Must alternative investment companies operating on a registered basis adopt a conflicts of interest management policy document?

In the official publication of the Polish Financial Supervision Authority (hereinafter “PFSA”) “Alternative Investment Companies as a new type of investment vehicle in Poland”, one can find an excerpt stating that “An entity applying for an entry in the register of AIC managers does not have to (…) adopt a number of rules and provisions. (hereinafter “PFSA”) entitled “Alternative Investment Companies as a new type of investment vehicles in Poland”, one can find an excerpt stating that “An entity applying to be entered in the register of AIC managers does not have to (…) adopt a number of internal rules on how to perform activities related to the management of alternative investment companies, in particular on conflicts of interest (…)”. Is this really the case?

At the outset, it should be pointed out that alternative investment companies (hereinafter “AIC”) are the least stringent form of investment activity in the Polish legal order. The activities of entities managing AICs, including the issues of managing conflicts of interest, are regulated by the provisions of the Act on Investment Funds and Management of Alternative Investment Funds of 27 May 2004 (Dz.U.2022.1523) (hereinafter the “Act”).

AIC managers can be divided into managers whose activity requires a permit from the Polish Financial Supervision Authority (PFSA) and AIC managers, whose business only requires an entry in the register of AIC managers. The criterion that determines the necessity of issuing an authorisation is (to put it somewhat simplistically) the total value of the assets included in the investment portfolio of a given manager – if the value does not exceed the equivalent of EUR 100,000,000 authorisation is not needed. Moreover, as regards AIC managers who do not use leverage in the AICs they manage and in which participation rights can be repurchased after at least five years from their acquisition – this limit increases to the equivalent of EUR 500,000,000.

As of today; the number of AIC managers whose activities require authorisation is only two. Confronting the two ‘authorisation’ managers with the 360 ‘registered’ managers (as at 15 May 2023); in terms of conflict of interest management policies, this article will focus on the vast majority.

With reference to”registered” AICs, although the Act does not directly provide for the need to draw up separate provisions on the management of conflicts of interest, Article 70b(2) of the Act provides that the manager of the AIC, together with the investment strategies and investment policy, also adopts other provisions and documents pertinent to the business pursued by the alternative investment company, hereinafter referred to as “internal rules of the AIC”, while Article 70l(2) of the Act stipulates that “the manager of an AIC is required, in particular, to prevent the occurrence of conflicts of interest, to detect such conflicts and, if such conflicts arise, to ensure the protection of the interests of the investors of the alternative investment company and the protection of confidential information or information constituting professional secrets”. Under the above provisions and Article 10 of the Act, which emphasizes that the AIC manager should act independently and in the interest of the investors of the AIC; the PFSA in certain cases, especially when persons performing management functions at the AIC manager carry out investment business within other entities; recommends that the AIC manager should also adopt as part of the internal rules of the AIC a conflict of interest management policy document (hereinafter the “Policy”).

The reference point for the Policy is the provisions of Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012 supplementing Directive 2011/61/EU of the European Parliament and of the Council as regards exemptions, general conditions for depositaries, leverage, transparency and supervision (hereinafter “Regulation 231”). Regulation 231 defines conflicts of interest as situations in which a person associated with an AIC:

1. can make a financial gain or avoid a financial loss at the expense of AIC or its investors;
2. has an interest in a particular outcome of a service or activity performed for the AIC that is divergent from the AIC’s interest in that outcome;
3. has reason to put the interests of AIC above those of others;
4. performs the same activities for another AIC or other entities;
5. may receive incentives in the form of cash, tangible goods or services, other than the standard commission or fee for the service in question, with regard to collective portfolio management performed for the AIC.

In view of the above, thethe above situations in the AIC should be taken into account and regulated in the Policy, and by provision is meant the definition of procedures to be followed in order to prevent such conflicts and, when they occur, to manage them.

Apart from persons related to the AIC in question (by a relationship of control, work or collaboration), the Policy document should also take into account its investors and so-called “stakeholders”, that is persons related to the AIC (or who could potentially be related) by some other legal relationship, such as law firms providing services to the AIC in question.

At a minimum, the basic procedures that the Policy should provide for should include a thorough verification of the capital relationships of entities with which a conflict of interest may potentially arise. If, as a result of this verification, it is deemed that this conflict may happen, all parties involved (for example AIC, investors, partners) should be informed immediately and all should agree to continue with the project in question – otherwise the party that does not agree should not be further involved in it.

A procedure to counteract conflicts of interest whereby information about an AIC partner acquired by an AIC Employee in the course of performing his or her tasks may harm the interests of another AIC partner should be considered very important. In order to prevent such situations, it is important that within AIC there is a division into teams committed to secrecy within their team. It is the responsibility of the management board to detect a possible conflict, and if it occurs, it should take immediate action, such as informing the partners who may be concerned.

The above examples of procedures are fairly universal and will probably be applicable to most AICs.

Furthermore, it should be borne in mind that the Policy should be tailored to the size and organisational structure of the AIC manager, and to the nature, scale and complexity of its business. Moreover, where the AIC is a member of a group, such Policy shall also take into account any circumstances of which the AIC manager is or should be aware which may give rise to a conflict of interest arising from the structure and activities of other members of the group.

In summary, it is crucial that the Policy is not a one-size-fits-all blank slate, but is tailored to the needs and realities of the AIC in question; is applied by the AIC and all related parties; and above all – fulfils its purpose.