COVID-19: Considerations for investment funds

Though barely a few months old, and already a centre-point of public consciousness, it is clear that the novel coronavirus ("COVID-19") will have a profound impact on the lives of many, with its  financial consequences being amongst, though far from the only, significant developments. Those involved in the investment funds sector will already be aware that the pandemic is having a significant impact on their sector, forcing participants to deal with questions not raised previously, and with potentially further implications yet to emerge.

t this stage, it is apparent that the virus and its related economic shock(s) will have a sizable bearing on the asset management and servicing sector as well as every other element of the economy.

In this article, we outline some of the key areas which may be of impact, from a legal and regulatory perspective, which funds, their managers, and key service providers may wish to consider. We also outline the necessary steps which should be taken to mitigate the scale of their impact and address certain associated points.

Governance

-          A fund, or its management company (where relevant), should ensure that its constitutional arrangements permit it to hold meetings of directors and other decision making organs remotely (where necessary), and be aware of the requirements which apply to the handling of such meetings, and the implications of holding a general meeting remotely or outside of Ireland;

-          Funds and all service providers should review their plans over the short-and-medium-term and ensure that all non-essential deliverables are achievable and, where this is in doubt, ensure that alternative arrangements are made;

-          A fund, or its management company (where relevant), should ensure that its corporate officers or authorised signatories have power to execute documents in a manner which facilitates that they are not required to sign common copies of wet-ink originals when a seal is applied, etc.; and

-          In terms of regulatory interaction, the Central Bank of Ireland (“CBI”) will be liaising with all significant service providers to ensure that business continuity planning (“BCP”) arrangements are working as appropriate. In the event that a fund or its management company are experiencing issues, these should be relayed to the CBI. Likewise, any issues in terms of fulfilling filing deadlines, etc, should be determined as soon as possible and reported to the regulator where delay will be unavoidable, together with an account of remedial plans. Regulatory authorities are engaging their own BCP arrangements and we understand that all key authorisation and associated facilities remain operational.

Delegate performance

-          A fund should liaise with its fund service providers (IM, fund administrator, depositary, etc.) without delay, to ensure that their BCP arrangements are in order, working as appropriate (e.g. conference line capacity is sufficient), and updated frequently, with any outages, capacity constraints, or other issues which affect the fund brought to its attention immediately; and

-          A fund, or its management company (where relevant), should be aware of emergency contact details of all key delegates and other service providers in the event that BCP arrangements are not sufficient and the fund’s affairs need to be attended to in extremis.

Dealing

-          UCITS are permitted, where provided for by their own constitutions, to suspend dealing for a period, but required to notify the CBI when doing so (see Regulation 104(2)(c) of the 2011 UCITS Regulations), and provide updates where the suspension lasts for 21 days or longer (Regulation 33 of the 2019 UCITS Regulations). AIFs are also permitted to suspend dealing where provided for in their constitutional arrangements. Prior to initiating any such action, the fund or its management company (where relevant) should ensure that requirements detailed in constitutional documents are met; and

-          A fund may have issues in obtaining original documentation from subscribers and redeemers and may wish to consider revising its standards where they do not provide for verified/verifiable electronic copies, call-back options to verify identity, etc., in liaison with key delegates.

Trading

-          Compliance with investment restrictions may be impacted by (temporary) closure of trading venues and/or decline in liquidity of investments held, irrespective of the fund's (or its delegate’s) own actions;

-          Recent ESMA and related announcements with respect to short-selling - and reporting obligations with respect to certain positions - should be taken into account by funds or their management companies where appropriate;

-          Fund liquidity management and investment policies may need to be revisited to deal with a changed dealing profile (to meet investor demand), investment profile, etc.; and

-          Time taken to complete trades and settle the same (as well as steps involved) may be at variance with standard practices – e.g. as counterparties, official registries, etc., change their practices, potentially for more than a matter of days. Funds should ensure that all relevant operational risks are considered and mitigating steps taken as appropriate.

Other issues which are likely to arise in the short-term include contractual obligations not being  fulfilled on grounds of force majeure or frustration, the need to consider the availability of key personnel, etc.; as well as difficulties operating a fund in a period of unprecedented financial turbulence and working environments impacted by a civil emergency.

For further information and advice dealing with any of the issues above associated with the impact of COVID-19, please contact the ByrneWallace Financial Services Team, or any member of the ByrneWallace COVID-19 task force.