Reference no: EM132396645
Case Study: No One Expects the Spanish Addendum
[Note that the format of this case study is somewhat different than previous ones.]
Alex McKenzie is the newly hired independent risk officer responsible to Mega Investments Offshore Funds Board supervising UCITS funds based in both Ireland and Luxembourg. During the first cycle of annual report preparation in which he participated, Alex encounters the so-called Spanish Addendum. Apparently, a couple of years previously, the Spanish Regulators demanded that the annual reports come with an extensive and complex statistical addendum.
In chatting with the Fund Treasurer, who has primary responsibility for preparing the financial data in the annual report, Alex learns that the firm has prepared an addendum in each of the prior two years, but one that only contains financial information accessible to the Fund Treasury Department.
Alex next approaches his legal liaison for offshore funds.
"Can the Spanish regulator compel us to provide this addendum to the annual reports?" Alex askes.
"Well," the lawyer replies, "they could de-register our funds in Spain and since the dealers marketing the funds in Spain are on the ground there, they would not be in a good position to defy the regulator. We would have to litigate with the regulator in the European courts. Our problem right now as I understand it is that the Fund Treasury group has already gone ahead and partially complied for the last couple of years. If we stop doing that then we call attention to ourselves and risk a run in with the regulator."
"Are we willing to litigate with the Spanish regulator on our own?" Alex asks.
"Only if they force our hand and deregister our funds." the lawyer replies.
Alex's final stop is with the Manager of the Operations team. He asks how difficult it would be to comply with the statistical requirements of the Addendum. Reviewing the regulation, the manager admits that without automation it would be virtually impossible to comply in the time frame left before publication of the annual report. And, automation would require a re-prioritization of technical resources - a decision only the Chief Operating Officer and senior management as a whole could make.
Alex feels that the resolution of the issue rests with him. The choices are:
1. Recommend stopping producing the current partial Addendum and hope the regulators do not notice, or otherwise take action, or be prepared to fight them in the European Court system.
2. Recommend continuing with the current policy of partial compliance and play for time hoping that the European authorities will pressure the Spanish into relenting.
3. Recommend a maximum effort for full compliance.
Put yourself in Alex's place and explain what you would recommend and why. Do you see other alternative choices? In particular make reference to the various duties and ethical obligations we have reviewed. Also comment on the situation that Alex has encountered - are there any red flags or areas of concern?
Comment as well on the actions of the Spanish regulators in light of what you know about the Marketing in Financial Derivatives Directive (MiFID).