How to delegate the activities of an investment fund manager

What can be delegated and what remains with the manager

An investment fund manager may delegate only individual activities included in the management to another person, and only under the conditions of the Act on Investment Companies and Investment Funds (Section 23). Typically, this involves portfolio management or risk management. The manager cannot delegate the management of the fund as a whole and remains responsible for the fund.

Delegation does not relieve the manager of liability. Towards third parties, the manager remains liable to compensate for damage caused by breaching their duties under the law, European Union regulations, or the statute (Section 24(2)). The manager must also implement risk management measures related to the delegation and regularly monitor how the delegate performs the activity (Section 24(1)). Thus, by delegating, the manager transfers the work, not the liability.

For management, this leads to a practical conclusion. Delegation makes sense when the manager lacks expertise or capacity and the partner can handle the work cheaper or better. It does not work as a way to get rid of duties. If the manager delegates everything and monitors nothing, the ČNB (Czech National Bank) may question whether they are performing their activities properly and prudently and acting in the best interest of unit holders (Section 23(c)).

The permits a manager needs are summarized in the text on licensing for an investment company. Delegation assumes that the manager holds the license and that their own organization is functioning. It is precisely the quality of the organization that the ČNB examines during supervision, and delegation cannot replace it. If the manager does not have people who can assess the delegated work, they cannot even monitor the partner.

Eight conditions that a manager must meet before delegation

Three conditions protect supervision and investors. The manager must notify the ČNB of the delegation in advance. The delegation must not obstruct the supervision of the manager or prevent the manager from performing activities properly, prudently, and in the best interest of unit holders (Section 23(a) to (c)). Another two conditions concern control. The manager must be able to monitor the delegate's activities and direct them with their instructions, and must have the option to terminate the delegation with immediate effect if it is in the interest of investors (Section 23(d) and (e)).

The manager must be able to justify the delegation and prove that the partner was carefully selected. The justification also relates to the connection with other delegations for the same fund and any potential sub-delegation (Section 23(f)). The manager must also be able to prove that the delegate meets the requirements of Section 25 and that the delegation was preceded by a careful selection process (Section 23(g)). Documenting the selection is therefore an integral part of the delegation, not an extra formality.

The eighth condition is the statute. The statute or a comparable document of the fund must define the given activity as one that can be delegated to another person (Section 23(h)). If this clause is missing from the statute, delegation is not permissible, even if other conditions are met. Therefore, the manager must amend the statute before the delegation, not after.

The conditions apply to each delegated activity individually. If the manager delegates portfolio management to one partner and risk management to another, they must document the eight conditions for both. They must also be able to explain how the two delegations relate to each other. The law thus prevents several partial delegations from gradually turning into a transfer of the entire management, which the manager no longer controls.

Special attention should be paid to the right to terminate the delegation with immediate effect if it is in the interest of investors. The law does not prohibit a standard notice period or settlement agreements. However, the notice period, contractual penalties, or settlement rules must not de facto prevent or unreasonably complicate immediate termination. It is also advisable to agree in advance on the transition of activities: data transfer, cooperation during the transition to a new partner or back to the manager, and completion of outstanding tasks. Without these provisions, the right to terminate the delegation will remain only on paper.

Who can be delegated

The partner must have the necessary material, organizational, and personnel prerequisites, as well as a business or other license for the given activity. Their executive officers must be trustworthy and possess the necessary knowledge and experience (Section 25). The partner must also comply with prudence rules comparable to EU regulations and be subject to supervision in the country where they have their registered office. The manager verifies these requirements before signing the contract, not during the first audit.

The delegate must not be the fund's depositary, and there must be no risk of a conflict of interest. The law excludes the fund's depositary as well as anyone delegated by the depositary to perform their activities. It also excludes anyone who might have a conflict of interest with the manager or the common interests of investors (Section 25(1)(e) and (f)). In conflicts of interest, actual relationships matter, not just form: ownership or personnel links can be sufficient.

Partnera se sídlem mimo Evropskou unii smí správce pověřit jen tehdy, když je zajištěna spolupráce ČNB s dohledovým orgánem jeho státu (§ 25 odst. 2). U partnera ze třetí země proto správce ověřuje i to, zda tato spolupráce skutečně existuje. Zda partner obstojí, závisí na jeho státu, vlastnické struktuře a vazbách na správce. Proto to the Prague-based Czech legal team at ARROWS law firm posuzují u každého partnera zvlášť, ještě před podpisem smlouvy.

When selecting, it is worth following a checklist that mirrors Section 25(1). The list includes prerequisites, trustworthiness, authorization, supervision, relationship to the depositary, and conflict of interest. For each point, the manager saves a document: an extract from the registry, a permit, confirmation of supervision, or a declaration of no conflict of interest. These documents then serve as proof of careful selection during a ČNB audit.

Exceptions for funds of qualified investors and large managers

In the case of a fund for qualified investors, the manager may delegate activities even to a partner who does not comply with comparable prudence rules or is not subject to supervision in their state. However, they must notify the ČNB of who they wish to delegate to at least one month before the delegation takes effect, and provide the information necessary to assess the conditions of Section 23. The delegation can then begin if the ČNB does not express disagreement within one month (Section 25(3)).

If the ČNB does not express disagreement within one month, the exception can be used, but this is not an approval of the delegation. The one-month period runs from the day the ČNB received the notification. The notification must contain details about the delegate and information necessary to assess the conditions of Section 23, so it is worth submitting it complete. The ČNB's silence does not confirm that the manager has met other legal conditions, and they continue to bear liability for them. It is advisable to include the one-month period in the project schedule right during the partner selection process.

Druhá výjimka platí pro správce oprávněného přesáhnout rozhodný limit, tedy hodnotu obhospodařovaného majetku stanovenou v § 16. Týká se fondu, který není standardním fondem, tedy speciálního fondu nebo fondu kvalifikovaných investorů. Takový správce smí svěřit činnost i partnerovi, u něhož může ke střetu zájmů dojít. Partner ale must mít organizačně zajištěnou řádnou, samostatnou a nestrannou kontrolu a funkčně i hierarchicky oddělit tuto činnost od činností se střetem zájmů. Musí také mít postupy pro řízení střetů zájmů, včetně jejich oznamování investorům (§ 25 odst. 4).

The exceptions apply only to the specified funds and managers and only if other conditions are met. They concern funds for qualified investors and other non-standard funds, provided they are managed by a manager above the relevant threshold. For standard funds, the conditions remain stricter. A manager invoking an exception should have documented which exception applies and how they met its conditions.

Sub-delegation and chain delegation

The delegate may transfer a specific task from the delegated activity to another person only under three conditions. The manager must agree to it in advance, the sub-delegation must be notified to the ČNB in advance, and the conditions of Sections 23 and 25 must be met analogously (Section 26). The delegate must then regularly monitor how the other person performs the tasks (Section 26(2)). Thus, the duty to monitor does not disappear in the chain; it also transfers to the delegate.

Chain delegation is permissible, but it must be transparent. Even the person to whom the delegate transferred the task may delegate it to another, provided that the conditions of manager consent, ČNB notification, monitoring, and Sections 23 and 25 are met analogously (Section 26(3)). The manager must therefore be informed of any further delegation in advance and must consent to it. The contract with the delegate should therefore explicitly prohibit further delegation (sub-delegation) without the manager's consent.

In practice, this is the most common weak spot: the partner transfers a task to another person, and the manager only finds out during an audit. This can be prevented by a contractual prohibition of sub-delegation without prior written consent, the partner's obligation to report changes immediately, and the manager's right to forbid sub-delegation. Without these provisions, the manager risks failing to meet the condition of Section 23(d), i.e., being able to monitor the activity and direct it with their instructions.

Při obhospodařování majetku zákazníka (portfolio management) se pro delegaci použijí § 23 až 25 obdobně a pro další pověření § 26 (§ 26a odst. 1 a 2). Na nabývání pohledávek z fondových úvěrů a na správu účelových společností při sekuritizaci se naopak § 23 až 26 nepoužijí vůbec (§ 26a odst. 3). Úvěrový režim fondu podrobně rozebírá text o tom, jak může investiční fond poskytovat úvěry.

Six steps from the decision to delegate to the ČNB notification

The first step is to decide what is being delegated and why. The manager lists the activities, their scope, and the reason for delegation, including the connection to other delegations for the same fund, as this is precisely what they must be able to justify (Section 23(f)). The second step is to select a partner according to the checklist from Section 25 and save the documents proving careful selection.

The third step is to amend the statute. The statute must define the delegated activity as one that can be delegated to another person, and the amendment must take effect before the delegation begins. The fourth step is the contract with the partner. It must include instructions and monitoring by the manager, the right to terminate the delegation with immediate effect, a prohibition of sub-delegation without consent, information obligations, and rules on conflicts of interest.

The fifth step is to notify the ČNB of the delegation in advance. For a fund for qualified investors where the delegate is not subject to comparable supervision, the manager must respect the one-month period and provide complete information. The sixth step is to continuously monitor the performance of the activity and manage the risks associated with the delegation (Section 24(1)). Regular obligations towards the ČNB are summarized in the text on what reports and notifications the ČNB requires from an investment fund.

Monitoring must not remain only in the text of the contract. It is proven practice to designate a single person to oversee delegated partners, regularly evaluate their performance, record complaints, and report issues to management. How intensive the monitoring should be depends on what the manager delegates, to whom, and how much of the fund's assets the activity concerns. Proto ji the Prague-based Czech legal team at ARROWS law firm navrhují pro každou delegaci zvlášť, spolu se smlouvou a statutem.

What the statute must say about delegation

For delegation, the statute is both a condition and a benchmark. The statute or a comparable document of the fund must define the activity as one that can be delegated to another person (Section 23(h)). At the same time, the manager must comply with the statute of the managed fund (Section 22(3)(j)). During an audit, the statute will therefore be the first document against which the delegation is assessed.

The statute should define delegable activities specifically, not generally. The law requires the statute to define precisely the activity that can be delegated to another person. A general clause stating that the manager can delegate anything to anyone may not meet this requirement and poses a regulatory risk. It is safer to list the activities that can be delegated, such as portfolio management, risk management, or valuation, and link them to the conditions of Sections 23 and 25. The more precise the definition, the clearer the boundaries for both the manager and the investors.

Amending the statute must follow the procedure applicable to the statute of the given fund. For some funds, amending the statute is subject to approval or notification, which is why the manager should plan it with a time buffer. A delegation that begins before the amendment to the statute takes effect violates the condition of Section 23(h). Modifying the statute is therefore the first step, not the last.

Co novela zákona změnila ve statutu a ve sdělení klíčových informací, shrnuje text o novele ZISIF a AIFMD II. Při úpravě statutu kvůli delegaci se vyplatí zapracovat i tyto změny, aby se statut neupravoval dvakrát. Každá změna statutu totiž znamená další administrativu a u některých fondů i další čekání na úřad.

Four mistakes that managers make most often when delegating

The first mistake is delegating without prior notification to the ČNB. The manager reaches an agreement with the partner and postpones the notification because it is "just a technical task." However, the law requires prior notification, and delegation without it violates Section 23(a). Prevention is simple: set the start date only after submitting the notification, and for a fund for qualified investors, potentially taking into account the one-month period.

The second mistake is delegation without support in the statute. The manager meets other conditions, but the statute does not define the activity as delegable. The delegation is then not permissible, even if the partner is of high quality. Prevention consists of amending the statute as the first step and verifying that the amendment takes effect before the delegation. The quality of the partner does not compensate for the lack of support in the statute.

The third mistake is weak monitoring. The manager delegates the activity and no longer monitors it, failing to fulfill the obligation to monitor performance and manage the associated risks. The fourth mistake is uncontrolled sub-delegation: the partner transfers the task to another person without the manager's consent. Both mistakes usually come to light only during a ČNB audit or in a dispute with an investor, when remediation is already expensive.

How much each mistake costs can only be estimated based on the specific contract and statute. Záleží na tom, jakou činnost správce svěřil, jak dlouho delegace bez splněných podmínek běžela a jak ji ČNB nebo investoři zjistili. Proto the Prague-based Czech legal team at ARROWS law firm procházejí smlouvy s pověřenými a statut u každého fondu zvlášť, dřív než chyba vyjde najevo při kontrole.

Risks of delegation without pre-set rules

Final Summary

The article has shown that a manager may delegate part of their activities to another person only after meeting the legal conditions, and this does not relieve them of liability. They must notify the ČNB of the delegation in advance, the partner must meet the requirements of Section 25, and the statute must define the delegated activity. The law also allows sub-delegation, but only with the manager's consent and after notifying the ČNB.

For the manager's leadership, this implies a clear sequence: decide what to delegate and why, amend the statute, select the partner, and only then sign the contract and notify the ČNB of the delegation. Reversing this order means that the delegation begins before the conditions are met. The manager then violates the law even before the first action is taken.

Delay has its price. Until the statute and the contract are in order, the manager either cannot use the partner or risks the ČNB questioning the delegation during an audit. The longer such a delegation runs, the harder it is to remedy retroactively, as the partner is already working with the fund's assets in the meantime and investors are counting on the results.

The Prague-based Czech legal team at ARROWS law firm připravují delegaci činností správců fondů, upravují statuty, sepisují smlouvy s pověřenými osobami a jednají s ČNB, včetně oznámení o pověření. Napište nám na consultation@arws.cz nebo si projděte naši službu contracts and negotiations.