PMT Chapter 4 Flashcards
Chapter 4
OWNERSHIP AND COMPENSATION STRUCTURES
They receive the same tax and fiscal benefits available to all those who choose to structure their business activities as corporate entities.
1) Investment management firm owners also receive the benefits of limited liability protection, as offered by the corporate structure.
2) firms are usually envisioned as long life business ventures, and the corporate vehicle best suits this objective
3) their business will develop a long history of stability and competitive returns for clients, as well as strong growth, both in terms of the number of clients and the amount of assets under management.
4) corporate share ownership is an incentive that attracts and retains key productive staff. personal wealth can accrue a successful institutional investment management firm’s owners as the firm benefits from considerable economies of scale and the accompanying profitability.
PRIVATELY OWNED STRUCTURE
some medium- to large-sized individually owned firms may slightly change their share ownership structure to accommodate an investment by an institutional investor. When it occurs, this change in the firm’s ownership is normally limited to one institutional investor whose original investment is always limited to a minority voting position in the firm and often starts with a modest 10% to 15% of its voting equity. Figure 4.2 depicts this type of shareholder arrangement.
PROFIT SHARING
is the payout of a certain percentage of an institutional investment management firm’s profits to selected portfolio management staff. When a number of individuals share ownership of a firm, the payout of its profits is calculated in direct proportion to the amount of equity each individual holds.
REGULATIONS AND LICENSING
Securities registrations and licenses are required in each province where the institutional investment manager’s targeted investors reside.
INDIVIDUAL REGISTRANTS VERSUS CORPORATE REGISTRANTS
investment management firm is the entity exposed to potential claims and litigation from its investors, which is why it must obtain and maintain suitable insurance coverage as part of its registration requirements
Trends in Direct Access Electronic Trading
The most common compliance parameters are the number of shares and the order’s total market value.
he firm that is granted this trading access has real-time data delivered to its desktop from the stock exchanges the investment dealer has permission to trade on.
Separation of Duties Principle
NON-EXEMPT INVESTORS
Non-exempt refers to the fact that investment dealers must sell securities to these investors via a prospectus, which discloses a fund’s full information, including its background and essential data about its securities.
EXEMPT INVESTORS
Securities regulators allow the following three common prospectus exemptions:
*Accredited investor exemption
*Minimum investment exemption
*Offering memorandum exemption
ACCREDITED INVESTOR EXEMPTION
Institutional
Generally includes entities such as pension funds, trust companies and corporations with net assets of at least $5 million.
Individual
Alone (or with a spouse) has financial assets with an aggregate realizable value (before taxes, but net of related liabilities) exceeding $1 million, or net income before taxes exceeding $200,000 (or $300,000, if combined with spouse) in each of the two most recent years, and a reasonable expectation of exceeding that same income in the current year.
MINIMUM INVESTMENT EXEMPTION
allows the sale of securities to non-individual investors who make a prescribed minimum investment. National Instrument (NI) 45-106 sets this minimum investment at $150,000 across all jurisdictions in Canada.
offering memorandum exemption,
waives the requirement for a security or fund to be distributed with a prospectus. This particular exemption is applied in many jurisdictions with the concept of an eligible investor. An eligible investor has a lower financial threshold than an accredited investor but requires a confirmation of suitability from an eligibility advisor who is a registered investment dealer.
INVESTOR-FIRM INTERACTION
These firms attempt to match certain investors with particular portfolio managers, so that the manager can build a rapport with an investor and strengthen their relationship over time.
MUTUAL FUND INVESTORS
INSTITUTIONAL INVESTORS
Typically, a mutual fund’s institutional investment manager (or portfolio manager) will participate and present at roadshows sponsored by the fund’s manager when they are launching new mutual funds. The manager uses these presentations to introduce to distributors the individual portfolio managers who will be managing the new funds.
