Fund oversight

_{(Update December 2022)}

Introduction

These notes contain recommendations on minimum standards and best practice in a number of areas, aimed at promoting transparency in the industry, and should be considered in conjunction with the requirements of the AREF Code of Practice.

Given the diversity of fund types within AREF’s membership not all of the following may apply to a particular fund and some funds may not be able to comply with specific recommendations due to restrictions in fund documentation. Nevertheless, if funds are capable of complying, but managers choose not to, they should explain to existing and potential investors the reasons for non-compliance.

If any of the matters referred in this note are the subject of formal regulation applying to the fund, such regulation takes precedence over this guidance.

During the writing of this guide AREF has been mindful of the principles of the UK Corporate Governance Code produced by the Financial Reporting Council.

The manager should appoint an oversight entity with, where possible, independent members (including an independent chair), to ensure that principles of sound corporate governance are observed in the management of funds.

The oversight entity should not be involved in the day-to-day decision making of the fund.

The oversight entity should have defined terms of reference.

The cost of the oversight entity is a valid cost to the fund.

The manager has primary responsible for sound governance of the fund which should not be delegated to the oversight entity.

Fund oversight and investor representation can take a range of different forms. However, for most funds, the oversight entity, would take the form of either a:

Supervisory Committee (independent);
Advisory Committee (not truly independent unless best practice is followed); or
For authorised funds, an authorised fund manager (AFM) board and a depositary or trustee.

Guidance on the composition and responsibilities of supervisory and advisory committees are provided below. However, AFM boards, depositaries and trustees are expected to follow FCA regulations.

Supervisory Committee

Composition of supervisory committee

A supervisory committee should comprise one or more members who are wholly independent of the manager.
These officers will be appointed for their appropriate market knowledge, experience and qualifications.

Role of supervisory committee

The supervisory committee should represent the investors to provide constructive challenge to the manager without taking away the discretion or accountability of the manager for investment performance or fund strategy, or of the depositary (if appropriate).
Each member of the supervisory committee should declare any potential conflicts of interest. A member must not participate in any decision affected by a conflict of interest.
The supervisory committee will recommend to the investors/trustee for consideration all changes to the appointment of the manager, key persons, manager fees or other terms of the fund in accordance with the constitutional documentation of the fund.
The supervisory committee’s duties will include oversight of the performance of the manager, relative to the business plan, compliance by the manager with AIFMD (if relevant) compliance with the appointment/constitutional documentation and other relevant legislation.
The supervisory committee should monitor the manager and undertake regular reviews of subscription and redemption policies.
The supervisory committee should oversee and review end of life processes for close-ended funds.
The supervisory committee should not carry out any investment or regulatory activities (as defined by FCA), which, for the avoidance of doubt, includes specific approval to any investment or divestment decisions.
The supervisory committee shall have an opportunity to review the annual and interim report and accounts, which should contain:
- i. clear definitions of the supervisory committee’s role and the role of the manager;
- ii. confirmation that the supervisory committee has undertaken its responsibilities for the period under review; and
- iii. Oversight of investors’ complaints received via the manager or directly by the committee.

The supervisory committee shall be allowed direct access to the valuer, trustees and auditors and all reports produced by them to assist it in performing its role.

Constitution of supervisory committee

The supervisory committee should be subject to election by unit holders/investors with re-election of members at regular intervals on a rotating basis. Unit holders/investors may propose their own nominations if allowed to do so under constitutional documentation.
Appointment of members beyond a six-year term should be subject to rigorous review, and take into account the need for progressive refreshing of the committee.
The representation of the supervisory committee should be multi-disciplined with members selected for relevant experience and qualifications for the roles required.
The majority of members of the supervisory committee should be independent of the manager. For the avoidance of doubt, a member is not independent if she or he has been in full time employment of the operator or property manager (or member of the group or associated company) within the previous five years or has had a material relationship within the last three years.

Liability/indemnity

It is considered to be best practice for members of the supervisory committee to be covered by appropriate liability/ professional indemnity insurance arrangements which will be a valid fund cost.

Advisory committee

Composition of the advisory committee

It is usual for advisory committees to be comprised of a mixture of manager and investor representatives.
The advisory committee is often chaired by either an investor or manager representative on a rotating basis.

Role of advisory committee

The role of the advisory committee is the same as a supervisory committee, although it will not have the same level of independence.
An advisory committee cannot be considered truly independent and it may not necessarily act for all investors collectively.

Constitution of Committee

The committee will often be comprised of a mixture of investor, manager and external representatives, and nominated by the investor group.
It is best practice for the manager not to be represented on the committee but will be required to attend to present reports and administer the meeting.
It is best practice for the chair to be independent of the investors and manager.
The committee representatives should be selected for their knowledge, experience and qualifications.
The committee should ideally be constituted to include a range of professional skills (not just property).
The committee should comprise of an appropriate balance of representation of investors both by size and type and shall be regularly reviewed.
The advisory committee should be representative of the investor base with smaller investors being collectively represented by a separate committee member.