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NED speaks with Ronan Daly

NED speaks with Ronan Daly

“Is there a conflict of interest in a fund director also acting as senior representative of the administrator? Of course there is”


Up until ten years ago most administrators provided directors to their fund clients. It was seen as a core part of an administrator’s offering and was often demanded by clients. But high profile blow ups caused many administrators to review their directorship lists. I went through this process in response to the Manhattan Fund scandal. I had built up a serious number of groups over the years as a consequence of my position at Hemisphere and realized that I needed to be more selective. Since 2000 there have been a huge number of takeover deals in fund administration and one of the consequences of these deals is that funds that had previously been served by smaller, offshore often owner managed firms were now being looked after by large international banks. The new owners were horrified to discover that their new subsidiaries were providing directors to funds and quickly embarked on a programme of resignation from board positions.

The reason cited by larger administration firms for pulling their staff off boards was conflict of interest. In my view, the true reason for this move is simple reduction of liability. The large bank administrators worry– quite understandably – that their appointee on a board will be a lightning rod for litigators looking for deep pockets in the event of hedge fund failure or fraud.

So, is there a conflict of interest in a fund director also acting as senior representative of the administrator? Of course there is. Just as there is also a clear conflict of interest when a senior member of a fund management firm sits on the board of a fund which his or her firm manages.

The key to the conflict is making sure it is clearly disclosed in the fund’s offering materials and related documents and that the conflict is carefully and effectively managed when it arises. In practice, the conflict arises when the administration firm’s performance and remuneration is being discussed. It is vital that the administrator related director is excluded from these discussions and is not permitted to vote on any proposals.

The conflict also arises– more subtly – when the time comes for the board to challenge actions taken by the fund manager. The concern is that too many administrator related directors have too much to lose in administration fees to be seriously independent of the manager. This issue needs to be looked at in detail in each case.

The more interesting question is whether the individual who also works for the administrator can add value to the particular board in question. The answer depends on the individual (his background, experience, qualifications, skills etc) and the make up of the other directors on the board. With regard to the individual, I should say that I have worked in fund administration for 18 years but can only think of a small handful of people who I would see as having the right aptitude, experience and skills to act as a fund director.

The life of the non exec fund director is a curious mix of humdrum administrative tasks (reviewing and signing vast amounts of documentation), occasional interpersonal interaction (attending board meetings, meeting the fund manager and other service providers) and assessing market and regulatory conditions, actions taken or proposed to be taken by fund managers and other service providers and having the judgment to step in to situations and raise concerns and provide solutions when times get tough.

This means that directors have to be nimble and confident in their thinking and at times it means that they should not be afraid of confrontation with the fund manager. Some directors suggested by fund administrators will fit the bill; many will not.

The other crucial factor to look at when considering whether to have an appointee of an administrator on a board is the general make up of that board of directors.

An ideal board would comprise individuals with different backgrounds to cover areas such as investment issues, compliance, regulation and operations. Therefore, a board member with an administration background would probably not add significant value to a board comprising people with similar experience.

I believe that having the right person from an administration firm sitting on a diverse board of independently minded directors can significantly improve the levels of discourse and decision making. When handled correctly, it can also lead to a far higher degree of accountability and transparency regarding administration matters and can give the board valuable insights into the practices of other funds, general market and industry trends, regulatory and reporting issues and investor concerns and feedback.

-Ronan Daly, Chairman, Centaur 

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