solution

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 include an
extensive statistical addendum. None of the data were particularly esoteric; it
was the shear volume of data required that was daunting.

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 and MiFID II).