Following the publication of the latest summary of its SPOT inspections, the Autorité des Marchés Financiers (AMF) has reiterated the applicable regulations and its expectations regarding the governance structure and the role of executives in portfolio management companies (sociétés de gestion de portefeuille – SGP).
As emphasized by the AMF, it is important to remember that the principle of proportionality is particularly applicable to this topic. This SPOT inspection summary has the merit of reiterating these useful fundamentals.
Semantic clarification regarding the term of SGP “executives” (dirigeants)
The AMF reminds that this term is not defined and may refer to several people such as management members, governing bodies, the board of directors, or the effective managers.
For reference, regarding the latter two, they are mentioned in Article L.532-9, II, 4° of the Monetary and Financial Code, stating that every SGP must be “effectively run by at least two persons who possess the necessary integrity and adequate experience in their functions to ensure sound and prudent management.”
The main regulatory obligations and regulator expectations can be summarized into four categories.
The organization of SGP governance
The regulator expects the governance of SGP to be clearly defined and properly documented. In this sense, SGP are legally required to:
- define the composition and distribution of responsibilities between their governing bodies and oversight functions (when this distinction exists, depending on the legal form of the SGP).
- establish a clear organizational structure, including the committee framework implemented within the SGP (committee composition, member responsibilities, and meeting frequency must be determined).
- appoint a person responsible within their management for implementing the AML-CFT framework.
- periodically evaluate the effectiveness of their compliance and internal control systems involving executives (e.g., periodic meetings of a compliance, internal control, and risk monitoring committee issuing recommendations for policy and practice improvements).
Moreover, the regulator pays particular attention to the training of governing bodies and members of its oversight function. Indeed, it considers it a good practice for SGP to assess the training needs of these individuals.
Defining and supervising the implementation of internal policies and procedures
Regarding the formalization and supervision of internal policies and procedures, the AMF particularly emphasizes the role and essential responsibilities of SGP executives concerning four types of these essential responsibilities:
- investment policies and strategies,
- risk management policy,
- remuneration policy, and
- evaluation policy.
Regulations require each of these policies and strategies to be regularly adopted and reviewed by SGP executives. Regarding the remuneration policy, it is important to note that the SGP’s governing body in its oversight role must adopt and regularly review the policy’s general principles and is responsible for its implementation (this is subject to at least an annual central and independent internal evaluation).
The regulator identifies the following as good practices:
- establishing a file or tracking tool for the update date of policies or internal procedures and implementing an alert system if the review frequency is exceeded,
- specifying in the policies and procedures the person responsible for validation and the review frequency,
- implementing a process to inform staff about updates to relevant policies and procedures and tracking acknowledgments of receipt for changes made in the procedural corpus.
Conversely, failing to provide a communication channel for key committee management decisions to the effective managers is considered a practice to avoid.
Receipt of reports on the implementation and verification of compliance function effectiveness
SGP executives must receive written reports on the implementation of investment strategies, compliance, internal audits, and risk management (for the last three, the SGP governing bodies must receive such reports at least once a year). This regulatory obligation should be implemented in all SGP; however, the AMF understands that these reports may vary in granularity (examples: internal committee presentation slides, committee meeting minutes, summary sheets, formalized reports) depending on the size of the SGP.
Beyond the annual obligation to produce a report for the governing bodies, the following practices were particularly appreciated by the AMF:
- regular presentations by the SGP’s RCCI (head of compliance and internal control) of the key points of their reports to the oversight function,
- establishing tools allowing executives to access real-time monitoring, both ongoing and periodic, of control plan progress and results, and
- validation by executives of mandatory reports to be addressed to the AMF.
Taking appropriate measures in response to potential incidents or failures
The AMF reminds that, in the context of the entry into force, last January 17th, of the Regulation (EU) 2022/2554 of the European Parliament and Council of 14 December 2022 on the digital operational resilience of the financial sector (Digital Operational Resilience Act – DORA), the obligations pertaining to SGP on informing the AMF of a significant incident’s occurrence have been clarified.
In this context, SGP effective managers are legally required to:
- promptly inform the AMF of incidents whose occurrence is likely to result in a loss or gain for the SGP, a cost related to its civil or criminal liability, administrative penalties, or reputational damage,
- promptly notify the AMF of any event preventing the SGP from meeting its licensing conditions, and
- provide the AMF with an incident report indicating the nature of the incident, the measures taken following its occurrence, and the initiatives undertaken to prevent recurrence.
If they have not already done so, this AMF publication should prompt SGP executives to question the robustness of their company’s current internal governance and clarify it as soon as possible in case of persistent uncertainty.
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