Chapter 6 Flashcards
A modern institutional investment management firm’s middle office has what four main areas of responsibility?
- Compliance
- Legal
- Audit
- Accounting
Each of the four main functions of an investment management firm has its own leader. These department heads are known as the:
-chief compliance officer
-chief legal officer
-chief auditor
-controller
(all report to president unless there is a COO)
Describe why the back office is known as “the cage”
- custodial and safekeeping staff used to be located in very close proximity to the vault and worked in physically secure offices with metal bars
- heightened security was required because everything was in bearer form
Define and describe bearer form
-the security certificate being exchanged at the cage was negotiable and payable to the bearer
What is the compliance function?
- ensures a firm is being run in such a way that it is abiding by the rules and regulations set by securities regulators
- primary objective is to ensure that all of the firm’s products, operations, and sales and marketing practices are in compliance with all security regulations and applicable laws
The roles and responsibilities of a firm’s compliance function focus on three primary areas:
- licensing
- sales, marketing and client service
- portfolio management
What are two examples of type of information that compliance staff need to review?
- promises regarding future rates of return
- calculating of rate of return (ie. is it GIPS compliance? Net or gross basis?)
The investment guidelines and restrictions for each portfolio are a combination of what two things?
- The investment restrictions stated in the applicable securities regulations
- The investment guidelines and restrictions negotiated with each investor
Define pre-trade compliance testing
-ensures that all securities trades are compliant with all regulations pertaining to both the conduct of capital markets and a particular fund, as well as the investment guidelines and restrictions that are agreed upon with investors prior to the execution of a trade
Define straight-through processing (STP)
- type of security processing and portfolio management software that provides one continuous real time investment management database that links a firm’s front, middle, and back office
- designed around all of the necessary steps required to properly execute, record, and settle a security trade
- designed to avoid human errors associated with securities trading, settlement, and record-keeping
What are the 5 STP system processing steps involved in a security transaction?
- PM enters trade
- STP analyzes trade and checks for compliance issues then approves if all good
- Trader places the approved trade and STP immediately notifies PM
- Upon execution, trade is then entered into the STP system either manually or electronically
- Executed trade is transmitted to four parties (PM, firm’s back office, firm’s custodians, and trader’s counter party)
Define and describe the Legal Function
-primary objective is to help ensure the firm has structured its business affairs properly from a legal perspective (so that firm doesn’t find its-self in a situation where it could be financially held liable to another party
Define and describe the Auditing Function
- primary objective is to audit a firm’s operations (to verify that all of the firm’s functions are conducting their affairs and activities in conformance with the operational procedures it has established
- primary responsibilities are financial accounting services, fund accounting, and unit holder record keeping
What are the middle office’s key operational interfaces and information flows
- the compliance function
- the legal function
- the auditing function
- the accounting function
What are the 6 key best practices for the compliance function?
- Leadership
- Communiction with regulators
- Prior approval of new investment products
- Prior approval when contracting new distributors
- Straight through processing system (STP)
- Personal trading pre-approval
