Chapter 4 - Roles Of The Parties To A Fund Flashcards
Key parties to a fund
Fund manager
Fund administrator
Governing body
Role of the fund manager
Manger is responsible for the management of the fund
Identifying a business opportunity - how fund is created
Arranging creation of the fund
Setting the investment strategy for the new fund
Marketing the fund to investors and sourcing investment
Seeking to maximise investment into the fund - marketing
Monitoring the performance of the fund and making recommendations for new investments / disposal of existing investment if suitable
Offering document is key to marketing process as ultimately sets out the terms of the fund including how it is to be managed - investors will review these before deciding to commit any funds
Management of the fund by the manager must be in line with terms of the offering document
Appointment and duties of manager will be governed by the investment management agreement - scope of the role and fees due inc how these are to be calculated
Key terms of the investment management agreement
Establish the managers authority and any constraints - discretionary or advisory etc
Guidance with regards to identifying new investments, researching and due diligence required in relation to new investments equally for disposals - will require recommendations to be put together for consideration by the governing body
Any limits to governing body’s authority to intervene will be established in the IMA
Provisions covering both management fees and performance fees - including when these are due and how they are to be calculated
Clawback provisions - how to clawback fees in the event of poor performance - in particular in relation to performance fees
Role of the fund administrator
Day to day administration of the fund - may or may not be part of the same group as the manager
Role is governed by the terms of the administration agreement - duties and responsibilities of the fund administrator is set out in the admin agreement
Main roles:
Calculation of the NAV of the fund - vital to redemptions and subscription process
Maintenance of books and records of the fund
Preparation of fund accounts (from records maintained)
Cash management - settlement of expenses, settlement of fund investments including ensuring dividends received where due
Filing of scheme particulars - ultimately this is responsibility of governing body but fund admin must have most recent copy
Filing regulatory notifications - annual returns etc
Monitoring compliance with investment particulars and offering document
Calculation of performance fees in accordance with relevant documentation in place
Company secretarial services - corporate governance
Issuing drawdown notices and ensuring funds received - following calculation of funds required
Role of the fund governing body
Governing body can be directors, GP (the board or the GP) or trustees
Charged with managing the fund - monitor the manger and manager reports to the governing body
Responsibilities of the governing body can be split into categories as outlined below:
Fiduciary
Enshrined in law - upheld by regulators, functionaries have a duty of responsibility to the fund and its investors - act with due care, diligence and skill - could be judged in a court of law
Statutory duties
Statute and enshrine best practice
Functionaries are granted responsibility to take care of assets, avoid conflicts of interest arising, communicate with investors and where necessary obtain consent for a given course of action, such as closed ended fund seeking new issue of shares
Breach of these duties can lead to penalties imposed both by common law and civil law - fines, prohibitions, custody and financial penalties
Regulatory
Enshrined in legislation - secondary legislation
Contractual
Governing body is subject to contractual agreement with investors - contractual duty to ensure that funds accepted from investors are invested in accordance with the fund documentation
Relationship between the governing body and the fund manager
Arguably the most critical relationship
Fund manager’s reputation in the asset class attracts investors and instills investor confidence - governing body needs to be conscious of this and ensure that the manager does not act in their own self interest in order to achieve inflated returns
Governing body should:
Be aware of regulators and shareholders expect the governing body to oversee the fund manager’s actions and to ensure that they are in the fund’s best interests - evidence achievement of this duty - documenting decision making process
Monitor the fund manager’s performance - consider if adequate (replacement of manager should be last resort)
Consider the costs and benefits of moving managers - finding adequate expertise to replace manager and impact on investor confidence - may not be the most suitable option
Achieve balance between theoretical duties and what is practical. If boar is too heavy handed investment opportunities could be missed. Actively oversee and query the investment manager
How to achieve balance in the board of a governing body?
Balance of the board to ensure that self interest does not benefit one party/ies
Balance achieved through the appointment of a chairman to the board who is normally totally independent from the board and has sufficient skill, experience and expertise to allow them to deal with manager if necessary
Board member represents the fund manager - difficult role due to the conflict of interest - but can bring manger point of view to the board when needed
Remaining board is a mix of individual with the relevant skills and relevant experience
Role of company secretary in supporting the governing body
Company secretary generates evidence in the form of records - to evidence the actions taken by the governing body to protect the interests of the fund and its investors
Retaining records of board meetings, minute books, AGMs and committee minutes
Ensuring that records of meetings and minutes are complete and accurate
Facilitating transparent communication between investors and the regulator
Preparing agendas in advance of meetings - summarise matters to be discussed at board meetings
Assisting with compliance with legal and regulatory compliance
Relationship between fund administrator and governing body - how does the governing body supervise the work of the fund administrator
Relationship between the two is down to the quality and frequency of communication between the two
The governing body on behalf of the fund will contract the administrator - terms of their appointment will be set out in the relevant contract governing their appointment - these terms can be referred to and analysed as a means of monitoring the admins performance
Usually the fund administrator will be a licensed provider - as a licensed provider required to monitor and ensure that investment limits and parameters are observed - governing body can draw some comfort from the fact that the administrator is regulated
Key to ensure that there is open and frequent communication between the two - fund admin supports the role of the governing body - if not this will need to be resolved
Relationship between the fund manager and fund administrator
Separation of the two roles is seen as added investor protection - since the administrator is responsible for calculating the NAV independently from the manager
Practically the calculation of NAV could be outsourced to the manager but the administrator would ultimately be responsible for ensuring that everything makes sense
Touch points for the two roles include
NAV - asset valuations, financial reporting in the form of financial statements
Administrator is responsible for cash management - settling transactions and expenses
Expectations of the regulator
Regulator expects administrators, managers and the governing body to fulfil the following responsibilities
Act with integrity
Demonstrate competence
Have the relevant experience
Act with diligence
Ensure that the interests of the investors are protected - ensure that the reputation of the jurisdiction remains intact
Have relevant professional qualifications
Fully understand the requirements of their roles - levels and professional obligations
Have adequate policies and procedures in place - to work along with other legal and AML requirements in place
Regulatory fit and proper test
Regulator will consider if any parties have committed and offence involving dishonesty or fraud, broken the law in particular in relation to AML or has been a party to bad business practices in the past
In addition to the fit and proper test - regulator will seek to ensure that the licensee maintains
Sufficient capital base and insurance cover - given the inherent risk of the business activities being undertaken
Staff of adequate knowledge and experience
Complaints history and process - demonstrating these can be dealt with appropriately
Weavering case
In this case directors did not perform duties to the required standard - directors must exercise powers independently without subordination to will of others - except where duties have been properly been delegated
Directors should:
Apply their minds and exercise independent judgment
Carry out independent reviews of any documentation received
Satisfy themselves with the terms of the offering document
Ensure that strategy is fairly described and that the manager is complying with this
Ensure that the manager and administrator are separate
Ensure that records are complete with a specific focus on NAV and compliance issues
Have a full and complete understanding of the fund’s current position
Ensure that decision making process if properly documented
Ensure that the frequency of meetings being held is appropriate for the fund
TAKE AN ACTIVE ROLE
