Guideline 32. Operational due diligence for external fund managers

Submitted by Anonymous (not verified) on Tue, 07/10/2018 - 09:46

Sufficient procedures are put in place to ensure that an appropriate level of operational due diligence is conducted on external fund managers.

Guideline code

INVEST_03800

Mechanism

A policy and procedures manual should exist that sets the operational due diligence process for external fund managers.
Throughout the operational due diligence process, three key areas should be considered: business, people and process:

There is provision of significant structural transparency;
Client and fund investment mix are reasonable;
There are no pending regulatory or litigation issues which are deemed significant;
Terms are sensible and easily reconciled (e.g. expenses).

People. Quality and quantity of operational staff need to match the complexity of the business:

Process. Operational processes can be complex and so require a range of control practices:

Key policies and procedures are documented;
There are multiple points of oversight (e.g. independent valuations, agreed procedures);
There is diversified exposure to reputable counter-parties (e.g. administrator, auditor, prime broker);
Independent directors are appointed to the board;
A strong compliance culture exists within the company;
Standardized technology is used for accounting and trading.

The board and/or management ensures that sufficient regard is paid to whether there are processes put in place by the external manager to ensure that its staff meet the prudent person principle. This would include ensuring that staff meet minimum suitability standards, a procedures manual exists to document how investment policies are to be implemented in accordance with the prudent person principle, and how compliance with the procedures manuals is monitored and reviewed.
Where external managers are selected by the management or investment committee, or external advisers are used to assist with the selection process, the operational due diligence on the external investment managers should be completed internally or outsourced to an appropriate third party (possibly as part of the mandate, with the external adviser assisting with the selection).
Where operational due diligence is outsourced to a third party, the mandate for the third party to conduct due diligence should be clearly defined and documented.
The operational due diligence process, whether conducted internally or outsourced to a third party, should comprise the following stages:
First, desk-based review to highlight specific areas of focus and/or concern;
Second, on-site visits and follow-up due diligence;
Third, ongoing monitoring from a due diligence perspective.

The management is responsible for ensuring that appropriate operational due diligence is conducted on the investing institution’s investment managers, with appropriate review by the board.
Where the board, management or investment committee lacks sufficient resource, expertise or governance budget to undertake fully informed operational due diligence, the board, or the management or investment committee with board authorization, should seek expert advice or appoint external professionals to carry out these functions.

Parent

Structure

The board should establish the policy that sets the operational due diligence process for the external fund manager(s).
The management is responsible for ensuring that appropriate operational due diligence is conducted on the external investment manager(s).
The operational due diligence process should cover three key areas: business, people and process.