Regulation on Additional Organizational Requirements for Alternative Investment Fund Management Companies

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Hrvatska agencija za nadzor financijskih usluga, 10000 Zagreb, Franje Račkoga 6, p.p. 164, Hrvatska t: 01 6173 200, f: 01 4811 507, e: info@hanfa.hr, OIB: 49376181407, MB: 02016419, w: www.hanfa.hr PRAVILNIK O DODATNIM ORGANIZACIJSKIM ZAHTJEVIMA DRUŠTAVA ZA UPRAVLJANJE ALTERNATIVNIM INVESTICIJSKIM FONDOVIMA (Official Gazette, No. 25/19 and 27/26 – Unofficial Consolidated Text)

PART ONE GENERAL PROVISIONS Article 1. (OG 27/26) (1) To ensure proper and efficient operations, and to reduce operational risk, this Regulation prescribes in detail additional requirements for alternative investment fund management companies (hereinafter: AIFM) with regard to:

1. business continuity measures,
2. maintenance and retention of AIFM's business documentation,
3. appropriate management of the network and information systems of a medium-sized AIFM,
4. remuneration policies, and
5. additional information that the AIFM's website must contain. (2) To ensure efficient performance of their activities, this Regulation prescribes in detail the internal control systems for medium and small AIFMs.

Article 2. (OG 27/26) Terms used in this Regulation and the Act on Alternative Investment Funds (Official Gazette, Nos. 21/18, 126/19, 110/21, 83/23, 152/24 and 13/26, hereinafter: the Act) have the following meanings:

1. Hanfa is the Croatian Financial Services Supervisory Agency.
2. Remuneration encompasses all forms of payment and benefits, in cash or instruments, that an AIFM or the AIF itself (including profit shares) pays to an employee of the AIFM in exchange for services performed, which includes: – remuneration based on employment – salary and discretionary pension benefits, – remuneration based on employment – instrument-based remuneration, and – other remuneration.
3. Identified staff are categories of employees under Article 61(1) and (2) of the Act.
4. Instruments within remuneration are shares or partnership interests in AIFs managed by the AIFM, or corresponding equity interests (including, for AIFs issuing only shares, instruments linked to shares), depending on the legal form of AIFs, their rules or founding deeds, or instruments linked to shares or equivalent non-cash instruments.
5. Variable remuneration is an amount dependent on the performance of the employee, business unit, AIFM and/or the managed AIF. Variable remuneration also includes severance pay exceeding the statutory amount.
6. Discretionary pension benefit is remuneration agreed as a pension contribution that the AIFM agrees or allocates to an employee on a discretionary basis. This remuneration is not paid regularly but is determined and accumulated for pensions. Discretionary pension benefits are part of the employee's variable remuneration.
7. Malus is a contractual provision whereby the employee agrees that the AIFM is not obliged to pay or transfer rights over a part of deferred unpaid variable remuneration, or over the entire deferred unpaid variable remuneration, if the realization of previously assumed risks leads to impaired performance or poorer financial results for the AIFM, business unit, managed AIF, and the employee, where applicable.
8. Remuneration clawback is a contractual provision whereby the employee undertakes to return a specified amount of variable remuneration, whether paid or rights from instruments, if the realization of previously assumed risks leads to impaired performance or poorer financial results. This provision may be agreed for both deferred and non-deferred variable remuneration.
9. Retention period is the period during which the employee retains variable remuneration paid in instruments, or instruments that cannot be disposed of. The retention period begins upon transfer of rights from the instruments. If deferred remuneration parts are instruments, the retention period begins upon transfer of rights for each deferred part.
10. Assessment period is the period during which employee performance is evaluated and measured to determine remuneration levels.
11. Deferral period is the period during which variable remuneration is retained after the assessment period ends, and deferred remuneration is paid. The deferral period begins with payment of non-deferred variable remuneration or transfer of rights from instruments not subject to deferral. If the entire payment is deferred, the deferral period begins on the date variable remuneration is determined. The deferral period ends with payment of the last deferred variable remuneration part or final transfer of rights from instruments subject to deferral.
12. Vesting point is the moment when an employee receives payment and becomes the legal owner of the remuneration. Once vested, no subsequent (ex-post) adjustment can be made, except based on the remuneration clawback clause.
13. Delegated Regulation 231/2013 is Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012 supplementing Directive 2011/61/EU of the European Parliament and of the Council with regard to exemptions, general operating conditions, depositaries, leverage, transparency and reporting (Text with EEA relevance) (OJ L 83, 22. 3. 2013).
14. ICT risk refers to the probability that a specific threat exploiting information system resource vulnerabilities will have a negative impact on AIFM operations.

PART TWO BUSINESS CONTINUITY MEASURES Article 3. (1) The AIFM shall, taking into account the type, scale and complexity of its operations and the type of AIFs it manages, establish, implement, regularly assess and update, and document effective and appropriate policies, measures and procedures for ensuring business continuity. (2) Business continuity measures include:

1. procedures and actions in extraordinary circumstances,
2. secure storage of copies of all records and registers enabling uninterrupted performance of business processes necessary for continuous and appropriate service provision and AIFM activities in extraordinary circumstances,
3. timely restoration of data and functions, and timely resumption of service provision and AIFM activities when continuous and appropriate service provision and activities are not possible in extraordinary circumstances. (3) Business processes necessary for continuous and appropriate service provision and activities are AIFM processes where errors or omissions in execution would significantly harm:
4. continuous fulfillment of conditions and obligations prescribed by the Act or regulations adopted under the Act,
5. financial stability of the AIFM, or
6. continuity in service provision and activities. (4) The AIFM shall prescribe and apply measures and procedures to ensure timely and correct recording of transactions executed on behalf of the AIF, and redemption or issuance requests for AIF shares in the AIFM's information system, in accordance with Articles 58, 64, 65 and 66 of Delegated Regulation 231/2013. (5) Activities not considered business processes necessary for continuous and orderly activities under paragraph 3 may include:
7. providing advisory services to the AIFM, providing other services not part of the AIFM's operations, including legal advice, employee training, provision of premises and staff insurance,
8. standardized services, including market information services and price data provision.

PART THREE MAINTENANCE AND RETENTION OF BUSINESS DOCUMENTATION Maintenance and Retention of Business Documentation and Data Article 4. (1) All business documentation and data that the AIFM is required to prepare and collect in accordance with the Act and regulations adopted under the Act shall be retained for at least 5 years after the end of the financial year to which they relate, or the financial year in which the contractual relationship with the investor ended. (2) The AIFM shall retain business documentation and data from paragraph 1 for longer periods if required by the investment strategy of the AIF it manages. (3) The AIFM shall, upon Hanfa's request and for supervisory purposes, retain business documentation and data or part thereof for longer than the periods prescribed in paragraphs 1 and 2, with Hanfa determining the retention period based on the type of financial instrument or transaction. (4) The AIFM shall retain business documentation and data after the expiration of the operating authorization under Article 37 of the Act, within the periods prescribed in paragraphs 1 and 2. (5) The AIFM shall provide access to or deliver business documentation and data for the last 5 years of operations relating to transferred AIF management functions to another AIFM that took over these functions. Exceptionally, the AIFM transferring management shall provide access or deliver documentation and data for a period longer than 5 years if required by the AIF's investment strategy. (6) Business documentation and data from paragraph 1 shall be retained on a durable medium enabling data storage such that they are accessible to Hanfa upon request at all times, in a format and manner meeting the following conditions:

1. Hanfa must be able to access documentation and data, as well as identify all key stages of processing each transaction,
2. it must be possible to easily identify all corrections or amendments, as well as the content of documentation and data prior to such corrections or amendments,
3. documentation and data must be protected against unauthorized access and potential recording losses, and stored in a manner ensuring record durability,
4. manipulation of documentation and data or any modification thereof must be prevented. (7) The AIFM shall keep copies of all data and documentation outside its business premises, in the manner and timeframes prescribed in paragraphs 1–4.

Maintenance of Documentation Regarding Remuneration Policy Article 5. The AIFM shall, where appropriate, ensure the integrity of documentation related to employee remuneration, which includes at least the remuneration policy and possible procedures for its implementation, decisions of the supervisory board and management regarding employee remuneration, as well as the methodology and results of performance measurements in determining variable remuneration for identified staff.

PART FOUR APPROPRIATE MANAGEMENT OF NETWORK AND INFORMATION SYSTEMS OF MEDIUM-SIZED AIFMS Article 6. (OG 27/26) (1) A medium-sized AIFM shall prescribe, implement and regularly update a network and information system security policy. The security policy must contain principles, measures and procedures ensuring confidentiality, integrity and availability of data processed in the AIFM's network and information system. (2) A medium-sized AIFM shall prescribe, implement and regularly update internal acts governing the appropriate use of its network and information system. (3) A medium-sized AIFM shall prescribe, implement and regularly maintain a disaster recovery plan. The disaster recovery plan must contain measures and procedures for recovering interrupted business systems within a reasonable timeframe. (4) A medium-sized AIFM shall, within its risk management system, establish an appropriate framework for managing ICT risks enabling effective identification, assessment and handling of ICT risks, including risks arising from contractual relationships with third parties.

PART FIVE REMUNERATION POLICY Article 7. (1) In a manner and to an extent appropriate considering size, internal organization, and type, scale and complexity of operations performed by the AIFM, when establishing and implementing its remuneration policy, the AIFM shall be guided by the remuneration policy requirements of Article 62 of the Act. (2) Remuneration determination procedures must be clear, well-documented and internally transparent. (3) When drafting and adopting the remuneration policy, it is necessary to consider overall corporate principles and AIFM management structure, at least:

1. the distinction between operational and control functions,
2. expertise and independence requirements of control functions and AIFM management members,
3. the role of internal committees and organizational units of the AIFM, including the remuneration committee where applicable,
4. measures and procedures for protecting and preventing conflicts of interest,
5. internal reporting system,
6. rules on personal transactions between relevant persons. (4) Control functions and key committees within the AIFM's supervisory board, where applicable, or other relevant committees in case the AIFM has no supervisory board, shall be involved in adopting and internally reviewing compliance with the remuneration policy. (5) When internal review of the remuneration policy identifies deficiencies regarding its operation or compliance, the AIFM's supervisory board shall ensure timely establishment of a compliance and adjustment plan for the remuneration policy, acting in accordance with review results, which also applies to relevant control functions. (6) When an AIFM established as a joint-stock company has a management board, provisions of this Regulation regarding the supervisory board apply accordingly to non-executive directors of the management board. (7) When an AIFM established as a limited liability company has no supervisory board, provisions of this Regulation regarding the supervisory board apply accordingly to the general meeting. (8) The AIFM shall take all necessary actions to comply with:
7. remuneration policy guidelines issued by European supervisory authorities in accordance with their powers, which are binding under Article 3(2) of the Act, and
8. Hanfa's guidelines on applying proportionality principles regarding remuneration policies of investment fund management companies and the exemption for small remuneration, adopted under Article 15(4) of the Act on the Croatian Financial Services Supervisory Agency (Official Gazette Nos. 140/05 and 12/12).

Remuneration Committee Article 8. (1) AIFMs that are significant by size, organizational structure, nature, scale and complexity of operations performed or size of AIFs they manage shall establish a remuneration committee. (2) The remuneration committee must have at least two members, one of whom is the chairman. (3) Members of the remuneration committee, composed in accordance with Article 63(2), Article 63(4) of the Act and paragraph 2 of this article, must have sufficient knowledge and professional experience in risk management and control functions, particularly regarding mechanisms aligning remuneration structure with the AIFM's risk profiles and capital. (4) The remuneration committee may use any expert resources it deems appropriate, including external advice. (5) When discussing and deciding on remuneration of an AIFM management member, that management member shall not participate in the remuneration committee meeting. (6) The remuneration committee, within the tasks under Article 63(3) of the Act, particularly performs the following responsibilities for which it is responsible:

1. providing support and advising AIFM management in drafting and implementing the remuneration policy under Article 61 of the Act,
2. providing support to the AIFM supervisory board in adopting and regularly reviewing fundamental principles of the remuneration policy under Article 62(1)(c) of the Act,
3. making recommendations to the supervisory board regarding management remuneration and preparing decisions of the AIFM supervisory board under Article 62(1)(c) subpoints 1 to 3 of the Act,
4. preparing decisions of the AIFM supervisory board regarding employee remuneration, including decisions affecting AIFM or AIF risk exposure and risk management.
5. providing support and advising the AIFM supervisory board in internal review of compliance with implementation of the remuneration policy under Article 62(1)(d) of the Act,
6. making proposals to the AIFM supervisory board regarding requests for external and internal consulting services in the field of remuneration policy and its implementation, considering that the Remuneration Committee should have access to advisors whose advice is independent of advice provided by senior management or intended for them,
7. reviewing appointment of external advisors for remuneration that the supervisory function decides to engage for advice or assistance,
8. conducting at least once a year documented and formal testing of several different scenarios for the purpose of testing the impact of future external and internal events on remuneration policy and implementation, as well as conducting retrospective testing,
9. cooperating with and appropriately involving control and other relevant functions whose activities may affect establishment and proper functioning of the remuneration policy in the process of establishing and implementing it,
10. consulting the AIFM supervisory board on remuneration of persons responsible for control functions and directly controlling remuneration of those persons. (7) AIFM management shall ensure the remuneration committee access to all data and information relating to the decision-making process on establishing and implementing the remuneration policy, including those from control functions and risk management functions.

Significant AIFMs Article 9. (OG 27/26) (1) A significant AIFM under Article 63(1) of the Act is considered:

1. An AIFM meeting two of three listed conditions: a) average total revenues of the AIFM for the previous three financial years shown in audited financial statements exceed 5,500,000.00 euros, b) the AIFM has 15 or more employees, c) total assets of investment funds managed by the AIFM at the end of the financial year shown in audited financial statements exceed 550 million euros, or
2. one declared significant by Hanfa by decision based on size, internal organization and nature, scale and complexity of operations. (2) In calculating total assets of investment funds under paragraph 1(1)(c), assets of AIFs and UCITS funds managed by that AIFM are included.

PART SIX ADDITIONAL INFORMATION THAT THE WEBSITE OF AN AIFM MANAGING AN AIF WITH PUBLIC OFFERING MUST CONTAIN Article 10. (OG 27/26) The website of an AIFM managing an AIF with a public offering, in addition to data and information under Article 67(1) and (2) of the Act, must contain:

1. material changes in the AIFM's ownership structure,
2. changes in the management and supervisory board of the AIFM,
3. data on membership of AIFM employees in supervisory boards of commercial companies, with special note of whether managed AIFs hold financial instruments of those companies in their portfolios, no later than 10 days after the event occurs,
4. for large AIFMs, details of current remuneration policy, including description of calculation methods, identity of persons responsible for awarding remuneration, and composition of the remuneration committee, if such a committee exists,
5. where applicable, publicly published decisions by Hanfa on: – temporary or permanent withdrawal of operating authorization, – issuance of public reprimand to the AIFM (publication of decision operative part), – withdrawal of consent for performing the function of AIFM management member (publication of decision operative part),
6. where applicable, notice on initiation of pre-bankruptcy settlement, bankruptcy or liquidation proceedings for the AIFM,
7. if in certain periods fees in the AIF are charged at amounts different from those in the rules or prospect of the AIF, where applicable, it is necessary to state periods and fee amounts,
8. immediately after conclusion, data on all transactions for purchase and sale of securities outside regulated markets executed by the AIFM on behalf of the AIF with a related party.

PART SEVEN INTERNAL CONTROL SYSTEM OF MEDIUM-SIZED AIFMS Article 11. (OG 27/26) (1) Internal control mechanisms are measures, policies and procedures ensuring achievement of set AIFM objectives, asset protection, risk control, compliance with relevant regulations and internal rules and procedures, accuracy of data in AIFM documents, timely publication or delivery of data where applicable, and economical and efficient use of resources. (2) Within internal control mechanisms, a medium-sized AIFM shall, considering the proportionality principle and activities performed:

1. establish, assess and monitor appropriate policies and procedures to ensure operations in compliance with the Act and regulations adopted under it, as well as other relevant regulations,
2. establish an effective risk management system to appropriately identify, measure, manage and monitor all risks relevant to investment strategies of AIFs it manages.

Article 12. (OG 27/26) (1) A medium-sized AIFM shall, when internally allocating functions, define responsibilities of senior management and persons performing supervisory functions, where applicable, in accordance with provisions of the Act and regulations adopted under it. (2) A medium-sized AIFM shall ensure that senior management and persons from paragraph 1:

1. are responsible for implementing investment strategies for each AIF managed by the medium-sized AIFM, as stated in the rules and, where applicable, prospect of the AIF,
2. supervise approval of investment strategies for each AIF managed by the medium-sized AIFM,
3. monitor and periodically confirm that investment strategies and risk exposure limits for each AIF managed by the medium-sized AIFM are properly and efficiently implemented and respected,
4. approve and periodically assess the appropriateness of internal procedures for making investment decisions for each AIF managed by the medium-sized AIFM, ensuring these decisions align with approved investment strategies, and
5. approve and periodically assess policies, procedures and risk management measures, procedures and techniques for applying risk management policies including the risk exposure limit system for each AIF managed by the medium-sized AIFM. (3) Persons from paragraph 1 and, as necessary, the management body or supervisory function of the medium-sized AIFM where applicable, shall monitor and periodically assess effectiveness of policies, measures and procedures prescribed for monitoring compliance of medium-sized AIFM operations with relevant regulations, and take appropriate measures to resolve identified deficiencies and irregularities in operations. (4) A medium-sized AIFM shall ensure that a report on achievement of the business plan for the medium-sized AIFM is prepared and properly recorded regularly, at least once a year. (5) The report from paragraph 4, relating to achievement of the annual work plan, must contain:
6. description of risk management and compliance systems with relevant regulations, particularly regarding AIF investment decisions managed by the medium-sized AIFM,
7. subject and scope of work and controls performed by the small AAF during the period covered by the report,
8. summary of key findings from performed controls, audits and/or other activities,
9. assessment of adequacy and effectiveness of risk management, including information on risk exposures,
10. identified illegalities and non-compliance with systems and procedures of the medium-sized AIFM if found during the period covered by the report,
11. deficiencies and weaknesses in operations or risk management if found during the period covered by the report,
12. proposals, recommendations and deadlines for resolving identified illegalities and irregularities as well as deficiencies and weaknesses,
13. responsible persons.