EEA Life Settlements Fund PCC Limited

Transcription

1 Report on Control Environment as at 30 April 2011 Incorporating an Independent Report by KPMG Channel Islands Limited dated 5 July 2011

2 Index Introduction 1 Fund structure 2 Organisation of responsibilities 3 Control environment 7 Simplified cash movements 8 Summary of control objectives 9 Reporting accountant s report 10 Management description of control areas and procedures and tests performed by KPMG 11

3 Introduction A strong internal control environment is a key element in delivering services to investors. EEA Life Settlements Fund PCC Limited (the Company ) is pleased to present this report which describes aspects of the control environment and control objectives in the management of the Company and sets out a selection of the control procedures designed to meet these objectives. The intention of the report is to allow the Company s investors to understand the means by which the business is conducted and how the risks are controlled. This report is designed to address specific risk areas considered of interest to investors. The specific nature of the Company s business and its control environment does not easily lend itself to frameworks for assurance reporting on internal controls such as AAF 01/06 (UK) or SAS 70 (USA). The report relates to the control environment in place at 30 April KPMG have been employed to conduct agreed upon procedures as set out in the report in relation to the specific identified controls. 1

4 Fund structure The Company is an open-ended investment protected cell company governed by the provisions of The Companies (Guernsey) Law, 2008, as amended. Investors dealing with a cell of the Fund (a Cell ) shall only have recourse to that Cell and their interest shall be limited to the assets attributable to that Cell. At the time of this report there were twelve active Cells: USD Fund Class X Cell Euro Fund Class X Cell Sterling Fund Class X Cell Swedish Krona Fund Class X Cell USD Fund Dist Cell Euro Fund Dist Cell Sterling Fund Dist Cell USD Fund Acc Cell Sterling Fund Acc Cell Euro Fund Acc Cell Meteor Senior Life Settlements Sterling Fund Meteor Senior Life Settlements Sterling Fund II WAY Life Settlements Fund Cell USD Fund Class I Cell Each of the Cells invests substantially all of its capital into EEA Life Settlements Holdings Limited ( EEA Holdings ) which in turn invests substantially all its capital in EEA Life Settlements Master Fund Limited (the Master Subsidiary ) and EEA Life Settlements Master Fund II Limited (the Master Sub II ), both wholly owned subsidiaries of the Fund. The investment policy of the Master Subsidiary is to provide debt financing to the Master Sub II. The investment policy of the Master Sub II is to provide equity and debt financing to EEA Life Settlements Inc ( EEA Inc ), its wholly owned subsidiary. The investment policy of EEA Inc is to invest in a diversified portfolio of life insurance policies. The Fund comprises the Company, its Cells, EEA Holdings, the Master Subsidiary, the Master Sub II and EEA Inc. The Company is authorised as a Class B collective investment scheme under The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended; and operates under The Collective Investment Schemes (Class B) Rules 1990 as issued by the Guernsey Financial Services Commission. The Company and its cells are listed on the Channel Islands Stock Exchange. 2

5 Organisation of responsibilities The Fund outsources its responsibilities to a number of well-known, reputable service providers which are independent of each other, providing good segregation of duties. The roles of investment adviser, custodian and transaction processing are performed by these different independent providers. Service providers Responsibilities Other information EEA Fund Management Manager Regulated by the Guernsey Financial (Guernsey) Limited Services Commission ViaSource Funding Group, LLC Investment Adviser Licensed as a viatical life settlements provider in New Jersey and 5 other US states BNP Paribas Trust Company Custodian Regulated by the Guernsey Financial (Guernsey) Limited Services Commission SAS 70 report available RBS Citizens N.A. Sub-Custodian Regulated by the Federal Reserve, the Federal Deposit Insurance Corporation and the New York State Banking Regulation Authority SAS 70 report available Mills, Potoczak & Company Servicing Agent and Certified Public Accountants Premium Payment Agent International Administration Administrator, Secretary Regulated by the Guernsey Financial (Guernsey) Limited and Registrar Services Commission AAF 01/06 report available Ernst & Young LLP Independent Auditors ICAEW registered auditor 3

6 Organisation of responsibilities (continued) EEA Fund Management (Guernsey) Limited (the Manager ) has the primary responsibility for the management and administration of the Fund and the making of investments on its behalf. The duties of investment of the Fund s assets have been delegated to the Investment Adviser and administration functions of the Fund have been delegated to the Administrator. EEA Fund Management (Guernsey) Limited is a company with limited liability incorporated in Guernsey and is regulated by the Guernsey Financial Services Commission. Its ultimate holding company is EEA Holdings Limited. Investment Adviser ViaSource Funding Group, LLC (the Investment Adviser ) is a limited liability company formed in the State of New Jersey, USA. The Investment Adviser is responsible for the investment of the Fund s assets and has discretionary authority to invest the same in accordance with the objectives, policies and investment restrictions set out in the Company s Offering Memorandum subject to the approval of the Servicing Agent. The Investment Adviser is appointed by the Manager. The Investment Adviser is a life settlement provider that has developed significant experience in the successful establishment and management of special purpose investment funds that acquire life settlements. It has developed core competencies in the successful management of life settlement investment funds. In serving the life settlement funds the Investment Adviser performs all the tasks from sourcing of policies and tracking the health status of the insured to monitoring the final settlement on maturity. The Investment Adviser has been appointed as agent of the Custodian to direct the operation of accounts maintained by the Sub-Custodian on behalf of the Fund for the purchase of life settlements and payment of their premiums and to give instructions and receive full information in respect of those accounts. Custodian BNP Paribas Trust Company (Guernsey) Limited (the Custodian ) is a company incorporated in Guernsey the principal activity of which is the provision of trustee and custodian services to collective investment schemes. The Custodian is licensed to carry out controlled investment business in the Bailiwick of Guernsey under the Protection of Investors (Bailiwick of Guernsey) Law, The Custodian is ultimately owned by BNP Paribas SA, a company incorporated in France. 4

7 The Custodian holds (either itself or through its agents or delegates) all the assets of the Fund and all documents of title to such assets but has no responsibility for selecting or valuing the investments of the Fund. The Custodian has no decision making discretion in relation to the Fund s assets. The Custodian has appointed the Sub-Custodian to perform some of its duties. The Custodian is primarily responsible under The Collective Investment Scheme (Class B) Rules 1990 for keeping the register of shareholders; the Custodian has delegated this task to the Administrator. Sub-Custodian The Fund and Custodian have appointed RBS Citizens N.A. as Sub-Custodian to hold the life policies for the Fund, serve as an escrow agent in connection with the purchase of life settlements, establish a premium reserve account and file with the insurance companies claims prepared by the Investment Adviser for the benefit of the Company. RBS Citizens N.A. is a subsidiary of Citizens Financial Group which is a wholly owned subsidiary of Royal Bank of Scotland Group plc. Servicing Agent The Fund and the Investment Adviser have appointed Mills, Potoczak & Company as Servicing Agent of the Fund to serve an active role as the verifier that policies identified for purchase by the Investment Adviser meet the investment criteria of the Fund. The Servicing Agent certifies that each policy meets such criteria and monitors all future premium payments. Premium Payment Agent The Fund, Investment Adviser and Sub-Custodian have appointed Mills, Potoczak & Company as premium payment agent to make payments of premiums due under insurance policies. Administrator, Secretary and Registrar International Administration (Guernsey) Limited ( IAG or the Administrator ) is a company incorporated in Guernsey with limited liability and is licensed by the Guernsey Financial Services Commission to carry out the restricted activities of promotion, subscription, registration, dealing, management, administration and advising in connection with category 1 collective investment schemes and category 2 general securities and derivatives under The Protection of Investors (Bailiwick of Guernsey) Law, The Manager has delegated certain duties to IAG, as Administrator and Secretary, including administration of the Fund, valuation of each Cell, and the issue and redemption of shares. The Custodian has delegated its duties as Registrar in respect of the Fund to the Administrator. 5

8 Organisation of responsibilities (continued) Auditors Ernst & Young LLP perform an audit of the Company annually in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). On an annual basis the Auditors give an opinion on the financial statements stating whether the financial statements give a true and fair view and if they have been prepared in accordance with the relevant law. 6

9 Control environment The directors of the Fund are responsible for maintaining a control environment through its service providers which ensures the protection of the Fund s assets and the quality of the services provided. The directors achieve this by monitoring the quality of its service providers and the environment in which they operate. The Fund is based in Guernsey, the finance industry of which is regulated and monitored by the Guernsey Financial Services Commission ( GFSC ). The Guernsey regulations are designed to ensure that providers of financial services in Guernsey carry out their business to established international standards. In addition to general powers of supervision, the GFSC has statutory powers to enforce compliance with the laws regulating the conduct of the finance business in Guernsey. The Fund takes advantage of the strict control environment in which IAG operates as an entity regulated by the GFSC and is subject to a comprehensive compliance monitoring programme conducted by IAG s Compliance Department. As well as the internal controls and their application within IAG, IAG and the Fund are subject to further external independent reviews: The GFSC makes on-site monitoring and inspection visits to IAG. The most recent visit was in October The Fund is audited annually and the auditors are required to report to the shareholders. For the year ended 31 December 2009, the auditors issued an unqualified opinion. The Custodian is required to perform reviews on the operation of the Fund to ensure that the Fund has been properly managed in accordance with The Collective Investment Scheme (Class B) Rules 1990 issued by the GFSC, the principal documents and the latest scheme particulars. The Custodian is required to report annually to the members about the Manager s performance of its duties. 7

10 Simplified Cash Movements The diagram below is a simplified representation of the Fund s transactions: Investor Life Companies HSBC Guernsey (Client Account) Premiums Maturity Proceeds BNP Paribas (Custodian) Cash for Policy purchase Cash for & premiums Redemptions EEA Life Settlements Fund PCC Limited Instruction to purchase Mills Potoczak & Company Independent verification RBS Citizens (Subsidiary of The Royal Bank of Scotland) Recommendation to purchase (Service Provider) Cash for Premiums (Sub Custodian and Trustee to order of the Fund) Cash for Policy Intermediary Policy Bidding process ViaSource (Investment Advisor) Policy Holder LE Company 1 LE Company 2 8

11 Summary of control objectives Issues and redemptions Issues and redemptions are carried out in accordance with the scheme particulars and applicable regulations. Issues and redemptions are recorded completely and accurately. Authorisation and processing of transactions Investment and cash transactions are subject to appropriate authorisation and control procedures. Investment and cash transactions are captured, authorised and recorded accurately on a timely basis. Custody of assets Life polices and cash are held to the order of the Fund. Reconciliations are accurately prepared on a timely basis and outstanding items are followed up and cleared appropriately. Valuation Net asset values and dealing prices are calculated in accordance with the offering memorandum. Third party monitoring The Fund is managed in accordance with the scheme particulars and the principal documents. 9

12 KPMG Channel Islands Limited P.O. Box 20 St Peter Port Guernsey Channel Islands GY1 4AN Telephone +44 (0) Fax +44 (0) Internet The Directors EEA Fund Management (Guernsey) Limited Regency Court Glategny Esplanade St Peter Port Guernsey GY1 1WW 5 July 2011 Dear Sirs Agreed procedures in respect of a controls report In accordance with the terms of our engagement letter dated 4 July 2011, we have carried out certain agreed procedures which we have agreed with the directors of the Fund. The procedures do not constitute either an audit or a review in accordance with any generally accepted auditing standards and, as such, no opinion is expressed. Had we performed an audit or review, other matters might have come to light that would have been reported. Our procedures performed and results are presented on pages 11 to 16, under the column headed Tests performed by KPMG This report is given solely in connection with our engagement. It was released to the directors of the Fund on the basis that it shall not be copied, referred to or disclosed, in whole (save for the Fund s own internal purposes) or in part, without our prior written consent. Our report was designed to meet the agreed requirements of the Fund determined by the Fund s needs at the time. Our report should not therefore be regarded as suitable to be used or relied on by any party wishing to acquire rights against us other than the Fund for any purpose or in any context. Any party other than the Fund who obtains access to our report or a copy and chooses to rely on our report (or any part of it) will do so at their own risk. To the fullest extent permitted by law, KPMG Channel Islands Limited will accept no responsibility or liability in respect of our opinion to any other party. This letter is for your benefit and information only and, save as set out in our engagement letter, is not to be copied, referred to or disclosed, in whole or in part, without our prior written consent. Yours faithfully KPMG Channel Islands Limited 10

13 Internal controls Management description of control areas and procedures Tests performed by KPMG Issues and redemptions Subscriptions into the Fund are collected in an IAG client account at HSBC. Monthly reconciliations of client accounts are performed, compliance with which is monitored. 1 Regulations prescribing the appropriate use of client money are set out in The Licensees (Conduct of Business) Rules 2009, to which International Administration (Guernsey) Limited is subject Confirmed that International Administration (Guernsey) Limited is licensed by the GFSC under The Protection of Investors (Bailiwick of Guernsey) Law, 1987 Confirmed that section 9 Client Assets of The Licensees (Conduct of Business) Rules 2009 contain regulations regarding treatment of client assets, including client money and client money accounts 2 The client account is designated as client monies which means it cannot be offset against any other balances which International Administration (Guernsey) Limited ( IAG ) might hold at HSBC. A letter confirming this is obtained from HSBC upon the account being opened. 3 Within IAG an individual carries out a reconciliation of amounts carried in the client accounts on a monthly basis. These reconcilitions are reviewed and signed off by an authorised signatory of IAG. Inspected the letter from HSBC confirming designation of a client account Inspected the client account reconciliations for 30 April 2011 and checked that they have been reviewed and signed by an authorised signatory of IAG 11

14 Internal controls (continued) Management description of control areas and procedures 4 IAG s Compliance Department checks on a monthly basis as part of its compliance monitoring programme that all client account reconciliations have been carried out. Tests performed by KPMG Inspected IAG Compliance Department s checklist for the Fund and observed evidence that client account reconciliations are checked on a monthly basis Issues and redemptions of shares are processed in accordance with client instructions and the Fund price. 5 A checklist is completed and checked by a second person to ensure issues and redemptions are in line with client instructions and relevant regulations. Inspected the checklists used for processing issues and redemptions Selected one example of each of these checklists completed for April 2011 and confirmed completion and review by separate people Authorisation and processing of transactions Payments from IAG client bank accounts and Fund bank accounts held at BNP Paribas Trust Company (Guernsey) Limited are properly authorised. 6 Payments out of the Fund are subject to the terms of Rule 2.04 of The Collective Investment Schemes (Class B) Rules 1990 which determine that only expenses disclosed in the scheme particulars may be paid out of the assets of the Fund. Confirmed that Rule 2.04 Payments out of and into the scheme property of The Collective Investment Schemes (Class B) Rules 1990 specifies restrictions over payments made out of schemes 12

15 Internal controls (continued) Management description of control areas and procedures 7 Payments require processing by two signatories in accordance with the Administrator s signatory lists for the relevant bank. Tests performed by KPMG Inspected IAG s authorised signatory list dated 28 March 2011 which specifies that any instruction requires two signatures, one of which must be an A signatory 8 Banking system administration of Fund and client bank accounts requires online signatories which are independent to the Administrator s signatory lists. Inspected authorised signatories within the HSBC and BNP online banking system 9 The Servicing Agent and Premium Paying Agent is required under the Servicing Agent Agreement to verify that policies identified for purchase by the Investment Adviser meet the investment criteria of the Fund and certify this to the Sub-Custodian and Investment Adviser. Inspected the executed Service Agreement and confirmed that the Servicing Agent is responsible for verifying that policies identified for purchase meet the Fund s investment criteria Traced an April 2011 policy purchase payment from the account held with the Custodian to receipt in the account held with the Sub-Custodian and subsequent payment out of that account Traced an April 2011 transfer for policy premium from the Sub- Custodian bank account to receipt in the Sub-Custodian premium reserve bank account and subsequent payment of premium to the Servicing Agent out of that account 13

16 Internal controls (continued) Management description of control areas and procedures 10 The Investment Adviser collates the required information for payment of premiums on life policies. The terms of the Servicing Agent Agreement require the Servicing Agent to monitor premium due dates, payment frequency and amounts and maintain a system to flag to the Sub-Custodian and Investment Adviser the due dates of premiums for each monitored policy and subsequently compare their records with premium payments requested by the Investment Adviser. Tests performed by KPMG Inspected the executed Service Agreement and confirmed that the Servicing Agent is responsible for maintaining a system that will flag for the Sub-Custodian and the Investment Adviser the due dates of premiums for each Monitored Policy (as defined in the Service Agreement) Custody of assets Fund assets are held to the order of the Fund and are complete and accurate 11 Fund bank accounts are held to order of the Custodian on behalf of the Fund and are reconciled monthly by the Administrator. Inspected the bank statements received from the Custodian and confirmed that these accounts are described as being held in the name of the Fund Inspected the reconciliations of the Fund s bank accounts for April 2011, which are prepared by IAG 12 Life policies are held by the Sub-Custodian to the order of the Fund and are reconciled quarterly by the Administrator. Inspected the 30 April 2011 Asset Listing Report provided to the Administrator by the Custodian Inspected the April 2011 quarterly reconciliation of the Fund s Life policies, which is prepared by IAG 14

17 Internal controls (continued) Management description of control areas and procedures Tests performed by KPMG Valuation Net asset value and Fund price is correctly calculated 13 The Administrator completes a monthly valuation checklist which is reviewed by a second individual to evidence the valuation process. Inspected the checklist used for preparing monthly valuations Selected the April 2011 checklist and confirmed completion and review by separate people 14 The Investment Adviser prepares a monthly policy valuation. The Administrator reconciles the policies thereon to its records on a monthly basis. Inspected the April 2011 monthly policy valuation prepared by the Investment Adviser Inspected the reconciliation of this valuation to the Fund s accounting records maintained by IAG Third party monitoring The Fund, Sub-Custodian and Administrator are subject to reviews by third parties 15 The Custodian is required to perform reviews on the operation of the Fund to ensure that the Fund has been properly managed in accordance with The Collective Investment Scheme (Class B) 1990 Rules issued by the GFSC, the principal documents and latest scheme particulars. Confirmed that the Custodian is required by Rules 6.04 and 6.01 (1)(j) of The Collective Investment Schemes (Class B) Rules 1990 to state, on an annual basis, whether in the Custodian s opinion the Manager has managed the scheme in accordance with the provisions of the principal documents and these rules. Confirmed that the audited financial statements include the Report of the Custodian 15

18 Internal controls (continued) Management description of control areas and procedures 16 The Administrator is subject to a GFSC on-site monitoring and inspection visit. 17 An annual external audit is conducted in accordance with International Standards on Auditing. 18 A Compliance Monitoring Programme is completed by the Administrator s Compliance Department. Tests performed by KPMG Inspected correspondence between the Administrator and the GFSC evidencing a routine compliance visit during October 2007 Inspected the Fund s 31 December 2010 financial statements and confirmed that the audit of those financial statements was conducted in accordance with International Standards on Auditing (UK and Ireland) Inspected the IAG Compliance Department s Compliance Monitoring Programme as applied for the Fund 16

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