Conduct of Fund Management Business

Question 1

What are the contents of the Investment Management Agreement

Answer 1

1. Client risk profiles and investment objectives
2. notification of any signification changes to the investment policy or investment recommendation
3. clear authorisation from the clients for discretionary mandate
4. scope of services that will be provided by the fund management company incl. frequency of written statements and reports
5. fees and charges to be paid by the clients or any other remuneration received by FM company
6. details of custodial arrangement
7. basis of valuation used for any type of investment products
8. terms and conditions relating to soft commissions
9. liability of fm company where there is a breach of the IMA
10. conditions for alteration and termination to the IMA and its implications in respect of settlement, repayment obligations and surrender documentation
11. Details of delegation of the fm company’s function

Question 2

SC requires agreement between FM company/trustee and its delegate or service provider including:

Answer 2

1. services to be provided
2. the fees, remuneration and other charges
3. restriction or prohibition regarding the performance of the function to be delegated
4. reporting requirements, including the line of reporting between the delegate and the management company or trustee and means of evaluating the performance of the delegate

Question 3

What is an investment mandate?

Answer 3

sets out the client’s instructions concerning the asset allocation of the portfolio (perhaps incorporating max and min of sector expoeures) and may provide a benchmark by which the performance of the fund management company may be assessed. It may also incorporate prohibited investments

Question 4

what is the disadvantage of a investment mandate?

Answer 4

may not be as readily amended by the client in response to variations in its investment objectives and investment strategy, hence may mandate may be included with the agreement as a schedule which the agreement may allow to be altered by agreement of the parties

Question 5

What are the contents of the investment mandate?

Answer 5

1. description of the fund management company’s investment style and investment approach
2. identification of the type of mandate
3. asset allocation ranges incl. details of how exposure to each asset class to be measured
4. details of the authorised investments from which the fund management company is able to select appropriate einvestments
5. details of any prohibited investments
6. estent of which the FM company may use derivatives , and methods by which the FM company monitors compliance with restrictions on the use of derivatives imposed
7. counterparty credit limits
8. gearing restrictions
9. related party investments
10. impact of taxation (whether to ignore tax effect)
11. foreign currency management
12. securities lending and borrowing policy

Question 6

what is usually included in investment mandate in relation to performance measurement?

Answer 6

1. Benchmarks to be applied
2. inclusion or otherwise of fund management company’s fees in measuring performance
3. performance attribution
4. impact of taxation on performance measurement

Question 7

what are the other issues included in investment mandate?

Answer 7

1. FM policies in relation to CG, proxy votings, related party dealings
2. restrictions imposed on the investment portfolio by legislation, trust deeds etc
3. time limit for remedying non-compliance with investment restriction s applicable

Question 8

The use of derivative instruments by fund management companies provides benefits to clients by way of

Answer 8

1. increased execution efficiency
2. improved investment returns: from mispricing of derivatives
3. reduced costs: share transactions attract stamp duty
4. Risk separation, for example forex

Question 9

Risks involved in the use by fund management companies of derivative

Answer 9

1. Market risk: risk inherent in a position that arises from market price movements
2. credit risk: risk associated with entering into a transaction with a specific counterparty.
3. operational risk: Inadequate systems and controls, human error or management failure
4. legal risk: enforceability of derivatives contract and includes risk arising from insufficient documentation and insufficient capacity or authority of the counterparty

Question 10

What is the Prudent Investor Rule?

Answer 10

Fiduciary must:
1/ Adhere to fundamental fiduciary duties of loyalty, impartiality, and prudence
2. maintain overall portfolio risk at a reasonable level (i.e. risk and return objetives and tradeoff must be reasonable and suitable to client on behalf)
3. Provide for a reasonable level of investment diversification ( an investment may be high risk, but in the context of the overall porfolio that investment may be justified)
4. prudence where delegation occurs and in the selection and supervision of agents
5. cost conscious when making investments and particularly in relation to the expected level of returns from the investments

Question 11

What are the potential areas of conflict of interest?

Answer 11

1. Personal account trading
2. Crossing between clients
3. (advisable that full disclosure of the transaction be made to each client prior to the crossing being disclosed to Bursa)
4. Allocation
5. soft dollar earnings: any or shared commissions should be directed to the account of the fund concerned. soft commissions provided may be retained by management company only if the goods and services are of demonstrable benefit to unit holders and dealins with broker are executed on terms which are the best available for the fund, and are adequately disclosed in the prospectus and reports
6. dealing through related party strockbrokers: must be made on terms which are the best available for the fund and no less fabourable to the fund than an arms length transaction, and should not exceed 50% of funds dealings in value

Question 12

Rules on records and segregation of assets

Answer 12

Custodian safeguards and maintains assets that comprise the portfolio on behalf of the client. It holds assets in its own name but on behalf of client who retains beneficial ownership. Custodian makes settlements for securities bought and sold, and collects income arising from the portfolio and pays expenses as instructed by the client. CMSA requires a fund management company to maintain a trust account for client monies and property and to make arrangemetns for licensed custodian to maintain account (s122), under s123(1c), separate record is to be maintained

Question 13

Under what condition can CMSRL holder accept or hold client monies or property?

Answer 13

not allowed unless rep does so on a behalf of a FM company and in the course of the rep’s employment with that FM company (s122(7))

Question 14

What are teh obligations of CMSL holder in relation to deposits and withdrawals from trust account?

Answer 14

1. shall open trust account for client’s assets and make arrangement for custodian to maintain such account, unless client has own arragement for custodian to maintain trust acc
2. Commission may exempt holder of CMSL from requirement to arrange trust acc and permit other person to maintain trust acc
3. shall deposit clients assets into the trust acc maintained by a custodian or any other person as may be permitted by the commission under subsection 2, as the case may be, not later than the next bank biz day
4. where clients assets are received in a place outside Msia, may deposit such assets into a trust acc maintained by custodian outside Msia
5. shall not withdraw from or deal with clients assets except for making payment to person entitled, or otherwise authorised by law
6. clients assets held in trust acc shall not be available for the payments of the debts of CMSL holder
7. CMS reps license holder shall neither accept nor hold clients assets unless he does so on the behalf of CMSL and in course of employment
8. nothing shall be construed as takin gaway or affecting any lawful claim or lein which any person has against or upon any clients assets held in a trust acc
9. person who contravenes this section shall be liable to fine not exceeding 500k, or with intent to defraud, RM1m, and prison term not exceeding 10 years

Question 15

What are the purposes of records maintenance in accordance with IMA?

Answer 15

providing information for purposes of proper monitoring of portfolio, and for reconciliation with custodian and portfolio ac records

Question 16

What are the requirements in keeping accounting and other records/

Answer 16

CMSA 1081a, requires accounting records that will explain the transactions and financial position of its biz and enable true and fair P&L accounts and balance sheet
108(1)(b) requires record s to be kept in a manner as will enable them to be conveniently and properly audited

Question 17

Reporting to clients

Answer 17

1. statement relating to clients portfolio required to send directly to each client, at least on monthly basis
2. Must contain, statement of account showing actual portfolio position, and fees and charges payable by client
   3, At least on a quarterly basis, reports to clients on performance of each clients portfolio against appropriate benchmarks, any changes in risk that will affect investments and any impact on clients capital and earnings of clients investments arising from change in risk

Question 18

Insurance coverage required

Answer 18

fidelity fuarantee insurance

2. Electronic and computer crime insurance
3. professional indemnity insurance

Question 19

What is due diligence

Answer 19

Ensure that a prospectus for the issue of shares or units in a unit trust complies with the companies ct or the prospectus guidelines for CIS, or in reviewing the process leading to an investment recommendation. Common to utilise checklists as part of review procedure. Sometimes refers to adherence to wider obligations such as complying with corporate philosophy or ethics in additions to legal obligations

Question 20

Steps in establishing a compliance system

Answer 20

1. establishing proper understanding of FM company’s business (mgmt structure, products, product design, investment processes, marketing, sales, sales culture, systems and existing compliance system
2. review of existing compliance system
3. conducting legal audit to establish legal and other requirements that apply to biz
4. Identification of risks, gaps in coverage of risks, and means by which gaps can be narrowed and risks realistically minimised
5. production of compliance plan and determination of structure of compliance programme
6. selection of appropriate compliance tools
7. Implementation of compliance programme

Question 21

What is a compliance plan

Answer 21

identifies all areas of a FM company’s biz that will be a part of a compliance system, and the aspects of compliance for which each area is responsible

Question 22

What is the role of compliance committee

Answer 22

Direct the compliance programme and to supervise its operation to ensure that it is working properly, means reviewing the programme on a regular basis to ensure that no systematic problems appear, and to ensure that appropriate disciplines are imposed when necessary

`. setting scope of investigation

2. reviewing results of investigation incl recommendations, priorities and reporting results to board
3. securing the approbal of board to proposed compliance system
4. approving final form of compliance system and allocating responsibilities and powers
5. devising programme to properly supervise the compliance system
6. obtaining reports on installation of compliance systems and ensuring its installation is completed on a timely basis
7. coordinate all parties involved in compliance system
8. reviewing reports of each compliance failure, resulting action and discipline imposed

Question 23

Infringement?

Answer 23

should be properly considered and appropriate discipline imposed. Changes by management to eliminate the causes of compliance failures should be requested in writing, and responded to in writing by the management responsible, and properly recorded

Question 24

Tools of compliance

Answer 24

1. board presentation on importance of compliance to obtain board’s commitment to compliance plan and programme
2. endorsement by CEO of compliance programme
3. properly documented and detailed compliance programme
4. up to date manuals and checklists
5. education of all direcotrs and employees in the importance of compliance
6. training of all directors and employees in compliance
7. system of effective monitoring of compliance programme
8. identification and control of high risk areas
9. legal audit
10. effecive system for complaints and monitoring and resolution
11. incorporation of compliance checks into all operating procedures
12. system to report compliance system breaches
13. prompt changes to the system where identified breaches occur amd appropriate disciplining
14. maintenance of detailed and complete records and statistics relating to compliance

Question 25

Role of compliance officer

Answer 25

1. administering implementation of compliance policies and procedure within company
2. updating compliance policies and produce and compliance manual in line with changes in the law, regulations and guidelines etc
3. coordinating compliance efforts
4. establishing procedure for annual review of compliance programmes
5. disseminating compliance manuals, procedures and policies and any other compliance related info within the company
6. establishing, maintaining and implementing policies and procedures designed to comply with relevant laws regulations, detect and prevent violations, and report any material violations and/or recommend remedial action
7. ensuring relevant personnel are appropriately licensed
8. establish and maintain a comprehensive compliance manual
9. report to the compliance committee and the board

Question 26

What are the benefits of compliance?

Answer 26

1. removal of fear of litigation and penalties
2. reduction in consumer complaints and cost restitution
3. enhancement to company reputationand reputation of staff, which is important for morale and ease of attracting new high quality employees
4. basis for updating employee knowledge on legal and other hanges in regular and formal manner

Question 27

What are the defence for due diligence?

Answer 27

(a) he had made all enquiries as were reasonable in the circumstances; and
(b) after making such enquiries, he had reasonable grounds to believe and did believe until the time of the making of the statement or provision of the information that–(i) the statement or information was true and not misleading; or
(ii) there was no material omission

Question 28

What is corporate governance?

Answer 28

Issues associated with business management practices and structure of a companys board of directors. System by which compenies are directed and controlled

Question 29

What is the corporate governance blueprint?

Answer 29

shareholder rights, roles of insti investors, boards, gatekeepers and influencers, disclosure and transparency as well as public and private enforcement

Question 30

Malaysia Code on Corp Gov 12012

Answer 30

1st deliverable of blueprint:
Principles: broad concepts underpinning good corp gov that companies should apply when implementing recommendations
2. commentaries: seeks to assist companies understanding the recommendation.

Question 31

Key elements of performance presentation

Answer 31

1. creation and maintenance of composites: at FM company level, , composites are aggregations of portfolios into single group that is representative of a particular invesmtment strategy . Nondisc should not be included
2. returns calculation: time weighted rateof return , takes into acc frequency of val, income acc. weighting of portfolios, treatment of expenses incl fees and taxation
3. / Presentation of result: meet objective of fair representation and full disclosure . requires min 56 years of record, additional annual perf up to 10 years after. ANnualised perf for periods <1 year not allowed
4. disclosures: requiers perf to clearly lable returns gross of fees or net of fees , currencies used, inconsistencies in forex rates used, effect of leverage and derivatives
5. verification: require FM companies perf be independently verified and attested