Circulation No. 16/CREPMF/2022 on Rules Applicable to Collective Investment Undertakings Regarding Conflicts of Interest and Conduct Rules

UNION MONETAIRE OUEST AFRICAINE crepmf CONSEIL REGIONAL DE L'EPARGNE PUBLIQUE ET DES MARCHES FINANCIERS

CIRCULAIRE N°16/CREPMF/2022

ON THE RULES APPLICABLE TO COLLECTIVE INVESTMENT UNDERTAKINGS REGARDING CONFLICTS OF INTEREST AND CONDUCT RULES

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The General Secretariat of the Regional Council for Public Savings and Financial Markets (CREPMF) reminds authorized Collective Investment Undertakings (OPC) and Management Companies for OPCs (SGO) on the regional financial market of the West African Monetary Union (UMOA) that, in accordance with current regulations, they must comply with the provisions of this Circulation, which specifies the procedures, mechanisms, as well as structures and organizational conditions designed to minimize conflicts of interest. It also specifies the implementation measures for conduct rules to ensure that the Management Company for OPCs fulfills its obligations.

For the purposes of this Circulation, the term Instruction refers to Instruction No. 66/CREPMF/2021 regarding Collective Investment Undertakings and their Management Companies on the regional financial market of the UMOA.

I. CONFLICTS OF INTEREST

1.1 Criteria for detecting conflicts of interest

In order to detect the types of conflicts of interest likely to arise during the provision of services and activities, whose existence may adversely affect the interests of an OPC, Management Companies for OPCs take into consideration, as minimum criteria, the possibility that the Management Company for OPCs, a relevant person, or a person directly or indirectly linked to the Management Company for OPCs through a control relationship, finds itself in any of the following situations, whether resulting from the exercise of OPC management activities or other:

a) the Management Company for OPCs or such person is likely to realize a financial gain or avoid a financial loss at the expense of the OPC;

b) the Management Company for OPCs or such person has an interest in the outcome of a service provided to the OPC or another client, or of an activity carried out for their benefit, or of a transaction executed on behalf of the OPC or another client, which does not coincide with the interest of the OPC regarding that outcome;

c) the Management Company for OPCs or such person is incentivized, for financial or other reasons, to favor the interests of another client or group of clients over those of the OPC;

d) the Management Company for OPCs or such person carries out the same activities for the OPC as for one or more clients who are not OPCs;

e) the Management Company for OPCs or such person receives or will receive from a person other than the OPC, an advantage in relation to the OPC management activities carried out for the benefit of the OPC, in the form of money, goods, or services, other than the commission or fees normally charged for this service.

When Management Companies for OPCs detect the types of conflicts of interest, they take into consideration:

a) the interests of the Management Company for OPCs, including those arising from membership in a group or the provision of services or exercise of activities, the interests of clients, and the obligations of the Management Company towards the OPC;

b) the interests of two or more managed OPCs.

1.2 Conflicts of interest policy

Management Companies for OPCs establish, implement, and keep operational an effective conflicts of interest management policy. This policy is set in writing and is appropriate, taking into account the size and organization of the Management Company for OPCs as well as the nature, scale, and complexity of its activity.

When the Management Company for OPCs belongs to a group, the policy also takes into account circumstances that are known or ought reasonably to be known by the Management Company for OPCs, which may give rise to a conflict of interest resulting from the structure and activities of other group members.

The established conflicts of interest policy must, in particular:

a) identify, in relation to the OPC management activities carried out by or on behalf of the Management Company for OPCs, situations that give rise to or are likely to give rise to a conflict of interest involving a significant risk of adverse impact on the interests of the OPC or one or more other clients;

b) define the procedures to be followed and measures to be taken in order to manage these conflicts.

1.3 Independence in conflict management

The procedures and measures provided for in point 1.2.b) must be designed to ensure that relevant persons engaged in different activities involving a conflict of interest carry out these activities with an appropriate degree of independence, taking into account the size and activities of the Management Company for OPCs and the group to which it belongs, as well as the importance of the risk of prejudice to client interests.

The procedures to be followed and measures to be adopted in accordance with point 1.2.b) include, to the extent necessary and appropriate for the Management Company for OPCs to ensure the required degree of independence:

a) effective procedures to prevent or control the exchange of information between relevant persons engaged in OPC management activities involving a risk of conflict of interest when the exchange of this information may adversely affect the interests of one or more clients;

b) separate monitoring of relevant persons whose main functions are to carry out OPC management activities on behalf of clients or investors, or to provide services to them, when the interests of these clients represent different interests, including those of the Management Company, which may conflict;

c) the elimination of any direct link between the remuneration of relevant persons primarily exercising a given activity and the remuneration of other relevant persons primarily exercising another activity, or the revenues generated by these other persons, when a conflict of interest is likely to arise in relation to these activities;

d) measures aimed at preventing or limiting the exercise by any person of inappropriate influence on how a relevant person conducts OPC management activities;

e) measures aimed at preventing or controlling the simultaneous or consecutive participation of a relevant person in several distinct OPC management activities when such participation is likely to harm the proper management of conflicts of interest.

1.4 Management of activities giving rise to material conflicts of interest

Management Companies for OPCs maintain and regularly update a register recording the types of OPC management activities carried out by or on behalf of the Company for which a conflict of interest involving a material risk to the interests of one or more OPCs or other clients has occurred, or, in the case of a continuous OPC management activity, is likely to occur.

When the organizational or administrative measures taken by a Management Company for OPCs are insufficient to guarantee, with reasonable certainty, that the risk of adversely affecting the interests of the OPC or its unit holders or shareholders will be avoided, the governing bodies or competent internal body of the Management Company for OPCs must be promptly informed so that they can take any necessary measures to ensure that the Management Company for OPCs acts in all cases in the best interests of the OPC and its unit holders or shareholders.

The Management Company for OPCs informs investors of the situations referred to in paragraph 2 above by means of any appropriate durable medium and states the reasons for its decision.

1.5 Strategies for exercising voting rights

Management Companies for OPCs develop appropriate and effective strategies determining when and how voting rights attached to instruments held in managed portfolios are exercised, so that these rights benefit exclusively the concerned OPC.

II. CONDUCT RULES

2.1 Obligation to act in the best interests of OPCs and their unit holders or shareholders

Management Companies ensure that unit holders or shareholders of the OPCs they manage are treated fairly.

Management Companies for OPCs refrain from placing the interests of any group of unit holders or shareholders above those of another group of unit holders or shareholders.

Management Companies for OPCs implement appropriate policies and procedures to prevent any malpractice that can reasonably be assumed to adversely affect the stability and integrity of the market.

Management Companies for OPCs ensure the use of fair, correct, and transparent pricing models and valuation systems for the OPCs they manage in order to fulfill their obligation to act in the best interests of unit holders or shareholders. Management Companies must be able to demonstrate that OPC portfolios have been accurately valued.

Management Companies for OPCs act in a manner to prevent the imposition of undue costs on OPCs and their unit holders or shareholders.

2.2 Duty of diligence

Management Companies for OPCs ensure that the selection and continuous monitoring of investments are carried out with great diligence and in the interest of OPCs and market integrity.

Management Companies for OPCs have adequate knowledge and understanding of the assets in which OPCs are invested.

Management Companies for OPCs develop written policies and procedures regarding the diligence they exercise and implement effective mechanisms ensuring that investment decisions made on behalf of OPCs are executed in accordance with the objectives, investment strategy, and risk limits of these OPCs.

When Management Companies for OPCs implement their risk management policy, they develop forecasts and conduct analyses regarding the contribution of the investment to the composition, liquidity, and risk and return profile of the OPC portfolio before making said investment. These analyses must be carried out based on reliable and up-to-date information, both quantitatively and qualitatively.

Management Companies for OPCs exercise all due competence, caution, and diligence when they conclude, manage, and terminate agreements with third parties relating to the exercise of risk management activities. Before concluding such agreements, Management Companies for OPCs take necessary measures to ensure that the third party possesses the necessary skills and capabilities to carry out risk management activities reliably, professionally, and efficiently. The Management Company for OPCs establishes methods to continuously evaluate the quality of services provided by the third party.

2.3 Information obligation regarding the execution of subscription and redemption orders

Once Management Companies for OPCs or structures responsible for managing an OPC's liabilities have executed a subscription or redemption order from a unit holder or shareholder, they transmit to the latter a notice on a durable medium confirming the execution of the order.

The notice referred to in paragraph 1 contains the following information, as applicable:

a) identification of the management company;

b) name or other designation of the unit holder or shareholder;

c) date and time of order receipt and payment method;

d) execution date;

e) identification of the OPC;

f) nature of the order (subscription or redemption);

g) number of units or shares concerned;

h) unit value at which the units were subscribed or redeemed;

i) date of the reference value;

j) gross value of the order, including subscription fees, or net amount after deduction of redemption fees;

k) total amount of commissions and fees charged, and, at the investor's request, their breakdown by item.

2.4 Execution of trading decisions on behalf of the managed OPC

Management Companies for OPCs act in the best interests of the OPCs they manage when they execute trading decisions or pass trading orders for execution with a third party on behalf of such OPC, in the context of managing their portfolios.

Management Companies take all reasonable measures to obtain the best possible result for OPCs taking into account cost, speed and likelihood of execution and settlement, size, nature of the order, or any other consideration relating to order execution.

For these purposes, Management Companies for OPCs establish and implement a policy enabling them to comply with the obligation referred to in paragraph 1. Management Companies regularly monitor the effectiveness of the established policy.

2.5 Order handling

Management Companies for OPCs establish and implement procedures and provisions that allow the rapid and fair execution of portfolio operations on behalf of OPCs.

The procedures and provisions implemented by Management Companies for OPCs meet the following requirements:

a) they ensure that orders executed on behalf of OPCs are recorded and allocated promptly and accurately;

b) they execute comparable orders placed by OPCs in the order of their arrival and with promptness, unless the nature of the order or prevailing market conditions make this impossible, or if the interests of the OPC require otherwise.

Financial instruments and cash amounts received in settlement of executed orders are promptly and correctly transferred to the account of the concerned OPC.

Management Companies for OPCs refrain from abusively exploiting information regarding orders placed by OPCs pending execution and take all reasonable measures to prevent abusive use of this information by any of these relevant persons.

2.6 Aggregation and allocation of trading orders

Management Companies for OPCs are not authorized to aggregate the execution of orders placed by an OPC with those of other OPCs or for own account, unless the following conditions are met:

a) It is unlikely that aggregating orders will have an overall negative impact on any of the OPCs or clients whose orders are aggregated;

b) an order allocation policy is established and applied, which provides in sufficiently precise terms for the fair allocation of orders, clarifying in particular, in each case, how volume and price of orders determine allocations and the treatment of partial executions.

In cases where a Management Company for OPCs aggregates an order placed by an OPC with one or more orders from other OPCs and where the thus aggregated order is partially executed, it allocates the corresponding operations in accordance with its order allocation policy.

2.7 Safeguarding the interests of OPCs

Management Companies for OPCs are not considered to act in an honest, fair, and professional manner that serves the best interests of an OPC when, in connection with investment management and administration activities carried out for the benefit of the OPC, they pay or receive remuneration or commission, or provide or receive a non-monetary advantage, other than the following:

a) remuneration, commission, or non-monetary advantage paid or provided to the OPC or by it, or to a person acting on behalf of the OPC or by that person;

b) remuneration, commission, or non-monetary advantage paid or provided to a third party or by that person, or to a person acting on behalf of this third party or by that person, when the following conditions are met:

• The OPC is clearly informed of the existence, nature, and amount of the remuneration, commission, or advantage, or, when this amount cannot be established, its calculation method. This information must be provided in a complete, accurate, and understandable manner before the concerned service is rendered;
• the payment of remuneration or commission, or the granting of non-monetary advantage, must aim to improve the quality of the service provided and must not adversely affect the obligation of the Management Company for OPCs to act in the best interests of the OPC;

c) appropriate remuneration that enables or is necessary for the provision of the concerned services, including custody fees, foreign exchange and settlement commissions, regulatory taxes, and procedural fees, which by their nature are not incompatible with the obligation incumbent upon the Management Company to act in an honest, fair, and professional manner that serves the best interests of the OPC.

This Circulation takes effect from its publication date.

Made in Abidjan, on 03 JAN 2022

The General Secretary Ripert BOSSOUKPE