can provide a range of services to

support our clients to cope with MiFID II. These include;

transaction, position and trade reporting, execution,

middle office, distribution and product oversight.

In Addition, through our vast experience of MiFID

compliance, our depth of knowledge of global regulatory

frameworks, inherent fund governance DNA, and unrivalled

client relationships, DMS is well-placed to provide a

licensed suite of solutions that span full MiFID hosting.

The impact on the funds industry will be wide-reaching,

affecting aspects of marketing and distribution, trading and

research, and day-to-day operations. Our comprehensive

MiFID II solution gives managers the ability to continue to

seamlessly service their existing clients while accessing

capital in Europe.

WHAT’S NEW AT DMS?


10 FUND GOVERNANCE REVIEW 2017WHAT’S NEW AT DMS?


FUND GOVERNANCE REVIEW 2017WHAT’S NEW AT DMS?

11

In August last year, DMS opened its first office in Singapore.

It was just over six year ago that DMS opened its first Asia-

Pacific Region office in Hong Kong and since them our

client base in the region has enjoyed significant growth

not only in Hong Kong but throughout the wider Asia-

Pacific region. As a result, we took the decision to open an

office in Singapore to provide our clients with a team of

local experts. We feel this new location goes a long way to

strengthen our presence and our capacity in the region.

We are able to offer professional, independent directors in

the Asia time zone (SGT) and with fluency in Mandarin and

Cantonese language skills that are key to the region.

The office serves not only hedge fund clients but also

those involved in private equity and venture capital. DMS’

clients include some of the largest asset managers in Asia

as well as start-up and emerging funds. The office will also

service clients in other service offerings including banking

+ custody, AIFMD/UCITS and International Tax Compliance

(FATCA/CRS) all of which have seen continued growth.

For DMS, the Singapore office represents another exciting

milestone in our commitment to the asset-management

industry in Asia and we continue to see an increased

demand for our professional directorship services along

with our other Risk & Compliance services in the region.

DMS is now better placed geographically to continue to

achieve the best results for its clients in this region.

LAUNCH OF THE SINGAPORE OFFICE

DMS LAUNCHES ITS NEW U.S. REGULATORY COMPLIANCE SERVICES


12 FUND GOVERNANCE REVIEW 2017WHAT’S NEW AT DMS?

At the end of last year DMS announced the launch of its

U.S. Regulatory Compliance services, designed to support

U.S. based investment advisers in improving the quality

and increasing the ease of compliance with their regulatory

responsibilities.

These new services offer expert compliance staff and

state-of-the-art technology to the investment advisers of

hedge and private equity funds, registered mutual funds,

exchange-traded funds, and other alternative investment

products. We provide clients with practical, real-world

perspective and proven solutions.

Leading the team, based in New York, is Wade Boylan,

“Our mission is to partner with U.S. investment advisers to

provide (1) strategic advice allowing clients to anticipate

and adapt to regulatory compliance developments, (2)

robust compliance services to support the day-to-day

compliance obligations of investment advisers, and (3)

advice on best practices to maintain internal compliance

excellence.”

William Woolverton, Managing Director of DMS comments

that, “As the scale of our governance, risk, and compliance

platform has increased dramatically over the years, DMS

has continued to innovate its product in order to offer its

clients easy access to high-quality, consolidated services at

fair and reasonable fees.”

DMS has a successful, long-term track record and expertise

in governance, risk, and compliance within the investment

fund industry and our unique position within the market

means it was a natural step for U.S. to take to advise not

only on regulatory compliance issues, but also to act as a

practitioner with regulatory interfaces in multiple global

jurisdictions.

In February 2017, DMS announced the immediate

relocation of a team of executives to augment its expansion

to a planned 20 employees by the end of 2018.

Managing Director, Darren Gorman is responsible for the

oversight of recruitment of experienced, local professionals

to complement DMS’s unique process and relationship

driven approach. This expansion is necessitated by DMS

being the Third-Party Management Company of choice for

leading institutional Investment Managers in Europe and

the Fund Governance name that U.S. investment managers

know, trust and look to when establishing their European

product.

Darren brings with him over 20 years of compliance and

management experience in regulated financial services

firms in Luxembourg, London and Dublin.

Relocating with Darren are Kim Lattimore who will oversee

compliance, Miriam Wall who will drive client relationship

management and Paddy Foley who will ensure that our

substantive risk oversight and monitoring is performed on

site in Luxembourg.

DMS LUXEMBOURG EXPANSION


FUND GOVERNANCE REVIEW 2017WHAT’S NEW AT DMS?

13

CAYMAN ISLANDS REGULATORY UPDATE


14 FUND GOVERNANCE REVIEW 2017CAYMAN ISLANDS REGULATORY UPDATE


2018 will see significant updates to Cayman Islands AML

Regulations which are certain to have a significant impact

on the funds industry. We are working with our clients to

ensure they are compliance ready following these new

regulations.

On 13 December 2017 the Cayman Islands Monetary

Authority (“CIMA”) issued their updated Guidance Notes

under the new AML Regulations which came into effect on

2 October 2017. These Guidance Notes clarified that all

regulated funds are required to appoint individuals who are

suitably qualified and experienced as Compliance Officer

(“CO”), Money Laundering Reporting Officer (“MLRO”) and

as Deputy MLRO (the first two appointments could be held

by the same person). The requirements for these roles is

extensive with knowledge, experience and independence

at the forefront. (Link to guidance notes http://www.cima.

ky/guidance-notes)

Robust compliance is essential for mitigating any risks and

other related threats to the integrity of the international

financial system. Noncompliant AML/CFT entities could be

subject to severe sanctions that are generally universally

adopted. Under the updated Anti-Money Laundering

Regulations any person who contravenes the Regulations

commits an offence and is liable for a fine of approximately

on conviction on indictment, to a fine and to imprisonment

for two years.

In addition, as of 16 March 2018, CIMA will have the

power to impose administrative fines for breaches of AML

requirements up to approximately U.S.$1.2M.

Currently the administrator is typically appointed to

provide Fund Accounting, AML/KYC on investors and

Transfer Agency services and through this appointment

the Board of the Fund delegates the requirement to have

an AML framework to the Administrator (subject to Board

oversight). We understand that individuals have not been

formally appointed as CO, MLRO and DMLRO for the

Funds in most cases, although individual employees of the

administrator could formally accept these appointments,

if they meet the relevant criteria, including independence.

Investment managers must first, determine with their fund

administrator if these roles have been formally appointed.

If not, DMS Compliance has a team of MLRO, DMLRO and

CO specialists available for appointment that meet the

required criteria.

FUND GOVERNANCE REVIEW 2017CAYMAN ISLANDS REGULATORY UPDATE

15

http://www.cima.ky/guidance-notes

http://www.cima.ky/guidance-notes

2018Investment

FundsSummit+-


16 FUND GOVERNANCE REVIEW 2017DMS 2018 INVESTMENT FUNDS SUMMIT –NEW YORK

NEWYORK

In January this year we held the second annual DMS Investment Funds Summit at the Kimpton Eventi in New York. Building on the success of last year’s event we were delighted to welcome over 500 attendees this year from both our global client base and key sectors of the industry.

FUND GOVERNANCE REVIEW 2017DMS 2018 INVESTMENT FUNDS SUMMIT –NEW YORK

17


As well as high-profile speakers from across the industry we also featured a lively “investors vs managers”

debate which covered two topics:

For certain strategies, Alpha is effectively and permanently dead.

2 and 20 is dead, should be dead, and will never return.

We welcomed to the event this year a total of nine speakers on a wide range of topics:

William K. M. Goldsmith, Nantucket Capital Management, LLC

Brendan Kalb, Managing Director & General Counsel, ACQ Capital Management, LLC

David Shrier, Managing Director, MIT Connection Science CEO & Distilled Analytics

Michael Oliver Weinberg, CIO, MOV37 and Protégé Partners

Andrew Weymann, Vice President, Investcorp

Abbas F. (“Eddy”) Zuaiter, Managing Member, Zuaiter Capital Holdings, LLC

Greg Deeds, Senior VP, EACM Advisors

Marc Levine, Chairman, Illinois State Board of Investment

John Brennan, Co-Head of ODD, PAAMCO

We were delighted to welcome David Shrier, MD of MIT Connection Science as our keynote speaker who addressed “The Short Term Future” on how Artificial Intelligence can be used positively and for profit.

18 FUND GOVERNANCE REVIEW 2017DMS 2018 INVESTMENT FUNDS SUMMIT –NEW YORK

FUND GOVERNANCE REVIEW 2017DMS 2018 INVESTMENT FUNDS SUMMIT –NEW YORK

19

D M S G O V E R N A N C E . C O MD M S G O V E R N A N C E . C O M

https://dmsgovernance.com/dms-2018-investment-funds-summit-highlights/

KEY GLOBAL CONTACTS

20 FUND GOVERNANCE REVIEW 2017KEY GLOBAL CONTACTS

FUND GOVERNANCE REVIEW 2017KEY GLOBAL CONTACTS

21


ANNE STORIECHIEF EXECUTIVE OFFICERCayman [email protected]+1.345.749.2584

DEREK DELANEY

[email protected]+353.1.619.2300

CAOIMHGHIN O’DONNELLMANAGING DIRECTOR [email protected]+353.1.619.2375

COLM O’DRISCOLLMANAGING DIRECTORCayman [email protected]+1.345.749.2795

MURRAY MCGREGOR

Cayman [email protected]+1.345.749.2538

HEAD OF STRUCTURED FINANCE

JELANA ECKHARDTDIRECTORCayman [email protected]+1.345.749.2559

ALAINA DANLEYMANAGING DIRECTORCayman [email protected]+1.345.749.2455

KEVIN A. PHILLIPMANAGING DIRECTORCayman [email protected]+1.345.749.2590

JOHN D’AGOSTINO

New [email protected]+1.212.257.5051

WILLIAM H. WOOLVERTONMANAGING DIRECTORNew [email protected]+1.212.403.2781

WADE BOYLAN

New [email protected]+1.212. 403.2783

EXECUTIVE DIRECTOR - COMPLIANCE REGULATORY SERVICES

DON W. EBANKSMANAGING DIRECTORCayman [email protected]+1.345.749.2562

CHIEF OPERATING OFFICER

HEAD OF INVESTOR ENGAGEMENT

fund governance review 2017 · asset revolution 07 proposed fca changes to the governance of u.k...

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