Purpose and scope
FundRock Management Company (“FRMC”) as Management Company is required to establish, implement and maintain an effective policy on conflicts of interest that is appropriate to FRMC’s size and organisation and the nature, scale and complexity of its business and the materiality of the risk of damage to the interest of clients.
The policy is applicable to the FRMC in Luxembourg as well as in any other country where FRMC is present via subsidiaries or branches.
The Policy sets out the potential material conflicts that have been identified by FRMC together with the high level overview of the procedures and arrangements adopted to manage those potential conflicts. While total assurance cannot be secured that its systems and controls will prove fully effective in all and every circumstance, FRMC continuously ensures that all reasonable steps have been taken to prevent conflicts of material detriment to clients’ business and to investors’ interests.
FRMC will take appropriate measures to ensure on an ongoing basis that delegates have appropriate measures in place to comply with regulations.
Definition of a Conflict of Interest
A conflict of interest (“CoI”) is a situation in which a person has a duty to more than one person or organization, but cannot do justice to the actual or potentially adverse interests of both parties. This includes when an individual's personal interests or concerns are inconsistent with the best interests for a customer, or when a public official's personal interests are contrary to his/her loyalty to public business.
Common CoI situations may include, but are not limited to :
- Employee trading;
- External directorships and personal outside activities;
- Employees of the Company having mandates on client boards;
- The provision and receipt of gifts and entertainment
The Company shall take all reasonable steps to identify CoI that arise in the course of managing the Fund’s operations between:
- The Company, including directors, conducting officers, managers, employees and/or any company or person directly or indirectly linked to the Company by control and the Fund managed by the Company or any investor in such Fund;
- The Fund managed by the Company or its investor(s) and any other Fund or investor(s) in such Fund;
- The Fund managed by the Company or its investor(s) and another client of the Company.
CoI may come in different forms. They may be real and appear in the form of a direct conflict between current obligations and/ or interests.
The risk presented by a CoI to the Company, its clients, Funds and investors can be significant. Therefore, the Company shall take whatever actions necessary in order to avoid any adverse consequences that may be caused. For this purpose, the Company appropriately and manages CoI that could result from the service offered by the Company to avoid them prejudicing the interests of its Funds and investors.
For the purposes of this Policy, “Client” refer to the UCI to which FRMC provides services, the fund Board members and the initiator or the UCI (usually also acting either as Investment Manager and/or Global Distributor).
- Existing Clients of FRMC;
- Prospective Clients (where FRMC is seeking to enter into a contractual relationship in respect of its business activities);
- Historic Clients, to whom FRMC may owe ongoing duties.
In the context of UCITS and the AIFM laws, conflicts of interest are those that may arise between:
- FRMC, including its managers, employees or any person directly or indirectly linked to FRMC by control, and the UCI managed by FRMC or the investors in that UCI;
- The UCI or the investors in that UCI and another UCI or the investors in that UCI;
- The UCI or the investors in that UCI and another client of FRMC;
- Two (or more) clients (whether current, former or prospective) of FRMC;
- Two (or more) service providers/delegates (whether current, former or prospective) of FRMC, or between such delegate(s) and the UCI, client of FRMC as Management Company or AIFM;
- FRMC and a client when the Management Company is carrying on activities as defined in the Luxembourg Law dated 17 December 2010 relating to UCITS and the AIFM Law.
Other circumstances that could be taken into consideration:
- Risk management functions and operations;
- Internal audit and risk management functions;
- Internal audit and compliance function;
- Valuation and portfolio management;
- Depositary and portfolio management or risk management functions.
Factors giving rise to Conflicts of Interest
FRMC shall ensure that when identifying the types of conflicts of interest, the existence of which may damage the interests of a Client, include also those types of conflicts of interest that may arise as a result of the integration of sustainability risks in their processes, systems and internal controls.
In addition, when identifying potential conflicts of interest, FRMC will consider all of the factual circumstances and will take into account whether FRMC, its clients/service provider/delegate or a UCI:
- Is likely to make a financial gain, or avoid a financial loss, at the expense of another party;
- Has an interest in the outcome of an activity provided to a third party or of a transaction carried out on behalf of a third party, which is distinct from the third party’s interest in the outcome;
- Has a financial or other incentive to favour the interest of a third party or group over the interest of another third party;
- Carries on the same business as the third party; and/or
- Receives, or will receive, from a person other than the third party an inducement in relation to a service provided to the third party, in the form of monies, goods or services, other than the standard fee for that service and which has been properly disclosed to the third party.
Specific to FRMC’s AIF activity – Investor liquidity
As AIFM that manages open-ended AIFs, FRMC must identify, manage and monitor CoI arising between investors wishing to redeem their investments and investors wishing to maintain their investments in the AIF and any CoI between the FRMC’s incentive to invest in illiquid assets and the AIF’s redemption policy.
Independence in conflicts management
The procedures and measures established for the prevention of management of conflicts of interest are designed to ensure that relevant persons engaged in different business activities involving a conflict of interest carry on those activities at a level of independence appropriate to the size and activities of FRMC and to the materiality of the risk of damage to the interests of the funds or their investors.
These procedures and measures include the following where necessary and appropriate for FRMC to ensure the requisite degree of independence:
- Effective procedures to prevent or control the exchange of information between relevant persons engaged in activities of collective portfolio management or other authorized activities involving a risk of a conflict of interest where the exchange of that information may harm the interests of one or more funds or their investors;
- The separate supervision and monitoring of relevant persons whose principal functions involve carrying out activities of collective portfolio management on behalf of, or providing services to, Clients or investors whose interests may conflict, or where these Clients represent different interests that may conflict with the interests of the funds or the interests of FRMC;
- The removal of any direct link between the remuneration of relevant persons principally engaged in one activity and the remuneration of, or revenues generated by, different relevant persons principally engaged in another activity, where a conflict of interest may arise in relation to those activities;
- Measures to prevent or limit any person from exercising inappropriate influence over the way in which a relevant person carries out collective portfolio management activities;
- Measures to prevent or control the simultaneous or sequential involvement of a relevant person in several distinct collective portfolio management activities or other authorized activities where such involvement may impair the proper management of conflicts of interest.
If the adoption or the implementation of one or more of those measures and procedures does not ensure the requisite degree of independence, FRMC adopts such alternative or additional measures and procedures as are necessary and appropriate for that purpose.
Managing conflicts management – general arrangements
FRMC has in place arrangements designed to ensure that potential conflicts of interest are identified promptly and are managed fairly and effectively.
As a minimum these include:
- Segregation, within FRMC operating environment, of tasks and responsibilities which may be regarded as incompatible with each other or which may potentially generate systematic conflicts of interest; Where FRMC assesses whether its operating conditions may involve any other material conflicts of interest, it discloses them to the investors of the funds.
- Appropriate controls in place to identify and manage cross-board memberships and the outside business interests of relevant persons;
- Maintenance of records of activities that may lead to conflicts (please refer to section n°7)
In addition to this, as part of its senior management governance framework, FRMC has established a number of key organisational and administrative arrangements and internal control systems within its business which are designed to manage these potential conflicts and to prevent a material risk or damage to the interests of its Clients or third parties.
- Corporate governance structure;
- Senior management oversight, management and reporting;
- Compliance and operational risk functions;
- Terms and conditions of employment;
- Handling confidential information;
- Declaration of interest (please refer to policy related to Other Business Interests);
- Gifts and Entertainments arrangements (please refer to policy related to Gifts & Entertainments);
- Supervisory arrangements for the separate supervision of staff where necessary to ensure the fair management of CoI;
- Personal account trading restrictions and monitoring and
- Records maintenance.
Managing conflicts management – specific arrangements
Where a conflict is identified following options might be envisaged to reduce or avoid the conflict:
- The relevant person may be asked to step aside from working on a specific transaction or participating in the management of a potential conflict of interest.
- Making arrangements for members of boards and committees to absent themselves from debate or decision on specific matters.
- Taking no further action because the potential for conflict is minimal or can be eliminated by disclosure and effective supervision;
- Appointing extra persons to the panel or committee to minimise the influence of the individual about whom the perception is held;
- Seeking the views of persons likely to be affected about the person continuing in the process;
- Restricting the access of the person to relevant information that is sensitive or confidential;
- Requesting the person to relinquish or divest the personal interest which creates the conflict;
- Removing the person from the responsibilities or duties to which the conflict relates.
Identifying and reporting a Conflict of Interest
Any FRMC staff member who becomes aware of:
- Potential or an actual CoI; and/or
- A situation where he/she thinks it could lead to a CoI
must report it immediately to his/her line Manager and to FRMC Regulatory Compliance Department.
Doubt is sufficient to report a conflict and the staff member is not asked beforehand to assess if it deals truly with a CoI. Employees shall direct any question or report any potential breach to this Policy to the attention of the Senior Management and the Compliance Officer who shall take appropriate action(s) to manage the situation, depending upon the nature and the severity of each reported case.
In any situation, the employees have the obligation to act with an egalitarian diligence for unitholders and principals. Any employee who is in a potential or actual CoI situation shall refrain from acting in the context of the situation, at least until she/he has informed the Senior Management and the Compliance Officer of this situation.
The Senior Management is ultimately responsible for identifying, preventing and managing the potential and actual CoI.
Considering that the reported CoI is confirmed and could not be avoided, the Senior Management shall take measures in order to resolve and/or control the situation in the best interests of the clients and investors. The Senior Management shall also take decisions and implement measures in order to control the conflicting situation. This CoI shall be also reported to the Board.
In its decision and proposals, the Senior Management shall take into consideration the activities of the Company, the professional secrecy, the confidentiality of the personal information and the privacy of the concerned persons.
The Compliance Officer will log the notification regarding the CoI, after assessing the situation with the impacted parties. He will also ensure that policies and measures in place are effective and efficient in order to prevent conflicts.
Staff members who fail to follow the requirements of this Policy will expose themselves and FRMC to the risk of breaching legal and regulatory requirements and may render themselves liable to disciplinary action by FRMC, up to and including termination of their employment.
Conflict of Interest Register
Actual and relevant potential conflicts which have been identified by FRMC are maintained in a register together with the procedures and measures in place to manage these.
The register is maintained by the Regulatory Compliance department of FRMC (i.e. the Compliance officer of FRMC and the staff reporting to him/her).
Disclosure of Conflict of Interest
Where a CoI, or potential CoI, is identified, the conducting officers of FRMC must ensure that steps are taken to ensure that the conflict does not negatively impact the UCIs that it manages or the investors of the UCIs. This may include additional independent oversight by management of the specific situation.
Where the organisational or administrative arrangements made by FRMC for the management of conflicts of interest are not sufficient to ensure, with reasonable confidence, that risks of damage to the interests of UCIs or of its unitholders will be prevented, the Management Committee and Board of Directors of the UCIs are promptly informed in order for them to take any necessary decision to ensure that in any case the Management Company acts in the best interests of the UCIs and of its unitholders.
For the above situations where a CoI cannot be avoided and/or that require particular actions, FRMC or the board of directors of the relevant fund must report to investors by any appropriate durable medium and give reasons for the decision.
With regard to thirds that perform delegated tasks of FRMC, the adherence to CoI requirements are monitored and documented in the context of outsourcing controls and Due Diligence audits.
In that respect, FRMC oversight teams will ensure that on an initial and on-going basis the delegate:
- Has adequate CoI procedures in place taking all reasonable steps to identify, manage and monitor potential CoI that may arise between itself and the company and/or the Funds and their investors;
- Report to the Company potential CoI as well as procedures and measures they have adopted.
As part of the Apex group, FRMC may from time to time delegate and/or have UCI’s delegates that are part of the Apex Group. This proves particularly relevant in the context of Central Administration, Depositary Bank, Investment Management and Distribution services. With regard to the COI that may arise with those entities/individuals and FRMC, The Management Company has the following mitigation measures in place:
- A clear segregation of the personnel per entity that may be involved in activities related to the UCI. No employee from FRMC shall also work for another Apex group entity on a particular UCI.
- In case, a Senior Manager from FRMC is also a senior Manager of another Apex Group entity, the person shall step down of any decision that may favour one entity above the other.
- Any Apex entity identified as a delegate follows the same due diligence process as any other third party delegate. The remediation plans are proposed and implemented the same way as for any delegate of FRMC. This includes the control and the respect of the CoI procedures in place.
A paper version of this Policy is made available free of charge to investors at FundRock’s registered office.