Chapter 9: Applications of legislative and regulatory frameworks (1)

Question 1

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).

Terms of the agreement are set out in the trust deed or will. Specifies purpose of fund and how it’s to administered.

Question 2

Trustees may have the following resposibilities

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

Main concerns of the trustee in carrying out their duties

Answer 3

• act prudently
• act in the beneficiaries’ interests
• demonstrate fairness and equity between beneficiaries of the trust
• not to profit directly from action taken
• act in line with the constraints of the trust deed and rules and any overriding legislation.

Question 4

Function of a trust

Answer 4

1. Assets placed in a trust are kept separate from the settlor’s personal affairs to protect the beneficiaries. The assets are shielded from potential risks or liabilities that might arise from the settlor’s actions after the trust is established.
2. Provide mechanism for the collective representation and protection of members of a group of people linked by common interest.

Question 5

Corporate governance

Answer 5

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

Good corporate governance involves managing the company in a way that reflects the interests of the various stakeholders

Question 6

How is good corporate governance achieved?

Answer 6

• Remunerating managers in such a way as to align their interests with those of the shareholders
• a requirement to have non-executive directors, who provide an independent voice on behalf of shareholders

Question 7

Role of non-executive directors

Answer 7

• challenging and contributing to the development of strategy
• monitoring the performance of management
• role in setting remuneration for executive directors’ pay
• role in nomination and appointment of new board members
• role in audit committee

Question 8

Listings authority

Answer 8

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

Question 9

Listing authority’s concerns during a listing

Answer 9

• the production of relevant business and financial informationon the issue of shares.
• the process by which the shares are offered to potential shareholders and price is set for the issue of shares.
• continuing production and distributing of business and financial information on timely basis on companies with listed secuities
• continuing conduct of the market in listed securities - ensuring market is fair to all participants, pricing process is fair and reasonable.
• rules to ensure the listed companies don’t behave in manner that conflicts with the objectives of the listing authority

Question 10

Investment approaches that incorporate both financial and non-financial objectives

Answer 10

• Sustainable investing
• Impact investing
• Socially responsible investment
• Ethical investment

Question 11

Responsible investment

Answer 11

The UNs Principles for Responsible Investment (PRI) defined it as ‘ a strategy and practice to incorporate environmental, social and governance factors in investment decisions and active ownership’.

Question 12

Impact investing

Answer 12

Seeks to generate positive social and/or environmental impacts as well as a financial return

Question 13

Sustainable investing

Answer 13

Takes account of ESG issues in way that’s consistent with long-term sustainability of society and the natural environment

Question 14

Principles for Responsible Investment (PRI)

Answer 14

• The fund will commit to responsible investment practices by making ESG issues a consideration in their investment analysis, decision making process and active ownership.
• The fund would be committing to incorporating the 6 voluntary and aspirational principles relating to ESG.

Question 15

Socially reponsible investments

Answer 15

Incorporates social, environmental and/or ethical objectives as well as financial ones

Question 16

Ethical investment

Answer 16

Incorporates one or more ethically or morally motivated constraints

Question 17

Risks arising from climate change

Answer 17

• Physical risks - effects of the changing climate itself
• Transition risks - arise from shift away from lower fossil fuel use. Sources include policy measures, technological change and changing customer preference.
• Liability risk - potential costs from 3rd parties seeking compensation because they’ve suffered loss/ damage from the effects of climate change.

Question 18

Social impact investing

Answer 18

Investment in companies and projects that consider ESG factors as part of their strategy and hold themselves accountable for delivering an explicit positive impact on society.

Question 19

Mandate

Answer 19

Term used to refer to the authority given by the owner of investments to the investment manager whom they employ to manage their investments.

Question 20

Restrictions applying to all mandates

Answer 20

• asset classes that are entirely prohibited
• limitations on the use of assets and asset classes
• maximum permissable holdings in individual assets or asset classes
• counterparty exposure limits for derivative instruments
• prohibition on ‘self-investment’ in sponsor’s own securities
• ethical, social or governance limitations

Question 21

Regulation may impose investment restictions such as

Answer 21

• Requirement to hold government bonds and bills
• Requirement to match assets and liabilities by currency
• Restriction on choice of assets or asset classes
• Specification of admissable assets used to demonstrate statutory solvency

Question 22

Purpose of restrictions on investment agreements

Answer 22

1. Protect beneficiary from gross incompetence or mismanagement by fund managers
2. Encourage confidence in investment schemes and benefits they secure
3. Promote the accumulation of investible funds