Chapter 4

Question 1

All investment management firms in Canada are structured legally as ____________.

Answer 1

Corporations to be considered for, and receive registration from, the appropriate securities regulator

Question 2

The corporate ownership structure offers investment firms what four key advantages?

Answer 2

1. Firm’s owners benefits from protection the structure offers (limited liability) and other tax benefits
2. Firms are envisions as long life business ventures therefore the corporate vehicle suits this objective
3. Creation of brand identity
4. Corporate share ownership is an incentive that attracts and retains key productive staff

Question 3

What are the two forms of private ownership?

Answer 3

1. 100% employee owned

2. employee majority owned with a passive external owner

Question 4

From a legal perspective, describe the “publicly owned structure”

Answer 4

• there are technically no publicly owned investment management firms
• all publicly owned financial institutions consolidate their investment management personnel and operations within one or more companies (ie. wholly owned subsidiaries of holding companies that are publicly owned)

Question 5

What are the four elements of compensation available to institutional investment managers?

Answer 5

1. Base salary
2. Annual cash bonus
3. Shares or share purchase options
4. Profit sharing

Question 6

What is the separation of duties principle?

Answer 6

• incorporated into an organizational structure to minimum the potential for employee self dealing via collusion with another individual in the firm
• should be incorporated into the design of all organizations and institutional investment management firms

Question 7

What are two specific positions of critical importance in the investment management firm?

Answer 7

1. the ultimate designated person (UDP)

2. the chief compliance officer (CCO)

Question 8

What are the responsibilities of the UDP and the COO

Answer 8

UDP: responsible to the SRO for the firm’s conduct and the supervision of its employees
CCO: responsible for designing and implementing a supervision system that will provide the firm’s board of directors with reasonable assurance that compliance standards are being met

Question 9

What is the difference between an exempt and a non-exempt investor?

Answer 9

Non-exempt: a small individual retail investor. Non-exempt refers to the fact that investment dealers must sell securities to these investors via a prospectus

Exempt: securities regulators permit the sale of securities without a prospectus

Question 10

What are the three common prospectus exemptions that securities regulators permit?

Answer 10

1. Accredited investor exemption
2. Minimum investment exemption
3. Offering memorandum exemption

Question 11

What are the qualifications for being an accredited investor?

Answer 11

Institutional: minimum $5M net assets
Individual: financial assets of over $1M or net income of over $200K (or $300K HH income)

Question 12

What is the minimum investment exemption?

Answer 12

• allows the sale of securities to investors who make prescribed minimum investment
• NI45-106 sets this number to $150,000

Question 13

What are the four main channels for institutional investment managers to offer their services by?

Answer 13

• pooled funds
• seg funds/managed accounts
• limited partnerships
• sub-advisory capacity

Question 14

Describe a pooled fund

Answer 14

• an open ended trust in which investors contribute funds that an institutional manager than invests or manages
• like a MF but not required to have prospectus

Question 15

Describe a segregated/managed fund

Answer 15

-an investment account that is owned by an institutional investor and managed by a third party portfolio manager

Question 16

What are two reasons why investors prefer segregated account structures over pooled fund structures?

Answer 16

1. For safety reasons, certain investors stipulate that their assets remain with the custodian of their choice
2. Seg accounts are the preferred investment vehicle for personalized investment portfolios tailored to an investor’s specific needs

Question 17

What are the 5 most popular investment strategies used by institutional investment managers?

Answer 17

1. Growth
2. Value
3. GARP
4. Momentum (sector rotation)
5. Technically based

Question 18

From a business perspective, what is a major drawback of passive investment products?

Answer 18

-they cannot be patented and are very easily replicated

Question 19

What are 3 key operational changes required by firms that manage alternative investments?

Answer 19

1. appropriate legal and accounting services (assessing and negotiating private placements)
2. skills and resources for executing and accounting for short sales
3. admin staff must be properly trained in all aspects of securities borrowing and financing
4. the valuation of non-marketable or publicly traded securities must be performed in an extremely rigorous and documented process

Question 20

What are the two primary areas of structure and operations that an institutional investment management firm must modify when offering off-shore based investment funds?

Answer 20

1. Additional legal and tax counsel

2. Proper custody, safekeeping, security settlement, and fund unit holder services are arranged for the offshore fund

Question 21

Describe the role of the fund manager

Answer 21

• creator and sponsor of the fund
• primary role is to provide day to day administration of all aspects of mutual funds operations
• the fund manager is a corporate entity

Question 22

What are the fund manager’s primary responsibilities?

Answer 22

• preparing and filing documents (ie. prospectus)
• ensure all service providers exercise due diligence in creating, managing, and distributing the mutual fund
• negotiating service contracts
• ensure service providers conduct their affairs according to rules, regulations, and best practices

Question 23

Describe the role of principal distributor

Answer 23

• responsible for a mutual fund’s marketing and distribution
• usually a wholly owned subsidiary of the entity registered as the fund manager
• always must be registered as a mutual fund dealer

Question 24

Describe the role for the trustee (pertaining to mutual funds)

Answer 24

• mutual fund assets are normally held in a trust

- trustee holds the title to the property on behalf of unit holders

Question 25

Describe the role of the custodian

Answer 25

• holds all of the fund’s cash and securities and ensures that those particular assets are kept separate from any other cash and securities it might be holding
• safekeeping role
• security settlement role

Question 26

What are some of the major challenges facing the institutional investment managed industry?

Answer 26

• investment performance
• access to suitable distribution (having enough AUM)
• investing in resources
• expanding distribution network (internal vs third party)
• increasing compliance requirements
• increasing competition

Question 27

Global competition is a threat on what two basic levels?

Answer 27

1. a domestically focused institutional investment manager will see the potential growth rate for AUM diminished as an increasing proportion of its investors assets are managed by foreign based global competitors
2. by their global investment mandate, foreign global competitors are required to invest a portion of their investors assets in the Canadian financial markets

Question 28

What are the two primary reasons why the shift toward passive investment strategies is a threat to the industry?

Answer 28

1. it potentially diverts assets from the institutional investment management firsts that manage solely on an active basis
2. fees are substantially lower