Chapter 8:Applications of the legislative and regulatory framework

Question 1

What is meant by a trust

Answer 1

• Relationship between 2 parties, in which legal owner of trustee owns properly whilst beneficial/owner recieves all from that property
• Trust deed
  
  • Divides legal and beneficial ownership
  • specifies purposes of trust fund and how it is to be admistered
• Trustees then appointed to carry out these provisions

Question 2

State the 2 main roles of trusts in the context of investment funds

Answer 2

• Means of segregating assets for protextion of beneficiaries eg pension scheme seperate from sponsoring company
• Mechanism for collective representation and protection of members of a group of people linked buy common interest eg trustee look after interests of bond holders or pension scheme members

Question 3

What is meant by coporate governance

What is the aim of good corporate governance

Answer 3

Corporate governance

• Refers to high level framework within whic managerial decisions are made in a company
• responsibility of board of directors
• aim of good corporate governance is to manage company to best meet appropriate requirements of stakeholders
• In particular, management (as agent( should act primarily in best interests of shareholders (as principals)

Question 4

Give 2 mechanisms for ensuring that company management act in the best interests of the shareholders

Answer 4

1. Ensuring remuneration aligns interests of management and shareholders, and so incentivises management to act in interests of shareholders, eg share options or actual shares
2. Applying non - executive directors to provide impartial view on behalf of shareholders

Question 5

• What is CSR
• What is socially responsible investment (SRI)

Answer 5

• Corporate social responsibility
  
  • Set of guidelines that requires company to consider and report on impact of its activities on society, economy and enviroment
  • Aims to protect stakeholders in company who have no say on its governance
• Socially responsible investment
  
  • Set of guildlines that requires that investment decisions have regard to social (eg diversity), ethical and enviromental performance of companies, and not just their financial performance

Question 6

Explain what a listing authority is responsible for

List 5 main concerns of listing authorities

Answer 6

• Responsibility for ensuring that
  
  • Any new issue of shares is conducted in orderly and fair way
  • conduct of company remains consistent with listing of shares after issue
• Five main concerns
  
  • production of information on isssue of shares
  • process by which shares are offered to potential shareholders
  • continuing production and dissemination of information on timely basis by listed companies
  • Continuing conduct of market in listed securities
  • rules to ensure listed companies continue to behave in manner that doesn’t conflict with its other objectives

Question 7

State the main aims of competition and monopolies regulation

Give 2 potential difficulties for competition regulators

Answer 7

• Compeition and monopolies regulation
  
  • Aim to protect the interest of customers and suppliers
  • Aim is to encourage competition and prevent mergers that would reduce competition through exercise of market power
• Two potential difficulties for competiion regulators
  
  • Multinational companies that operate in many countries
  • definition of the product

Question 8

Distinguish between a specialist and a balanced investment mandate

Answer 8

Specialist and balanced investment mandates

• Under specialist mandate, investment manager engaged to invest in single asset class, in whicch he or she specialises - often on an active management basis
• Under balanced (multi - asset) mandate, investment manger engaged to invest across range of asset classes, usually within certain restrictions that specify extent to which manager is allowed to depart from benchmark strategic asset allocation at any time

Question 9

List 6 restrictions that might by included withini an investment mandate

Answer 9

• Asset classes that are entirely prohibited
• Limitations no use assets and asset classes, such as prohibition on the speculative use derivatives
• maximum permissible holding in indivudal assets or asset classes (to ensure diversification)
• Counterparty eposure limits for derivative instruments
• prohibitions on self investment in sponsor’s own securities
• ethical or social limitations

Question 10

List 5 other forms of regulatory requirements that might influence the asset allocation

Answer 10

• Localisation requirements that require matching of assets and liabilities
• requirements to hold specific assets to back specific liabilities
• Requirements to hold specific assets, such as government bonds
• Prohibitions on the holding of specific assets
• admissibility reqirements that determine whether assets can by taken into account for solbency purposes

Question 11

State 3 purposes of trestrictions on invesetments

Answer 11

1. Protect ultimate beneficiaries from gross incompetence or mismangement by fund managers
2. encourage confidence in investment schemes and benefits they secure
3. promote the accumulation of investible funds