Relationship between fund management company and client

Question 1

What is the liability of a fund management company?

Answer 1

FM company will be liable for losses caused by agents if the FM company failed to discharge professional responsibilities of selecting and monitoring agents, Also if agent isunder direct control and supervision of fund management company

Question 2

what happens when there is a mistake of an agent?

Answer 2

FM is not legally liable for the loss, but they would generally act quickly to resolve the issue with the broker or custodian to minimise the effect or loss. Any claim for loss will be at clients risk although leverage over agent could be obtained by the fund management company could result in the client obtaining restitution for its losses

Question 3

Fiduciary duties of a FM company

Answer 3

FM company owes duties to client including

1. duty of loyalty
2. duty to act in good faith
3. avoid conflicts of interest

Question 4

What are the aspects of avoiding conflict of interst?

Answer 4

1. Off market transaction between clients
2. transaction through intermediary owned by FM company -should declare transactions placed with related parties, and transactions are at arms length
3. secret commissions or bribes to place shares in particular client portfolios. Share allocation offered to FM company for clients should not be taken up by the FM company as principal

Question 5

Trust Law

Answer 5

Trustees are restricted to investing in a range of defined authorised investments, including

1. securities issued by federal gov, gov of sabah or sarawak, or republic of Singapore
2. securities the interes on which is or shall be guaranteed by parliament of federal gov
3. fixed interest securities in Malysia with approval of treasury by any aby public authority established uner federal or state law
4. loans to approved company
5. securites issued by comapbny where paid up ordinarty share capital is RM5m or more, each of 3 years preceding investment, company has paid dividend on fully paid up share
6. approved unit trust schemes

Question 6

Section 6 (1) investment powers of the trustee and requires trustees to have regard for

Answer 6

1. need for diversification of trust investments, trustees is required to take into account trust circumstances and degree of risk attached
2. suitability of proposed investment

Question 7

Relevant parts of CMSA:

Answer 7

s89-107: provides for conduct of business of licensed person in general as well as specific conduct of licensed persons dealing in securities and dealing in derivatives
s109-124. regulates treatment of client assets in respect of securities, derivatives and fund management
s174-209. relates to various market misconduct and other prohibited conduct such as false trading and market rigging, and making of false and misleading statements, insider trading, bucketing etc

Question 8

Principal areas coverd byMAAM’s code of conduct

Answer 8

1. compliance with laws and regulations
2. risk managment
3. managment of conflict of interests
4. safeguarding clients interest
5. duty to exercise due care and skill

Question 9

what are the 13 ethical considerations?

Answer 9

1, compliance with securities laws and regulations
2. professional misconduct: should observe higher standards than those laid down in laws and regulations
3. competition with representative’s employer
4. conflicts of interest with representative’s employer
5. disclosure of benefits from clients
6. reasonable basis for investment recommendations and action
7. independence and objectivity
8. fiduciary responsibility
9. know your client: financial position, investment experience and investment objectives
10, fair dealing and equity between clients
11. misrepresentation of capabilities
12. disclosure of confliects
13. corporate governance

Question 10

What are the rules on short selling?

Answer 10

Selling of securities prohibited unless at time of sale, the person or agent has presently exercisable and unconditional right to vest securities in the purchaser. exceptions are in s 98 (4). Fine is up to RM5m or up to 10 years in jail

Question 11

Rules on market rigging

Answer 11

1. s.175 and s176: transactions that are not entered into for legitimate trading purposes, but with the intention of creating a false impression of genuine demand for securities are prohibited by s176.
2. relates with transactions designed to raise, lower, maintain or stabilise relevant price with intention of inducing others to buy sell or subscribe for the securities
3. s202 of CMSA prohibits creation or cause for the creation of a false or misleading appearance of active trading in derivatives
4. Bucketing prohibited under s203
5. No person shall execute order for purchase/sale derivatives without having effected a bona fide purchase or sale of the derivatives in accordance wth the rules and derivatives market
   Cornering prohibited in futures market under s205

Question 12

Rules on false trading and market rigging transactions

Answer 12

1. Prohibits creation of false or misleading appearance of active trading in any securities on a stock market,
2. or a false or misleading appearance of fluctuation in the price of any securities on a stock market

not necessary for active trading to actually occur, wide enough to cover all kinds of market rigging and distortion of market prices by fictitious sales

Also prohibited from causing a change in the market price of securities by buying or selling legal title to securities without change in beneficial ownership
Transactions include offers and invitations to purchase or sell

Question 13

Market manipulation by information

Answer 13

s175 and s176: person must not make a statement or disseminate information that

1. is false or misleading in a material particular
2. likely to induce the subscription, sale or purchase of securities by other person , or is likely to have the effect of raising or lowering, maintaining or stabilising the market price of securities
3. when he or she makes or disseminates, the person does not care whether the statement or information is true or false, or knows or ought reasonably to know that is false or misleading . For derivatives, market manipulation by means of information is state under s204, s206, 207 of CMSA

Question 14

Fraudulently inducing persons to deal in securities

Answer 14

1. making or publishing any statement, promise or forecast that the maker knows to be misleading, false or deceptive
2. dishonestly concealing material facts
3. recklessly making or publishing any statement, promise or forecast that is misleading, flase or deceptive
   4, recording or storing in,information that they know to be false or misleading in a material particular

s.178, impose on directors and other persons making statements by way of inducement, duty to enquire whether the information they have been given is correct and reliable

persons subejct to this prohibiition are officers in relationto company prospectus, stockbroking company , fund manageent company recommending clients

Question 15

Dissemination of information about illegal transaction

Answer 15

If transaction is entered into a contravention of s175-178, it is an offence for a person to circulate or disseminate a statement or information that indicates that the transaction will affect the price of the securities if that person has entered into the transaction

Question 16

Use of manipulative and deceptive devices

Answer 16

It is an offence in connection with subscription, purchase or sale of any securities, a person

1. uses any device, scheme or artifice to defraud
2. engages in act, practice or course of business which does, or would, operate as a fraud or deceit
3. makes any statement which is untrue of a material fact or omits to state material fact necessary to make a statement not misleading in the context in which it was made

For derivatives, s207 of CMSA provides for prohibition of making false statements of a material fact, or omit to state a material fact necessary in order to make the statement made in the light of the circumstances under which they are made, not misleading

Question 17

Penalties for contravention of market manipulation by information

Answer 17

Fine of at least RM1m and up to 10 years in jail . Under s374, person who suffers loss or damage can recover looses or damage from person convicted

Offences committed by corporation, such as fund management company, liability extends to directors, CEO , and officer under represntative under s367, unless
1. he or she proves that the offence was committed without consent or connivance,
2 he exercised all such diligence to prevent the commission of the offence as ought to have been exercised

Question 18

Other offences relating to dealing?

Answer 18

1. carrying on a business in any regulated activity without a licence or is a registered person.
2. duty to maintain secrecy of information relating to depositors accounts/ in the CDS
3. fraudulent inducing person to invest money

Question 19

other offences relating to false and misleading statements?

Answer 19

1. false statements made to SC in connection with application for a licence, or variation. s. 71 CMSA
2. false reports to the SC, exchange or approved clearing house with the intent to deceive
3. false or misleading statement to the SC in connection with proposaol in relation to securities required by s212
4. furnishing false or misleading information in connection with an application or in purported compliance with Act s49 SICDA
5. false and misleading statements in relation to the nominal or authorised capital of the company, or in returns, reports, certificates, balance sheets or other ocuments required by the act s364

Question 20

Rationale of prohibiting insider trading?

Answer 20

1. fairness in marketplace, equal access to information to all market participants.
2. market integrity
3. fiduciary duty of company oficers to the company and its shareholders
4. prevention of ijury to the company, its shareholders and investors.

Question 21

In CMSA s208, what are the information caught by “information” for insiders (officer, agent or employee) who Should not make improper use of information to gain and advantage?

Answer 21

1. price-sensitive information
2. be obtained by virtue of his or her official capacity or fomer official capacity
3. information that except for the proper performance of his or her official duties would not be disclosed
4. be known by person to be unpublished price sensitive information related to an underlying instrument which is subject of a derivatives or relating to dealing in derivative

Question 22

What constitutes information for Insider trading of securities provided for in s183-198

Answer 22

Section 193 defines information as
1. matters insufficiently definite so as to inform the public about it.
2. matters relating to intentions or likely intentions of a person
3. matters relating to negotiations or proposals relating to commercial dealings
4, information relating to financial performance of a corporation
5. informatiojn relating to the future transactions or proposed transactions or agreements in relation to securities

information is categorised as becoming generally available if it has or tend to have material effect upon the price or the valier of the securities. once becoming generally available, will influence a reasonable person wto decide whether to acquire or ddispose securities

for corporations, s190

Question 23

Exceptions from c188(2) with respect to corporations under s194

Answer 23

Corporation is deemed to possess any information when the officer of the corporation is in of such information that arise in the course of his duties as an officer of the corporation

Corporation is not in breach of s188(2) merely because the corporation is aware that it proposes to enter or has previously entered into one or more transactions or agreement relating to those securities
2. does not contravene on the basis that the officer of the corporation is aware that it proposes to enter into or has previously entered into, one or more transactions or agreements in relations to those securities . this is not applicable if the person became aware in the course of his said duties

Question 24

Penalties for insider trading

Answer 24

prison not exceeding 10 years, fine of at least RM1m

Question 25

In what cases will fund management company entitled to be indemnified against losses, liabilities and expenses

Answer 25

if acting within scope of its authority to perform its duties . IMA should generally contain an indemnity where FM company is not responsible for normal investment losses, matters beyond its control and defaults of brokers, gents and intermediaries that are not under its direct control and supervision

Question 26

What are the other offences in the CMSA?

Answer 26

1. General penalties in falsification of records by directors, employees and agents, and penalty for destroying, concealing or altering records or sending records outside Msia to prevent audits

Question 27

Failure to cooperate with the SC

Answer 27

1. Failure to appear before investigating officer
   2 refusal to answer questions
2. failure to produce records on request
3. failure to disclose information to SC as required

Question 28

Offences that carry civil penalty

Answer 28

Loss or damage as aresult of acting or refraining from acting in reiance on a recommendation of that licensed person, if the licensed person did not have a reasonable basis
2. Improper use of confidential price-sensitive info, will be liable to person who suffers a loss in relation. Loss will be diff between consideration paid or received by the person and amount that would have been reasonable if the price sensitive info had been generally known at the time of the dealing

Question 29

Liability of directors/employers

Answer 29

deemed to have committed an offence if corporation is charged with an offence unless they can prove that the offence was committed without their consent or connivance. Have to establish that they had exercised all such diligence to prevent the commission of the offence as ought to have been exercised having regard to their position and functions and to all the circumstances

Question 30

What is the basic legal relationship within the investment management agreement?

Answer 30

the principal and agent relationship. Agent is not responsible for losses made by a aclient, but is obliged to exercise a certain level of care