Legal overview of Board responsibilities with respect to risk managementConference “Director’s liabilities and their evolving role in managing & mitigating risk for Alternative Funds”

Novotel Luxembourg-Kirchberg23 March 2015

Monique Bachner, Bachner Legalmbachner@bachnerlegal.com+352 621 514632

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Directors in Luxembourg – Responsibility : Duties

• Director Mandate = appointment by the shareholders in general meeting• Shareholders elect the Board of Directors as a collegiate body

• to manage the affairs of the company…• Strategy: must consider the business to be pursued• Decisions : must take management decisions and

appropriate steps to implement such decisions

• Oversight / Supervision: • Duty to supervise persons to whom the

day-to-day management has been delegated• No general delegation of powers /oversight functions

• … in its best corporate interests and to fulfil its objectseverything which has not been reserved to shareholders in its Articles

(general meeting only retains residual powers)

• Directors must devote necessary time and attention to allow proper discharge of their functions

• Directors must act in the best interests of the company (not of any particular shareholder – treat all investors fairly and equally)

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Directors in Luxembourg – Responsibility : Liability1. Civil liabilities

i. Mismanagement- individual liability to the company (art.59, al.1, 1915 Companies Law)

e.g. Negligence e.g. lack of supervision/ oversight over delegatesii. Breaches of Companies Law or Articles

- joint liability to the company & to 3rd parties (art.59, al.2 , 1915 Companies Law)

iii.General civil law responsibility- individual liability where fault causes a loss to the company or a 3rd party (C.Civ a.1382)

2. Criminal liabilitiesi. Criminal sanctions – 1915 Companies Law art. 162-173

most often these are limited to fraudulent acts, but not all…. e.g. annual accounts not submitted to shareholders

ii. Criminal sanctions – 2010 UCI Law, 2013 AIFM Law, etc… e.g. breaches of investment restrictions

3. Administrative fines – foreseen by 2010 UCI Law, 2013 AIFMD Law, 2007 SIF Law, etc.

e.g. transmission of incomplete declaration of honour e.g. annual accounts and auditor’s management letter not submitted to CSSF

4. Other - Liability under other laws (employment, accounting rules, insolvency, … )

e.g. may be banned from serving as a director (Code de Commerce / CSSF)

Directors are ultimately responsible for both their actions & omissionsMany (but not all) offences are judged in relation to reasonableness

• Director must act as a normally prudent & diligent person in the same position would.

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• Time limits for claims (prescription)• Code Civil = generally 30 years (C.Civ. a.2262)• Company Law = generally 5 years (LSC a.157)• Some time limits only start when facts discovered (e.g. fraud)

• “D&O” = to defend yourself (insurance against civil liabilities)

• Indemnities • indemnification provisions in Articles • Indemnity agreements

• Annual discharge• Discharge only v-à-v shareholders (≠ third parties)• only covers items appropriately disclosed

• Avoid liability in the first place … • track all delegations - and require periodic reporting from all delegates• act conscientiously, with integrity & with “independence of mind”• actively manage conflicts of interest• ask questions. Constructive challenge.• manage your time (& limit commitments to what is reasonable)• try to avoid insolvency situations• effective on-going oversight of delegates

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Directors in Luxembourg – How to manage risks (generally) ©2015

• Why so important? • Collective responsibility of board

No general delegation of powers => Need to track & to manage all delegations effectively

• No delegation of responsibilityNo delegation of responsibility for oversight functions

=> Must ensure adequate periodic reporting from all delegates

• Powers of Directors to bind the company • general position = Board is a collegial body, powers lie collectively with

the Board as a whole acting at duly convened meetings of the Board

• Articles - usually set out specific signature and representation powers of each Directors (e.g. 2 Directors may sign together). Check the Articles.

• Powers of others to bind the Company => rules of “mandat”• Board may decide to grant a proxy (or “power of attorney”) to one or more Directors or third

parties for certain specified activities

• No general delegation of powers. Must be reasonably specific.

• Keep track of such delegations. Consider delegation guidelines.

• They are signing in YOUR name. Ultimately Directors remain responsible for the actions taken in the Company’s name pursuant to a delegation

• Senior Management / Conducting Officer = delegates=> to execute the strategy which has been set by the Board

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Directors in Luxembourg – Effective & on-going oversight of delegates

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Directors in Luxembourg – Governance structure in an AIFMD world• General obligations of the Directors (+ senior management//conducting

officers) AIFM Law general principles = similar to general directors duties (act in best interests cf. the defined mission, communicate with investors and regulators, commit sufficient time and still maintain appropriate mix of competencies, …. )

• Specific governance structures required by AIFM Law / AIFMD (in addition to the general)

=> distribution of responsibilities among different participants– including internally & appointment of an AIFM, depositary, etc.

=> CSSF Circular 12/546 as a reference model

• Strategic Management of the Fund : role of the Directors: • Choose and appoint AIFM (and if self-managed, senior management)• Set strategy (investment policies/restrictions, risk profile, etc…)• Choose key delegates and service providers (depositary, central admin, …)• Determine rules of conduct, policies & guidelines (Fund w. AIFM) (e.g. the Risk

Management Policy)

• Discharge of their obligations = via effective on-going oversight• heavy reliance on Senior Management (Conducting Officers) of the AIFM for day-to-day

oversight• = 4 eyes (minimum)• = delegated function – Senior Management are chosen & appointed by Board =>

report to the Board• Review and analyse reports from delegates + ask questions,

(re-)assess form of reporting to directors (adequate? timely? appropriate?)• due diligence requirements – initial and on-going (nb. documented!)• ensure active management of conflicts of interest • (re-)assess collective skills & capacity (Fund, AIFM, delegates, service providers) +

training • ensure compliance with rules of conduct & (re-)assess periodically policies and

procedures e.g. codes, policies being complied with? valuation policies working correctly? Back-testing? Escalation procedures working?

• Ensure compliance by the AIFM and delegates with AIFM Law requirements

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Directors in Luxembourg – Sanctions under AIFMD1. AIFMD

i. Mostly leaves sanctions to the local regulators /lawsii. Other mentions e.g. disclosure to public of any measures or

penalties imposed

2. Regulated entities generally => supervision by CSSF (visits, investigations, enforcement actions, bans)

3. AIFM Law - Criminal sanctions – art. 59 : If no authorisation for activity / to be AIFM

4. AIFM Law – Administrative penalties (art. 51)i. Warningii. Reprimandiii. Fines €250 to €250,000iv. Prohibition regulated activities (temporary or permanentv. Prohibition to act as a director, manager or conducting person of

regulated entity

Risk Management Function : functionally independent of portfolio management

“All risks must be be monitored at all times” (AIFMD Level 2, art. 41, 1a)

• Managing risk = need to demonstrate appropriate controls in place• Appropriate personnel and IT infrastructure• Written policies and procedures. Review RMP at least annually• Regular report to Directors (measure & monitor risks) e.g. dashboards, KRIs.

Escalation procedures• Testing of polices and procedures (limits, stress tests, scenario testing,

backtesting, sampling, …)

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Questions?

Monique Bachner, Bachner Legalmbachner@bachnerlegal.com+352 621 514632

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Conference “Director’s liabilities and their evolving role in managing & mitigating risk for Alternative Funds”

Novotel Luxembourg-Kirchberg23 March 2015