Ch 8 - Applications of Legislative and Regulatory Framework (1)

Question 1

What is a trust?

Answer 1

A trust is an agreement under which one party – the trustee – has legal ownership of certain property that they must manage for the benefit of another party – the beneficiary

Trusts could exist in many different situations; examples include:

Unit trusts
Pensions
Charitable bodies
Trust funds for children

Question 2

Trustees may have the following responsibilities*

Answer 2

Exercising control over the investment and management of assets

Payment of benefits to beneficiaries

Ensuring compliance with the trust deed and rules and legislation

Exercising discretionary powers in the interest of the members

Ensuring the smooth running and admin of the trust

Note: standard of care required is that of the ordinary prudent person of business acting in the management of their own affairs

Question 3

Two main functions of a trust

Answer 3

Means of segregating assets for the protection of the beneficiaries, thus insulating them from any consequence of the settler’s actions subsequent to the settlement

Provide a mechanism for the collective representation and protection of members of a group of people linked by a common interest

Question 4

Corporate governance

Answer 4

Refers to the high-level framework within which managerial decisions are made within a company.

Good corporate governance involves managing the company in a way that reflects the interests of the various stakeholders. It tackles agency problems and costs, and other potential conflicts of interest.

Question 5

Good corporate governance is achieved through

Answer 5

Remunerating management in such a way as to align their interests with those of the shareholders

A requirement to have non-executive directors, who provide an impartial view and represent the shareholders’ interests

Regulation

Question 6

Role of non-executives

Answer 6

Challenging and contributing to the development of strategy

Monitoring the performance of management

Play a leading role in setting the remuneration for executives directors’ pay

Play a leading role in the nomination and appointment of new board members

Play a leading role in the audit committee

Question 7

Listing authority

Answer 7

Is responsible for ensuring that any new issues of shares is conducted in an orderly and fair way, and that the conduct of the company remains consistent with the listing of the shares after the issue

Question 8

To achieve this the listing authority regulates

Answer 8

Financial and business information that is made available to the public at issue – presented in the share prospectus

The issue process

Financial and business information that is made available post-issue – must be timely

Conduct of the listed security market

Conduct of listed companies

Question 9

Share prospectus which includes

Answer 9

Number of shares on offer and offer price

Number of shares currently in circulation

Underwriters of the issue

Details of how shares will be allocated if the offer is over-subscribed

How the money raised will be used

Company’s intended dividend policy

Audited financial statements

Outline of the aims and objectives of the company and any special factors

Details of the senior management, board directors and their salaries

Question 10

Specialist mandate basis

Answer 10

Invest in a single asset class

Question 11

Balanced or multi-asset approach (mandate basis)

Answer 11

Invest in a range of asset classes with certain restrictions

Question 12

Common restrictions in all mandates

Answer 12

A prohibition on certain asset classes

Limitations on how assets and asset classes are used

Maximum holdings in certain individual assets or asset classes/sectors

Restrictions on self-investment in the sponsor’s own securities – tesla buys tesla shares for example

Counterparty exposure limits for derivative investments

Ethical or social limitations

Question 13

Regulation may also impose investment restrictions

Answer 13

Requirement to hold government bills or bonds

Requirement to match by currency

Restrictions on the choice of assets/asset classes

Admissibility regulations

Question 14

Regulation may require a Statement of Investment Principles to be prepared

Answer 14

Less prescriptive approach than admissibility regulations

Requirement that any restrictions in the mandate are set out in this statement for the information of beneficiaries

May include statements to highlight any departure from accepted ‘best practice’ and justification for such departures

This increased disclosure will enable the beneficiary will perform the regulatory function

Sanctions for failure to meet standards

Question 15

Purpose of restrictions in investment agreements

Answer 15

Protect beneficiaries

Encourage market confidence

Encourage investment

Question 16

A ‘statement of investment principles’ should set out

Answer 16

Who is taking which decisions, and why this structure has been selected

The fund’s investment objective

The fund’s planned strategic asset allocation strategy, including projected investment returns on each asset class, and how the strategy has been arrived at

The mandates given to all advisors and managers

The scope for tactical asset allocation decisions to move away from the strategic asset allocation benchmark

Any risk controls in place

The managers’ approach in attempting to achieve the objective

Any investment restrictions imposed by the trustees or regulation, for example restrictions on self-investment

Clear time scales of measurement and evaluation

The nature of the fee structure in place and why this set of structures has been selected

The ethical investment policy of the trustees

Question 17

Good corporate governance can be demonstrated by

Answer 17

Seeking to improve shareholder value and acting in the best interests of shareholders

Ensuring the solvent operation of the business

Not seeking to make excessive profits from customers

Paying appropriate recompense to suppliers, particularly a risk where monopolies operate

Question 18

Aims/principles of merger regulation

Answer 18

Protect customers, in particular individuals who will have less bargaining power

Ensure suppliers are treated fairly

The rights of employees of the two companies are protected (including pension benefits)

All shareholders are treated fairly (in particular minority shareholders)

Aim of the regulators is to encourage competition and prevent mergers that would reduce competition

Ensure that the takeover process is transparent to all stakeholders

Question 19

Areas of the takeover process that are usually regulated:

Answer 19

Notification

Shareholder information

Timescales (3)

Conditions

Question 20

Main concerns of the trustee will be

Answer 20

To act prudently

Act in the beneficiaries’ interest

Demonstrate fairness and equity between beneficiaries of the trust

Not to profit directly from actions taken

Act in line with the constraints of the trust deed and rules and any overriding legislation