Guiding Principles on Governance for Islamic Collective Inve

Top 20 FREQUENT WORDS

icis 376 investors 98 governance 85 shar<U+012B> 83 investment 79 cis 71 financial 60 ifsb 57 management 53 compliance 48 funds 47 information 47 islamic 45 principles 45 manager 41 sponsor 41 assets 36 disclosure 34 insiders 31 ensure 30 interests 30

DOCUMENT KEY POINTS

• about the islamic financial services board ifsb the ifsb is an international standard setting organisation that promotes and enhances the soundness and stability of the islamic financial services industry by issuing global prudential standards and guiding principles for the industry broadly defined to include banking capital markets and insurance sectors
• the standards prepared by the ifsb follow a lengthy due process as outlined in its guidelines and procedures for the preparation of standards guidelines which includes the issuance of exposure drafts and the holding of workshops and where necessary public hearings

• sultan bin nasser al suwaidi governor central bank of united arab emirates in alphabetical order of the country the member represents ii

• technical committee chairman h

• islamic development bank shar ah committee chairman sheikh mohamed mokhtar sellami deputy chairman sheikh saleh bin abdulrahman bin abdul aziz al husayn sheikh abdul sattar abu ghodda member sheikh hussein hamed hassan member sheikh mohammad ali taskhiri member sheikh mohamed hashim bin yahaya member in alphabetical order secretariat islamic financial services board professor rifaat ahmed abdel karim secretary general professor barry a
• rider consultant professor simon archer consultant mr madzlan mohamad hussain senior project manager iv

• depending on the legal and regulatory framework in the jurisdiction as well as the structural form adopted by the icis a gb could be the bod investment committee investment management committee etc

• in order to further strengthen governance in the islamic financial services industry ifsi and promote soundness and stability in the islamic financial system the ifsb council during its meeting in jeddah in december approved the proposal that the ifsb develop a second tier of its governance standards by focusing on collective investment schemes cis that are claimed to be shar ahcompliant
• its findings are consistent with the surveys conducted by the iosco on cis namely that a regardless of the diverse cis framework applied in different jurisdictions a they still share many similar governance concerns such as independence of oversight of cis operators their conduct and execution of fiduciary duties the management of conflicts of interest transparency in disclosures of material information etc

• such units or shares constitute in effect claims of ownership to the undivided assets of the fund which can consist of financial or non financial assets and give rise to the right or obligation to share in the profits or losses derived from those assets ii the fund is established and managed in accordance with shar ah rules and principles and iii whether or not the icis is managed by the institutions that established or sponsored it it is separately financially accountable from those institutions ie has its own asset and liabilities profile

• as a framework for the organisation and operation of cis that seeks to ensure that cis are organised and operated efficiently and exclusively in the interests of cis investors including both resident and potential investors and not in the interests of cis insiders is expected to reduce the risks associated with conflicts of interest and robustly seek to ensure that the interests of well informed investors in cis are well protected and managed through appropriate oversight control and review mechanisms according to traditional fiduciary standards

• it must always be remembered that icis operates within the legal environment and much will therefore depend on the development and sophistication of the legal system and in particular on the existence of laws facilitating the establishment and management of corporations and trusts and the financial markets as a whole

• the stakeholders sanctions may range from reputational damage for the icis to loss of trust in the management a forcing some managers to quit or take legal actions based on contractual ter miss supervisory authorities particularly should have adequate enforcement mechanisms ranging from the power to direct necessary disclosures to imposing reprimands and fines to curb deliberate non compliances

• the guiding principles part i a general governance approach of icis principle the icis s highest governing body gb shall establish a comprehensive governance policy framework which protects the independence and integrity of each organ of governance and sets out mechanisms for proper control and management of conflicts of interest and duty
• the gb shall strive for consistent improvement of its governance by establishing a comprehensive governance policy framework that protects the independence and integrity of each organ of governance and sets out mechanisms for proper control and management of conflicts of interest and duty

• it is necessary for a system to be developed to evaluate and monitor the level of conflicts of interest and to provide adequate guidance to determine whether an icis insider should be i strictly prohibited from subscribing to the icis ii allowed to subscribe to the icis but must either a disclose their subscription in the prospectus b hold on to their investment prohibited from disposing for a specific length of time or c only dispose of their investment subject to prior disclosure of their transactions interests and with adequate time for icis investors or supervisory authorities to object to such disposal

• in particular icis shall adopt as a matter of policy that whistle blowers be permitted to report irregularities directly to the gb and in the event the gb fails to address the problem satisfactorily the whistle blower may alert the supervisory authorities without any consequences to their employment or the risk of victimisation
• whistle blowers as these informants are often called play a very important role in checking and inhibiting unethical and unlawful practices that can damage the reputation and standing of the icis and undermine investor and regulatory confidence

• although in practice the icis investors shall not intervene in the management of the investments made on their behalf it does not mean they should not have access to appropriate information in order to monitor the performance of the icis and protect their investment
• insiders must be fully aware of their legal responsibilities in the provision of such information and ensure that it meets the requisite legal regulatory and professional standards in terms of accuracy topicality clarity and comprehensibility

• which is a mixture of integrity and investment related disclosure ii periodic and progressive disclosure which takes the form of quarterly reports semi annual reports and annual reports and iii timely or continuous disclosure which sometimes may be a non financial disclosure relating to significant events that affects the governance evaluation of the icis

• iii basic ownership structure a for example major share ownership and voting rights beneficial owners major unit holders participation on the gb or in senior management positions and unit holders meetings iv organisational structure a for example general organisational chart business lines subsidiaries and affiliates and management committees if any v information about the incentive structure of the icis insiders from the gb and senior management down to the ssb trustee custodian and depository administrator in particular any payments charged from or linked to the icis assets a for example the remuneration and compensation schemes bonus options fees etc

• for example in addition to monthly and quarterly investment statements sent to the investors icis can facilitate dissemination of timely information by enabling the investors to check the performance of their investment in the icis by accessing the appropriate websites covering useful information for investors and researchers including updates on any changes to the fund based on the terms and conditions of the icis as well as the unit price of the fund on the day of valuation whether on a daily weekly bi weekly or monthly basis
• providing real time access to portfolios as well as a host of third party information would assist icis investors to be better informed about the performance of their investments as well as on any changes in the types of risks to which their investments are exposed from time to time

• in order to strengthen its shar ah governance structure an icis shall adopt and implement an appropriate shariah governance system that caters for the following processes i monitoring consistent compliance with the shar ah rules and principles in its daily operations ii portfolio screening to ensure its investment portfolios remain within shar ahpermissible assets projects and iii purification tanqiyyah of tainted income whereby income that is contaminated by prohibited haram elements is removed from the icis
• while it may not be objectionable for the same person to handle both the compliance check and the internal audit functions on the condition that he or she is qualified for both tasks nevertheless the two processes should still be carried out separately

• the actual role of the shar ah scholars may vary from one icis to another depending on the terms of reference of their appointment but in addition to the critical portfolio selection approvals as noted above other roles may include i the study of the offering memorandum constitutional documents and any major agreements controlling the relationship between the functionaries of the structure ii giving general advice to the icis sponsor manager regarding compliance with shar ah and iii advising on the use of instruments and techniques for efficient cash management and their compliance with the principles of shar ah

• the mechanisms should be made transparent to the potential investors in order to help them make an informed decision before participating in the icis and the shar ah scholars shall be vigilant in alerting the icis to any part of the portfolios that has become non compliant with the shar ah
• in this regard the icis internal and external auditors need to have full awareness of and adequate access to information relating to the purification process in order to ensure appropriate checks on any liquidation of the icis s assets and the justification for separating its earnings

• depending on jurisdictions icis sponsors and managers may among others dictate or influence the shuffling or movement of icis funds and assets under their control through the following practices i commingling this practice refers to the act where the icis sponsor or manager mixes funds or assets that it holds in the care of icis investors with its own funds assets making it difficult to determine which funds assets belong to the sponsor manager and which belong to the investor
• in general through fluid movements of funds and assets under their control icis sponsors managers would not only be able to optimise the scale of their resources and achieve better portfolio diversification but they would especially be able to create an image of strong performance for all the funds sponsored managed by them

• where the icis plays a matchmaker role between a willing buyer and willing purchaser of an existing icis s share units the gb should safeguard the integrity of asset valuations and calculation of nav that may be factored into the pricing of those share units by at least ensuring the staff department carrying out the valuation is separate and cannot be influenced by the staff department who actually manages the fund

• as the building up of per in the first instance involves the commingling of profit portions shared between the icis investors and the icis sponsor manager s own fund the icis s gb should have careful regard to the general fiduciary law and in particular the specific terms and authority in the relevant trust and contractual documents
• the fact that there is no regulated process on how an independent organ of governance such as the governance committee as recommended in ifsb can scrutinise and oversee the smoothing of returns makes it an area for potential abuse misrepresentation and misappropriation

• in case a revision of the above items is proposed at any time after the issue of icis share unit certificates it should be effectively communicated to the icis investors whereby an adequate notice period as may be imposed by the relevant local regulations if any should also be complied with
• final report on elements of international regulatory standards on fees and expenses of investment funds report of the technical committee of iosco november also contains extensive recommendations of best practices on this subject including appropriate definitions for various types of fees and expenses

• in addition to the recommended minimum best practices under ifsb in respect of the smoothing of dividend payments ifsb a that is the guiding principles on risk management for iifs a and ifsb a that is the capital adequacy standard a both issued by the ifsb in december set out some requirements for an adequate framework in managing displaced commercial risk
• the attempt by some icis sponsors to smooth dividend payments to icis investors further requires them to develop and maintain an informed judgement about the appropriate level of balance in the reserves created if any bearing in mind that their essential function is to mitigate displaced commercial risk

• such units or shares constitute in effect claims of ownership to the undivided assets of the fund which can consist of financial or non financial assets and give rise to the right or obligation to share in the profits or losses derived from those assets ii the fund is established and managed in accordance with shar ah rules and principles and iii whether or not the icis is managed by the institutions that established or sponsored it it is separately financially accountable from those institutions that is it has its own assetand liabilities profile

• stakeholders those with a vested interest in the well being of icis including � employees � customers icis investors including iah if any � suppliers � the community and � supervisors and governments based on the unique role of icis insiders in national and local economies and financial syste miss unrestricted investment an account where the account holders authorise the institution accounts offering islamic financial services iifs to invest their funds based on mu rabah or wak lah investment without laying down any restrictions
• see also restricted investment accounts wak lah investment an agency contract where the icis investor as principal appoints the icis sponsor manager as agent to carry out on their behalf the investment for a fee or not fee as the case may be

• or a tas fun op ci pa co main organs of bod is responsible for the depository is responsible similar to the corporate this model is comparable in governance overseeing at a first level for the oversight of the icis model cases in which the to the earlier models as su the icis s operations and and icis operator s activities cis operator s functions the functions performed by or the cis operator and other as well as for the custody of are assumed by an the depository are pla service providers such as the icis assets
• appendix a icis models models corporate model a corporate model a contractual model a contractual model a hy board of directors depository depository trustee co key feature in icis organised under the corporate form investors contrary to icis under the icis under this type of in become shareholders by acquiring shares of a company corporate form in the contractual form are op whose principal objective is to invest in a portfolio of contractual type investors denominated unit trusts re securities

• other features the acts of purchasing and subscriptions from redeeming cis shares are investors are pooled generally processed together and then used to through an authorised purchase a portfolio of distributor on behalf of the assets managed by the cis
• cis operator which is appointed through a contract approved by the bod of the cis although sometimes the bod will directly manage the cis themselves selfmanaged

• d oversight of icis investment manager and distributor activities including the i global supervision of the icis activities and of the r prevention of conflicts of interest
• flowchart icis governance structure corporate model a board of directors cis regulator i i i i f custodian j board of directors ssb g e d i i f d d shareholders distributors b cis c inv a g i h cis auditors a placement of orders for purchase redemption of icis shares

• d oversight of icis investment manager and distributor activities including the i global supervision of the icis activities and of the r prevention of conflicts of interest
• flowchart icis governance structure corporate model a depository cis regulator i i i i j depository ssb g e d i i f d d shareholders distributors b cis c inv a g i h cis auditors a placement of orders for purchase redemption of icis shares

• d oversight of icis management company and distributor activities including the i global supervision of the icis activities and of the r prevention of conflicts of interest
• flowchart icis governance structure contractual model a depository cis regulator i i i i j depository ssb g e d i i f d d unitholders distributors b cis c ma a g i h cis auditors a placement of orders for purchase redemption of icis unitshares

• i global supervision of the icis activities and of the r e duty of reporting and submission to approval ratifications of contracts and certain main goal of protecting unitholders best interests
• flowchart icis governance structure contractual model a trustee cis regulator i i i i custodia f j trustee ssb g e d i i f d d unitholders distributors b cis c ma a g i h cis auditors a placement of orders for purchase redemption of icis unitshares

• flowchart icis governance structure hybrid corporate and contractual model a supervisory board review or compliance committee cis regulator d super board r compliance a investors e shareholders distributors cis g h ssb investors shareholders distributors cis management investmen c investors shareholders distributors cis b f deposit cis auditors a licence held by management company offering range of icis ucits non ucits
• e outsourcing and monitoring of investment manageme b auditors review only management company financial reporting report irregularities f legal ownership of assets separate from icis and m to regulator

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DOCUMENT WORD ANALYSIS

Main Category

AlHuda Material\sukuk islamic

KeyWords

asset invest risk ici rate investor origin credit financi structur securitisation NA iif required exposure fund estate servic NA legal

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DOCUMENT REFERENCES

Number of Pages

37

Published Date

2009-02-20 21:00:02

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