With a recent article in the Financial Times (paywall), the debate around the management of the Woodford Equity Income Fund has broadened out to include the actions of the Authorised Corporate Director (ACD), a role very few outside the industry know anything about, but one that is very important nonetheless.
The arrival of Open-Ended Investment Companies (OEICs) as a corporate alternative to unit trusts brought with it the concept of a corporate director, rather than named individuals, responsible for operating the fund and having regulatory oversight for it.
In the case of Woodford, the ACD is a third party, Link Fund Solutions, rather than an associate company. This is established business practice, allowing those interested only in portfolio management to get on with that and leave the operational side – compliance oversight, administration and appointment of depositary, registrar and auditor – to a regulated company that also does this for others. It also means the fund manager doesn’t incur all the fixed costs of having these skills in-house.
Traditionally, the ACD is a fund company, which delegates the management of the fund to a sister company consisting of the investment managers in the same group. But not having the fund manager (the “sponsor”) and ACD in the same corporate group raises questions around which one really runs the show.
Technically, the ACD owns the fund and appoints the fund manager to manage it. In practice, however, the fund manager appoints the ACD and pays a fee usually based on the assets under management. Crucially, this means the fund manager also has the power to sack the ACD and appoint another. If this sounds confusing, then it is – Andrew Bailey, head of the FCA, commented in a parliamentary hearing: “There are many confusing things about the . . . [European fund] world. [The role of the ACD] is one of them.”
But we now have PS18/8, the FCA’s policy statement that requires all ACDs to have at least two independent non-executive directors (iNEDs) to represent the interests of clients over those of the management company and its shareholders. The role of an iNED role is hugely important, with both board oversight over the ACD’s activities and responsibility for representing investors in the underlying funds. Could then the iNED requirement shift the balance of power in the relationship and make things clearer for the investor?
The iNEDs are responsible for ensuring that the ACD and its fund managers act in the best interests of investors, but it will be interesting to see whether that extends to going beyond a strict enforcement of the rules, particularly given that iNEDs will be in a minority on the board.
Would the iNEDs be able to persuade a third party ACD to stand up to a fund management company, which pays the bills, if they feel investors are being disadvantaged? In the aftermath of the Woodford fund suspension, it’s just possible that they could and ACDs can wrest some power away from fund managers. But with Link’s role in the affair now the subject of an FCA review, we may need to wait for a possible wider probe into the sector before we see any substantive change.
NOTES TO EDITORS
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