Fund management companies responsible for rectifying errors: Irish Central Bank

Out-Law News | 16 Sep 2019 | 3:30 pm | 1 min. read

The Central Bank of Ireland has launched a consultation into a regulatory framework that will establish rules and guidance on the treatment of errors in investment funds.

The Central Bank said the guiding principle behind the proposals was that if an error occurred, the fund or the investor should be ‘appropriately rectified’ by the fund management company. The concept of rectification should cover the reporting of mistakes, notification to investors and payment of redress obligations.

Investment funds expert Aongus McCarthy of Pinsent Masons, the law firm behind Out-Law, said: that “[w]hile we must await out the outcome of the consultation process, the establishment of a clear regulatory framework for the treatment, correction and redress of errors in investment funds, which will hopefully provide clarity and consistency of approach, will be welcomed by funds industry participants.”.

The proposed regulatory framework (19 page / 1MB PDF) covers the treatment, correction and redress of errors. Exactly how an error should be rectified would depend on the type of error, and the Central Bank identified four error types in its consultation: an error in the calculation of net asset value (NAV); an ‘investment breach error’, relating to the investments of a fund and non-compliance with applicable restrictions; errors relating to the overpayment of a fee; and ‘control breach errors’ which do not fall into the other categories.

The proposed framework would apply to fund management companies acting for Irish-authorised Undertakings for Collective Investment in Transferable Securities (UCITS) funds or alternative investment funds (AIFs). It would also apply to Irish fund management companies, even if they are acting for non-Irish authorised funds.

The consultation follows a thematic review of the fund industry’s approach to the treatment of NAV pricing errors in 2015, which found that while industry guidance was widely adopted and applied, there were a number of areas which needed attention.

The Central Bank said it would explicitly set out the requirement for fund management companies to ensure that errors were appropriately rectified, by way of an obligation which would be included in future editions of the Ucits regulations and AIF rulebook and regulations. Depositaries will be required to ensure that an error has been appropriately rectified by the fund management company.

Where mistakes are deemed to be material, the Central Bank said redress should be paid so that the fund or investor are returned to the position that they would have been in if the error had not been made. However in the case of fee errors, a sum at least equal to the sum of the overpayment should be repaid to the fund and also investors, if applicable.

The consultation is open until 9 December.