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On July 6, 2021, the Bank of Italy issued the new supervisory guidelines (hereinafter, the "Guidelines") regarding the “simple investment companies” (hereinafter, "SiS").
In a nutshell, SiS are fund managers which, due to their small size and complexity, fall within the scope of the simplified regime provided for sub-threshold managers under the EU Directive 2011/61/EU (AIFMD).
In particular, the Guidelines (i) provide an overview of the main provisions applicable to SiS, and (ii) provide the procedure applicable in case of non-temporary exceeding of the net assets limit set forth in Article 1, paragraph 1, letter i-quater, of the Legislative Decree No. 58 of 24 February 1998 (the "TUF").
Basically, it should be duly noted that the Guidelines are not mandatory; therefore, SiS, in order to comply with the rules applicable to them, have the right to communicate to the Bank of Italy during the authorization process and, subsequently, to the Bank of Italy and Consob, in the context of the information provided on a periodic basis through the report on the organizational structure, the intention to adopt measures different from those indicated in the Guidelines.
In this regard, the Supervisory Authorities verify that such measures are effective and appropriate and, where at the outcome of such analysis the measures are not satisfactory to ensure compliance with the applicable rules, both the Bank of Italy and Consob may adopt the supervisory measures provided for by law.
In any event, the Bank of Italy has the power to verify on a continuous basis that the conditions for the granting of authorization are still met.
As mentioned above, the Guidelines provide a brief summary of the regulatory framework applicable to SiS, stating that, with reference to the national rules, SiS are subject to the same rules applicable to Sicaf, unless expressly regulated or derogated from by Articles 1, paragraph 1, subparagraph i-quater, and 35-undecies, paragraphs 1-bis, 1-ter and 1-quater of the TUF. The Guidelines also set out all the secondary rules implementing the provisions of the TUF applicable to SiS, outlining, at the same time, that they are also required to comply with the national legislation in force on anti-money laundering and countering the financing of terrorism.
On the other hand, with regard to the EU measures directly applicable in the Member States, in the case of SiS marketed to retail investors, the following apply: (i) Regulation (EU) No. 1286/2014 of 26 November 2014 (the "PRIIPs Regulation") and its implementing regulations, where relevant, and (ii) Regulation (EU) No. 2017/1129 of 14 June 2017 (the "Prospectus Regulation") and its implementing regulations, where relevant.
With reference to the content of the Guidelines, the main provisions are set out below, summarized by macro-areas:
(i) Governance and internal control system
The Guidelines highlight the role and responsibility of corporate bodies for the purposes of defining an adequate and effective governance and internal control system. To this aim, the composition of corporate bodies, in terms of number and professionalism, should ensure the effective performance of their duties.
In this respect, the division of competences among corporate bodies should be clearly defined and guarantee a constant internal dialectic, avoiding overlapping of competences that could affect the company's functionality.
In addition, the Guidelines provide, inter alia, that the work of the corporate bodies should be documented in order to allow control over management actions and decisions taken.
For instance, the minutes of the meetings of the corporate bodies should illustrate in detail the decision-making process and the reasons for such decisions.
Risk management and internal control system
According to the Guidelines, SiS should have a risk management and internal control system proportionate to its organizational, dimensional and operational complexity.
In particular, the risk management and internal control system encompasses all the rules, functions, structures, resources, processes and procedures aimed at ensuring effective management and control of the risks to which the SiS or the managed assets are exposed, as well as the verification of the compliance of the activity carried out with the laws, regulations and by-laws applicable to it and with the internal procedures that the company has established to comply with them.
In general, the Guidelines clarify that a risk management and internal control system structure similar to that provided for sub-threshold AIFMs, which may centralize the corporate control functions in a single control function, is considered adequate for SiS.
In any case, SiS has to inform the Bank of Italy and Consob of the outcome of the controls carried out by sending the reports of the corporate control functions or the single control function, where established, or the report provided by the director with delegated powers in relation to controls.
Finally, the SiS could assign control functions to third parties in compliance with the general principles provided for in the matter of "Delegation of functions", provided that the controls on the different types of risks continue to be effective.
In particular, the Guidelines highlight that SiSs should describe their risk management and internal control systems in their organizational structure report, justifying their adequacy with respect to their organizational, size and operational complexity.
Delegation of functions
The Guidelines further specify that SiS may delegate certain essential or important operational functions only to third-party service providers that meet the appropriate requirements in terms of professionalism, integrity and independence. In particular, SiS should only delegate the portfolio management function to intermediaries authorized to provide collective management or portfolio management services.
In general, in case of delegation of essential or important operational functions, SiS should be able to demonstrate that the third party is qualified and capable of exercising the delegated functions with the diligence required by the nature of the task. In substance, with respect to the delegation of portfolio management or risk management functions, SiS should not delegate these functions to persons whose interests could conflict with those of SiS or its investors, unless such persons have functionally and hierarchically separated the performance of the portfolio management or risk management function from other potentially conflicting tasks and potential conflicts of interest have been properly identified, managed, monitored and disclosed to investors.
(ii) Prudential forecasts
Professional indemnity insurance
As a preliminary remark, the Guidelines point out that professional indemnity insurance with the characteristics set out in Article 15 of Delegated Regulation (EU) 231/2013 would be adequate to cover the risks arising from the activity of the SiS.
In particular, the verification of the adequacy, on a continuous basis, of the policy to cover the professional liability risks of the SiS should be carried out by the internal control functions or by the single control function or, in case the establishment of specific corporate control functions has not been foreseen, by the director with delegated powers on controls.
Risk containment and fractioning
With specific reference to prudential regulation, the Guidelines state that, in order to ensure the sound and prudent management of the intermediary, SiSs should base their activities on the principles of risk containment and spreading consistent with their investment policy and the types of investors admitted.
The Guidelines, inter alia, also specify that irrespective of the investment constraint, SiSs may hold liquidity for treasury needs and that, in such a case, with reference to the holding of SiSs' liquid assets, the application of the rules on depositaries set out in Articles 47 and 48 of the TUF and related implementing provisions remains unaffected.
Criteria and procedures for the valuation of assets in which the SiS is invested
According to the Guidelines, SiS should in particular have policies, procedures, including controls, information tools, technical and professional resources in place to ensure a clear, true and fair representation of the current value of the assets in which the fund is invested and to prevent any overvaluation.
In this respect, the management body, according to the applicable accounting standards, should establish asset valuation policies and procedures that ensure - also taking into account the tendentially illiquid nature of the assets in which the SiS's assets are invested - that the value of assets and liabilities is correctly assessed.
The SiS supervisory body and the competent corporate control functions should then periodically verify the faithful and correct implementation of the criteria and procedures for the valuation of the assets in which the SiS assets are invested.
(iii) Decision-making process, conflicts of interest and complaint handling
In view of the illiquid nature of the assets in which SiS's assets are invested, the Guidelines provide that the investment process should be based on adequate knowledge and understanding of the investable assets, on the consistency of investment transactions with the objectives, investment strategy and risk profile of SiS, and on the definition of a business plan to be regularly updated and monitored in order to operate in the best interest of the investors.
In particular, taking into account the different phases of the decision-making process (origination, due diligence, approval, implementation and monitoring), the SiS should clearly identify the roles and responsibilities of the actors involved in each phase. In addition, the course of the different stages of the process should be formalized in such a way that it can be reconstructed ex post.
SiSs should also adopt (i) safeguards for the identification and management of conflict of interest situations and the communication of such situations to their participants, and (ii) procedures to ensure prompt handling of investor complaints.
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Finally, with regard to the indications for the SiS in the case of non-temporary exceeding of the limit of net assets, it is provided that in such case the SiS must make an evaluation in order to determine whether the exceeding is of a temporary nature or not.
In particular, where the excess is not considered temporary and the SiS intends to apply for authorization as manager above the threshold, the company must notify the Bank of Italy within 30 days of the excess.
A similar communication is given to the Bank of Italy by the SiS which, even in the absence of a non-temporary exceeding of the threshold referred to in Article 1, paragraph 1, letter i-quater, point 1), of the TUF, intends to voluntarily subject itself, at any time subsequent to the issue of the authorization, to the regime of the sub-threshold SICAFs or of the ordinary ones (so-called opt in).
Within 60 days from the receipt of the communication, the Bank of Italy informs whether there are any obstacles to continue operations above the threshold referred to in Article 1, paragraph 1, letter i-quater, point 1), of the TUF.
