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Terms of Reference
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Audit Committee Terms of Reference
  1. Membership
    1. The Committee shall comprise at least two members. Members of the Committee shall be appointed by the Board in consultation with the chairman of the Audit Committee.
    2. All members of the Committee shall be independent non-executive directors, if possible, at least one of whom shall have recent and relevant financial experience. The chairman of the Board shall not be a member of the Committee.
    3. Only members of the Committee shall have the right to attend Committee meetings. However, other individuals such as the chairman of the Board, other directors, the Investment Managers and service provider representatives may be invited to attend all or part of any meeting as and when appropriate and necessary.
    4. The external auditor will be invited to attend meetings of the Committee on a regular basis.
    5. Appointments to the Committee shall be for a period of up to three years, which may be extended for further periods of up to three years, provided the director still meets the criteria for membership of the Committee.
    6. The Board shall appoint the Committee chairman who shall be an independent non-executive director, if possible. In the absence of the Committee chairman and/or an appointed deputy, the remaining members present shall elect one of themselves to chair the meeting.
  2. Secretary
    1. The Company secretary or their nominee shall act as the secretary of the Committee.
  3. Quorum
    1. The quorum necessary for the transaction of business shall be two members. A duly convened meeting of the Committee at which a quorum is present shall be competent to exercise all or any of the authorities, powers and discretions vested in or exercisable by the Committee.
  4. Frequency of meetings
    1. The Committee shall meet at least two times a year at appropriate times in the reporting and audit cycle and otherwise as required.
  5. Notice of meetings
    1. Meetings of the Committee shall be called by the secretary of the Committee at the request of any of its members or at the request of the external or internal auditor if they consider it necessary.
    2. Unless otherwise agreed, notice of each meeting confirming the venue, time and date together with an agenda of items to be discussed, shall be forwarded to each member of the Committee, any other person required to attend and all other directors, no later than five working days before the date of the meeting. Supporting papers shall be sent to Committee members and to other attendees as appropriate, at the same time.
  6. Minutes of meetings
    1. The secretary shall minute the proceedings and decisions of all meetings of the Committee, including recording the names of those present and in attendance.
    2. Draft minutes of Committee meetings shall be circulated promptly to all members of the Committee. Once approved, minutes should be circulated to all other members of the Board, unless it would be inappropriate to do so.
  7. Annual General Meeting
    1. The Committee chairman should attend the annual general meeting to answer shareholder questions on the Committee’s activities.
  8. Duties
    The Committee should carry out the duties below for the Company and, as appropriate, the Group.
    1. Financial reporting
      1. The Committee shall monitor the integrity of the financial statements of the Company, including its annual and half-yearly reports, interim management statements, and any other formal announcement relating to its financial performance, reviewing significant financial reporting issues and judgments which they contain. The Committee shall also review summary financial statements, significant financial returns to regulators and any financial information contained in certain other documents.
      2. In particular, the Committee shall review and challenge where necessary:
        1. the consistency of, and any changes to, accounting policies both on a year-on-year basis and across the Company;
        2. the methods used to account for significant or unusual transactions where different approaches are possible;
        3. whether the Company has followed appropriate accounting standards and made appropriate estimates and judgments, taking into account the views of the external auditor;
        4. the clarity of disclosure in the Company’s financial reports and the context in which statements are made; and
        5. all material information presented with the financial statements, such as the business/operating and financial review and the corporate governance statement (insofar as it relates to the audit and risk management).
    2. Internal controls and risk management systems
      The Committee shall:
      1. keep under review the adequacy and effectiveness of the Company’s internal financial controls and internal control and risk management systems; and
      2. review and approve the statements to be included in the annual report concerning internal controls and risk management.
    3. Compliance, whistleblowing and fraud
      The Committee shall:
      1. review the adequacy and security of the Company’s arrangements for its employees and contractors to raise concerns, in confidence, about possible wrongdoing in financial reporting or other matters. The Committee shall ensure that these arrangements allow proportionate and independent investigation of such matters and appropriate follow up action;
      2. review the Company’s procedures for detecting fraud;
      3. review the Company’s systems and controls for the prevention of bribery and receive reports on non-compliance; and
      4. review regular reports from the Manager on its Internal Controls and Risk Management arrangements.
    4. Internal audit
      The Committee shall:
      1. monitor and review the effectiveness of the Company’s internal audit function in the context of the Company’s overall risk management system;
      2. consider and approve the remit of the internal audit function and ensure it has adequate resources and appropriate access to information to enable it to perform its function effectively and in accordance with the relevant professional standards. The Committee shall also ensure the function has adequate standing and is free from management or other restrictions;
      3. review and assess the annual internal audit plan;
      4. review reports addressed to the Committee from the internal auditor;
      5. review and monitor management’s responsiveness to the findings and recommendations of the internal auditor; and
      6. meet the head of internal audit at least once a year, without management being present, to discuss their remit and any issues arising from the internal audits carried out. In addition, the head of internal audit shall be given the right of direct access to the chairman of the Board and to the Committee.
    5. External audit
      The Committee shall:
      1. consider and make recommendations to the Board, to be put to shareholders for approval at the AGM, in relation to the appointment, re-appointment and removal of the Company’s external auditor. The Committee shall oversee the selection process for a new auditor and if an auditor resigns the Committee shall investigate the issues leading to this and decide whether any action is required;
      2. oversee the relationship with the external auditor including (but not limited to):
        1. recommendations on their remuneration, whether fees for audit or non-audit services and that the level of fees is appropriate to enable an adequate audit to be conducted;
        2. approval of their terms of engagement, including any engagement letter issued at the start of each audit and the scope of the audit;
        3. assessing annually their independence and objectivity taking into account relevant professional and regulatory requirements and the relationship with the auditor as a whole, including the provision of any non-audit services;
        4. satisfying itself that there are no relationships (such as family, employment, investment, financial or business) between the auditor and the Company (other than in the ordinary course of business);
        5. agreeing with the Board a policy on the employment of former employees of the Company’s auditor, then monitoring the implementation of this policy;
        6. monitoring the auditor’s compliance with relevant ethical and professional guidance on the rotation of audit partner, the level of fees paid by the Company compared to the overall fee income of the firm, office and partner and other related requirements;
        7. assessing annually the qualifications, expertise and resources of the auditor and the effectiveness of the audit process, which shall include a report from the external auditor on their own internal quality procedures; and
        8. seeking to ensure co-ordination with the activities of the internal audit function.
      3. meet regularly with the external auditor, including once at the planning stage before the audit and once after the audit at the reporting stage. The Committee shall meet the external auditor at least once a year, without management being present, to discuss the auditor’s remit and any issues arising from the audit;
      4. review and approve the annual audit plan and ensure it is consistent with the scope of the audit engagement;
      5. review the findings of the audit with the external auditor. This shall include but not be limited to the following:
        1. a discussion of any major issues which arose during the audit;
        2. any accounting and audit judgments;
        3. levels of errors identified during the audit; and
        4. the effectiveness of the audit.

          The Committee shall also:
      6. review any representation letter(s) requested by the external auditor before they are signed by the Board of Directors;
      7. review the management letter to the Board and management’s response to the auditor’s findings and recommendations; and
      8. develop and implement a policy on the supply of non-audit services by the external auditor, taking into account any relevant ethical guidance on the matter.
  9. Reporting responsibilities
    1. The Committee chairman shall report formally to the Board on its proceedings after each meeting on all matters within its duties and responsibilities.
    2. The Committee shall make whatever recommendations to the Board it deems appropriate on any area within its remit where action or improvement is needed.
    3. The Committee shall produce a report on its activities to be included in the Company’s annual report.
  10. Other matters
    The Committee shall:
    1. have access to sufficient resources in order to carry out its duties, including access to the Company secretariat for assistance as required;
    2. be provided with appropriate and timely training, both in the form of an induction programme for new members and on an ongoing basis for all members;
    3. give due consideration to laws and regulations, the provisions of the UK Corporate Governance Code, Prospectus and Disclosure and Transparency Rules and any other applicable Rules, as appropriate;
    4. oversee any investigation of activities which are within its terms of reference;
    5. arrange for periodic reviews of its own performance and, at least annually, review its constitution and terms of reference to ensure it is operating at maximum effectiveness and recommend any changes it considers necessary to the Board for approval; and
    6. make these terms of reference available, explaining its role and the authority delegated to it by the Board.
  11. Authority
    The Committee is authorised:
    1. to seek any information it requires from any employee of the Company in order to perform its duties;
    2. to obtain, at the Company’s expense, outside legal or other professional advice on any matter within its terms of reference;
    3. to call any employee to be questioned at a meeting of the Committee as and when required; and
    4. to have the right to publish in the Company’s annual report details of any issues that cannot be resolved between the Committee and the Board.
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Management Engagement Committee Terms of Reference

The contractual relationship between the Board and the Investment Manager is governed by the Investment Management Agreement.  However, to ensure a practical application of the Agreement, the Committee should consider the following:

The Principle – Boards and managers should operate in a supportive, co-operative and open environment.

Recommendations

The ideal relationship is where the manager effectively acts as the CEO of the investment company, taking the initiative on all aspects of its operations, under the guidance and formal approval of the board.

The Principle – The primary focus at regular board meetings should be a review of investment performance and associated matters such as gearing, asset allocation, marketing/investor relations, peer group information and industry issues.

Recommendations

In some cases a board may wish to set the level of gearing and asset allocation and in others it may wish to set parameters within which the manager can operate in the course of its day-to-day portfolio management.

For its review of investment performance the board might find it useful for the manager to prepare attribution and volatility analyses.

Boards should take into account the company’s investment policy and its responsibility for delivering the long-term investment objectives, as well as the risks associated with pursuing the investment strategy.

A review of marketing and shareholder communication strategies should include the establishment of steps to mitigate the potential conflicts that the manager may have in promoting the company alongside any open-ended fund business that it may conduct.

Other items which should be considered include a risk map, the performance and cost of other service providers (legal advisers, custody, company secretarial etc), director remuneration and liability cover.

The chairman is responsible for ensuring that the directors receive accurate, timely and clear

information. Where appropriate, a representative of the management company should be invited to attend board meetings to report on activities in relation to the investment company.

The directors should have access to independent professional advice at the company’s expense where they judge it necessary to discharge their responsibilities properly.

The Principle – Boards should give sufficient attention to overall strategy.

Recommendations

Some boards have found it useful to have a specific annual strategy session separate from the normal agenda items. For example, the board could consider matters such as the original prospectus objectives, their continuing relevance and whether the investment policy and style

continue to enjoy sufficient support from investors. Issues that could also be discussed include:

  • whether it is in the interests of the shareholders that the company should continue in its present form (or at all).
  • whether the company should have regular continuation votes and, if so, how often?
  • the investment mandate and long-term investment strategy and performance of the company and appropriate guidelines within which the manager should operate.

The Principle – The board should regularly review both the performance of, and contractual arrangements with, the manager (or executives of a self managed company).

Recommendations

It should become best practice for a management engagement committee consisting solely of

directors independent of the manager (or executives) to make this review annually with its decisions and rationale described in the annual report.

The company chairman may be a member of, and may chair, the management engagement

committee, provided that he or she is independent of the manager.

The long-term nature of the advantages of investment companies suggests that frequent changes in management arrangements would be undesirable. Issues include:

  • Monitoring and evaluating the fund manager’s investment performance and, if necessary, providing appropriate guidance.
  • Considering the merit of obtaining, on a regular basis, an independent appraisal of the manager’s services.
  • Requiring the manager to provide attribution and volatility analyses and whether it should be published at least annually.
  • Putting in place procedures by which the board regularly reviews the continued retention of the manager’s services.
  • Reviewing the level and method of remuneration, the basis of performance fees and the notice period. The board should give due weight to the competitive position of the company against the peer group.
  • If there is a performance related element, or the introduction of a performance fee is under consideration, the review should seek to ensure that the basis does not encourage excessive risk and that it rewards demonstrably superior performance by the manager in managing the portfolio against the company’s stated objectives when compared to a suitable benchmark or peer group.

Key factors to be considered include:

  • the views of shareholders
  • appropriate benchmarks/hurdle rates
  • a reduction in the basic fee when a performance fee is introduced
  • a cap on the performance fee
  • a high water mark
  • a combination of short-term and long-term measurements and incentives

The Principle – The board should agree policies with the manager covering key operational issues.

Recommendations

The board should agree matters over which the manager has discretion and the areas of decision making that are exclusively reserved for the board. Key operational issues could include:

  • defining the scope of the manager’s responsibilities, including the principal operating issues (such as the methodology for performance benchmarking, hedging, gearing) and agreeing the procedure for the manager to report back to the board.
  • identifying any circumstances in which the manager should refer to the board for approval before undertaking transactions.

The Principle – The board should monitor and evaluate other service providers.

Recommendations

The board should determine which non-management services (such as secretarial, custody, settlement, registration) should be sub-contracted and establish procedures by which the providers, to whom these services are delegated, should report back and the methods by which these providers are monitored and evaluated.

The board should put in place a structure for the regular review of these delegated services to ensure their continued competitiveness and effectiveness.

In practice, boards will be heavily reliant on their manager or company secretary for much of this process. Boards should satisfy themselves that the auditor is not conflicted by any work carried out for the manager and that any potential conflict has been satisfactorily resolved.

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Schedule of Matters for Consideration of the Board
Strategy and Management Reference Committee where appropriate
1 Approval of the Company’s objective and benchmark. Code A.1
2 Major changes relating to the Company’s capital structure, including reduction of capital, share issues, share buybacks (including the use of treasury shares).
3 Borrowings and Gearing. AIC Principle 13
4 Approval of the expenses budget.
5 Review of performance in the light of the Company’s strategy and objective. AIC Principle 14
6 Any approval which might affect share capital or ownership of the Company.
7 Appointment and removal of Manager. AIC Principle 15 Management Engagement Committee
8 Investment in Unlisted and AIM stocks. N/A
9 Any changes to the Company’s listing.
10 Approval of half-yearly and annual financial statements. Code C.1 Audit Committee
Financial Reporting/Stock Exchange/Financial Services Authority Reference Committee where appropriate
11 Approval of Half-Yearly and Annual Reports. (Re the Annual Report this includes the approval of the Corporate Governance Statement and Directors’ Remuneration Report). Companies Act 1981 s84(2) Listing Rule 9.7A, 9.8 DTR 4.1, DTR 4.2 Code C.1 Audit Committee
12 Approval of the dividend policy.
13 Approval of any interim dividend and recommendation of the final dividend. Listing Rule 9.7, 9.8
14 Approval of any significant changes in accounting policies or practices. Audit Committee
15 Approval of resolutions and corresponding documentation to be put forward to shareholders at a General Meeting. Listing Rule 13
16 Approval of all circulars and listing particulars. Listing Rule 13
17 Approval of releases concerning matters decided by the Board.
Internal Controls Reference Committee where appropriate
18 Ensuring maintenance of a sound system of internal control and risk management including:
  • Receiving reports on, and reviewing the effectiveness of the Company’s risk and control processes to support its strategy and objectives;
  • Undertaking an annual assessment of these processes;
  • Approving an appropriate statement for inclusion in the Annual Report.
 Code C.2, C.2.1 Audit Committee
Board Membership and other Appointments Reference Committee where appropriate
19 Changes to the structure, size and composition of the Board.
20 Ensuring adequate succession planning. Code A.4, B.2
21 Appointments to the Board. Code A.4
22 Selection of the Chairman of the Board. Code B.3
23 Consideration of the appointment of a Senior Independent Director and, if not so appointed, the reason why not for inclusion in the Annual Report. Code A.4.1
24 Membership and Chairmanship of Board Committees.
25 Continuation in office at the end of their term of office, when they are due for re-election by shareholders at the AGM and otherwise as appropriate.
26 Appointment or removal of the company secretary. Companies Act 1981 s92 Code B.5.2
27 Appointment, reappointment or removal of Auditor to be put to shareholders for approval, following the recommendation of the Audit Committee. Companies Act 1981 s89 Code C.3.6 Audit Committee
28 Remuneration of the Auditors where, as is usual, shareholders have delegated this power to the Board possibly following recommendations of the Audit Committee. Companies Act 1981 s89 Audit Committee
Remuneration Reference Committee where appropriate
29 Determining the remuneration policy for the non-executive Directors, subject to the bye-laws and shareholder approval as appropriate. Code D.1.3
Delegation of Authority Reference Committee where appropriate
30 Division of responsibilities between the Board and the Manager. Management and Administration Agreements’ terms and conditions and issues arising therefrom. AIC Principle 15 Management Engagement Committee
31 Approval of terms of reference of Board committees. Code B.2.1, C.3.3 and D.2.1
32 Receiving reports from Board committees on their activities.
Corporate Governance Matters Reference Committee where appropriate
33 Undertaking a formal and rigorous review, annually, of its own performance, that of its committees and individual Directors. Code B.6
34 Determining the independence of Directors. Code B.1.1
35 Review of the Company’s overall corporate governance arrangements.
36 Receiving reports on the views of the Company’s shareholders. Code E.1.1
37 Authorisation of Directors’ conflicts or possible conflicts of interest. Companies Act 1981 s97
Miscellaneous Reference Committee where appropriate
38 Approval of the Company’s principal professional advisers.
39 Prosecution, defence or settlement of litigation.
40 Directors’ & Officers’ liability insurance.
41 Authorised Signatories
42 Environmental policy. N/A
43 This Schedule of Matters reserved for Board decisions.