Bank of Italy and Consob, Supervisory Guidelines for Simple Investment Companies - public consultation

• contains a survey of the main provisions applicable to SiS;
• defines some supervisory guidelines, which represent the expectations of Consob and the Bank of Italy on how the SiS will have to comply with the new regulations; and
• indicates the procedure to be applied in the event of non-temporary exceeding of the equity limit of Article no. 1, letter i-quater, of the Consolidated Law on Finance.

Background

As background to the public consultation, on 30 April 2019 the Council of Ministers approved the text of DL n.34 ("Growth Decree") drawn up by the MEF and the MISE and closely related to the Economic and Financial Document ("DEF"), in which a series of fiscal measures were proposed for the economic growth of the country and the revival of private investment.

In this regard, art. 27 of the Growth Decree, which amended the legislative decree of 24 February 1998, n. 58 (referred to as the Consolidated Law on Finance or “TUF”), defines and regulates a SiS as a new type of Italian closed-ended collective investment scheme (UCI) established in the form of an investment company with fixed capital shares (“Sicaf”).

In particular, art. 1, paragraph 1, lett. i-quater of the TUF defines the SiS as the Italian alternative investment fund ("FIA"), which has been set up in the form of a Sicaf to manage assets in compliance with the following conditions:

• shareholder equity does not exceed EUR 25 million;
• the exclusive object of the activity is represented by the direct investment of the assets raised in SMEs not listed on regulated markets that are in the experimentation, establishment and start-up phases;
• does not use leverage; and
• has a share capital at least equal to the amount specified by the civil code for a S.p.A.

In particular, due to the SiS's small size and operational constraints, the TUF outlines a simplified regime for the SiS that originates from the discretion granted to member states by the EU's AIFM Directive (Directive 2011/61) to define the roles of the applicable regime managers whose activities do not exceed certain thresholds (i.e. managers below threshold).

Therefore, taking this into account, while considering the need for SiS to have adequate governance and a control system to ensure healthy and prudent management and compliance with applicable provisions, art. 35- undecies, paragraph 1-bis of the TUF states that certain prudential rules do not apply to the SiS as adopted by the Bank of Italy and Consob pursuant to article 6, paragraphs 1, 2 and 2-bis of the TUF (with the exception of the provisions dictated by Consob regarding the marketing of UCITS).

To encourage the uniform and correct application of the new regulation, however, the Guidelines under discussion have been prepared for Authorities to provide intermediaries with some clarification on the regulatory framework applicable to SiS and the methods they should use to comply with the new discipline.

Taking into account the nature of a SiS's customers (i.e. professional or retail investors) and their protection needs, the Guidelines address:

• the system of governance and control;
• prudential provisions (including professional liability insurance) and decision-making;
• the handling of complaints and conflicts of interest.

Before analysing the Guideline's main contents, it should be remembered that they are not mandatory and that a SiS has the right to communicate to the Bank of Italy during the authorisation phase and to the Bank of Italy and Consob on a periodic basis through reports on organisational structures and any intention to adopt measures other than those in the Guidelines in order to comply with applicable regulations.

The regulatory framework in the Guidelines applicable to a SiS – with reference to national regulations although not expressly regulated or derogated from Articles 1, paragraph 1, lett. i-quater, and 35-undecies, paragraphs 1-bis, 1-ter and 1-quater of the TUF, the SiS – is subject to the same discipline applicable to SICAFs (referred to in Part II, Title III, of the TUF on Management collective savings and related implementing provisions), which sets rules and principles for sound and prudent business management and for the protection of investors. The Guidelines also contain all the secondary implementation rules for those TUF provisions applicable to SiS, although managers should remember that they are also required to comply with regulations on anti-money laundering and the fight against terrorist financing.

As for the Community matrix measures directly applicable in EU member states, a SiS – given that its marketing is aimed at retail investors – is governed by Regulation (EU) no. 1286/2014 of 26 November 2014 (so-called PRIIPs Regulation) and related implementation regulation as well as the Prospectus Regulation [(ii) Regulation (EU) 2017/1129 of 14 June 2017] and related implementation regulations.

With reference to the content of the Guidelines, its main provisions grouped by macro-area include:

(i) A system of governance and control

The Guidelines clarify the role and responsibility of corporate bodies and provide indications on the risk management and internal control system of a SiS, stressing that this system should be proportionate to the organisational, dimensional and operational complexity of the individual UCI.

In particular, for a SiS – like managers below the threshold – an internal audit function does not need to be established, but it is necessary to centralise management pertaining to risk and compliance control in a single permanent and independent control function.

Alternatively, a SiS has the right to assign control functions to a third party with a proven track record for professionalism, integrity and independence.

In addition, the Guidelines note that in terms of the confidentiality required by "professional" investors, a SiS could benefit from further simplifications and less specific corporate control.

For this purpose, the Guidelines specify that a reserved SiS should identify at least one component with control powers within the management body that is not the recipient of other powers that affect its autonomy.

Finally, the Guidelines state ways in which these managers can use the reduced complexity and size of a SiS to delegate certain essential or important operational functions to third parties who meet requirements of professionalism, integrity and independence.

In particular, the Guidelines specify that a SiS should delegate portfolio management only to intermediaries authorised to provide collective management or portfolio management services.

In this regard a SiS should be able to effectively control the delegated function at any time, give instructions to a service provider and revoke an assignment immediately to protect the interests of customers.

In regard to the delegation of functions via contracts, a SiS should identify the minimum guaranteed level of services and ensure that Supervisory Authorities are able to access the systems of any third-party service provider.

(ii) Prudential forecasts

Pursuant to art. 35-undecies, paragraph 1-bis, of the TUF, the Guidelines state that a SiS must ensure that potential risks deriving from its professional activity are adequately covered by professional liability insurance.

In this regard, the Guidelines point out that the need for professional liability insurance is set down in art. 15 of the delegated regulation (EU) 231/2013.

Regarding prudential discipline, the Guidelines specify that a SiS, in line with the discipline on the collective management of savings, should exercise risk containment and fractionation. With specific reference to a non-reserved SiS, the Guidelines suggest that intermediaries adopt certain limits on the concentration of investments that ensure a risk distribution that is at least equivalent to the distribution resulting from the application of the national regulation on closed AIFs not reserved for professional investors.

The Guidelines also contain clarifications for evaluating the assets in which a SiS invests, for requesting the definition (in accordance with applicable accounting principles) of assessment policies and for the procedures regarding purely illiquid assets subject to a SiS investment.

(iii) Behavioral forecasts

In this regard, the Guidelines expressly refer to art. 35-decies of the Consolidated Law on Finance, which sets down that SICAFs must manage their assets with diligence, fairness and transparency and in the best interests of the managed UCITS, the participants and the integrity of the market. They must organise themselves in a way that minimises the risk of conflicts of interest between managed assets. In situations of conflict, they must ensure the fair treatment of managed UCIs.

The Guidelines emphasise that the correct performance of SiS portfolio management activity cannot be separated from:

• the acquisition of information on investable assets in order to ensure knowledge and understanding of the same and the implementation of investment operations consistent with the objectives, the SiS's strategy and risk profile;
• the clear identification of the roles and responsibilities of the actors involved in the different stages of the process;
• the formalisation of each phase in order to allow for carrying out a post-reconstruction of the process.

Finally, in regard to conflicts of interest and the treatment of claims, the Guidelines identify principles that are consistent with the simplified regime envisaged for managers below threshold by promoting the adoption of the following:

• suitable safeguards for the identification and management of conflicts of interest and communicating any conflicts to the participants in the SiS and an arrangement for identifying and managing conflict situations similar to that envisaged for managers below the threshold; and
• adequate procedures to ensure a prompt treatment of claims presented by investors.

For more information on the application of the Guidelines to the Simple Investment Company, contact your regular CMS advisor or local CMS experts Andrea Arcangeli and Alfredo Gravagnuolo