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Update on the Appointment of Directors Through Conduit Firms

Mason Hayes Curran Investment Funds Update February/March 2012

On 21 December 2011, the Central Bank of Ireland (the “Central Bank”) issued a letter to the industry regarding director appointments via conduit firms.

The Central Bank referred to previous correspondence issued to the industry where they advised of their concern that such arrangements may contain unacceptable limitations on the liability of directors and explaining their view that all director appointments must be made directly by the collective investment scheme (the “CIS”) or management company in question.

In its correspondence of 21 December last, the Central Bank referred to the fact that a director is an officer of a company and that he or she is subject to the obligations and the duties of a director of a company under the Companies Acts of Ireland and has responsibilities arising from common law, legislation, regulations, codes of practice, guidance notes and guidelines.

Directors of CIS and management companies regulated by the Central Bank must also meet the standards of competence and probity known as “fit and proper” standards.

Given that the duties and responsibilities of a director and fitness and probity requirements are personal obligations placed on the individual who is appointed as a director, the Central Bank has stated its view that it is not appropriate to have the terms of a director’s appointment documented in and governed by an agreement between the CIS or management company and a conduit firm or other third party.

The Central Bank has specified that the terms of a director’s appointment should be documented in a letter of appointment which is in accordance with the IFIA Corporate Governance Code for Collective Investment Schemes and Management Companies (the “Code”). The letter should be issued by the CIS or management company directly to the director and the only parties to it should be the CIS or management company and the director. The Central Bank will not permit such letters to issue to any conduit firm or other third party on behalf of or in relation to the director.  Also, the Central Bank will not permit the terms and conditions relating to the appointment to be included in a separate agreement between the CIS or management company and a conduit firm or third party acting on behalf of or in relation to the director.

Taxation

The Central Bank stated in its letter that it expects directors, CIS and management companies to comply with tax law (and with guidance that may be issued by the Revenue Commissioners relating to such tax law) as regards the tax treatment of remuneration of directors.

Transitional Arrangements
The Central Bank is aware that there are currently agreements in place between CIS or management companies and conduit firms/third parties which relate to director appointments. The Central Bank pointed out that some of these agreements deal solely with director appointments and others contain terms for the provision of additional services. The Central Bank has said that the former agreements will need to be terminated and the latter amended to remove the provisions dealing with director appointments. Given the transitional arrangements set out in the Code, the Central Bank is allowing a period up to 31 December 2012 for existing agreements to be terminated or amended as relevant.

No new arrangements through conduit firms may be entered into from the date of the Central Bank’s letter.