Chapter 8:Applications of the Legislative and Regulatory Framework Flashcards
What is meant by a trust
Relationship between two parties, in which legal owner or trustee owns properly whilst beneficial/owner receives all from that property
Trust deed
Divides legal and beneficial ownership
specifies purposes of trust fund and how it is to be administered
Trustees then appointed to carry out these provisions
State the 2 main roles of trusts in the context of investment funds
Means of segregating assets for protection of beneficiaries eg pension scheme separate 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
What is meant by corporate governance
What is the aim of good corporate governance
Corporate governance
Refers to high level framework within which 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)
Give 2 mechanisms for ensuring that company management act in the best interests of the shareholders
Ensuring remuneration aligns interests of management and shareholders, and so incentivises management to act in interests of shareholders, eg share options or actual shares
Applying non - executive directors to provide impartial view on behalf of shareholders
What is Corporate social Responsibility (CSR)
What is socially responsible investment (SRI)
Corporate social responsibility
+Set of guidelines that requires company to consider and report on impact of its activities on society, economy and environment
+Aims to protect stakeholders in company who have no say on its governance
Socially responsible investment
+Set of guidelines that requires that investment decisions have regard to social (eg diversity), ethical and environmental performance of companies, and not just their financial performance
Explain what a listing authority is responsible for
List 5 main concerns of listing authorities
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 issue 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
State the main aims of competition and monopolies regulation
Give 2 potential difficulties for competition regulators
Competition 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 competition regulators
+Multinational companies that operate in many countries
+definition of the product
Distinguish between a specialist and a balanced investment mandate
Under specialist mandate, investment manager engaged to invest in single asset class, in which 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
List 6 restrictions that might by included within an investment mandate
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 individual assets or asset classes (to ensure diversification)
Counterparty exposure limits for derivative instruments
prohibitions on self investment in sponsor’s own securities
ethical or social limitations
List 5 other forms of regulatory requirements that might influence the asset allocation
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 requirements that determine whether assets can by taken into account for solvency purposes
State 3 purposes of restrictions on investments
Protect ultimate beneficiaries from gross incompetence or mismanagement by fund managers
encourage confidence in investment schemes and benefits they secure
promote the accumulation of investible funds
