Collective Investment Schemes (CIS) Governance Reviews

The failure of Madoff, Peregrine, Weavering and several other funds demonstrated that poor governance structures posed substantial risks to investors in collective investment schemes (CIS). As recently as December 13th 2013, the Securities and Exchange Commission of the US charged London-based GLG Capital with failures in internal controls that led to an overvaluation of the fund’s assets and inflated fee revenues that disadvantaged investors in the fund. These failures led many investors to conclude that the return of their assets was as important as the return on their assets.

What is CIS governance?

In 2006, The Technical Committe of The International Organisation of Securities Commissions's (IOSCO) developed a definition for CIS governance which describes it as:

'A framework for the organization and operation of CIS that seeks to ensure that CIS are organized and operated efficiently and exclusively in the interests of CIS investors, and not in the interests of CIS insiders.'

IOSCO’s Technical Committee, suggested that a framework for CIS Governance should reflect the unique nature and purpose of CIS as they are vehicles for pooling the investments of individuals in order to obtain professional management of the investors’ pooled assets, primarily for the benefit of CIS investors. The Technical Committee suggested that a robust CIS Governance framework should seek to protect, through oversight and review, the CIS assets from loss due to malfeasance or negligence on the part of those that organize or operate the CIS and should strive to ensure that investors are adequately informed of the risks involved in their investment and the rewards they can obtain, and above all that the CIS is operated in the investors' best interests at all times.

Reasons to be concerned about CIS governance?

It is recognised that the major role of CIS Operators is primarily to execute investment strategies on behalf of well-informed investors while investors must be able to select the desired level of risks and potential rewards amid a reliable market environment. Invariably the operation of CIS potentially entails conflicts between the interests of those who invest in CIS and those who organize and operate the CIS (“insiders” or “CIS Operators”)

It also recognised that CIS could be subject to the risk that those that organize or operate the CIS, although being legally committed to the fiduciary responsibilities of acting on behalf of the best interests of investors, will use the CIS’s assets for their own gain to the detriment of CIS Investors.

IOSCO's Technical Committee described how there are many different ways in which this could occur. For instance, CIS Operators could rid themselves of unattractive securities that they own by dumping them into the CIS, or CIS Operators could obtain rebates from third parties in connection with transactions for the CIS or could inaccurately value or inflate their assets in order to avoid showing poor performances.

Adversely, it is recognised that investors should be careful when choosing or negotiating governance structures for the reason being that if investor-friendly governance devices are improperly structured or taken too far, investors run the risk of undermining the unique performance-based incentives and other governance mechanisms that enable CIS such as hedge funds to produce superior returns in the first place.

How can Thomas Murray IDS help?

A review is undertaken that determines the appropriateness of the governance structure including checks and balances arising from the separation of the roles and responsibilities of CIS stakeholders including management directors, custodians, fund administrators andn other relevant service providers. The review examines the CIS’ annual reports and accounts, offering memoranda and their prospectuses.

Select the links below to learn more about each service.

If you would like to find out more, please contact: Nick Bradley, Managing Director at nbradley@ids.thomasmurray.com or telephone him on +44 (0) 20 8600 2300