Ch 9 - Applications of Legislative and Regulatory Framework (2)

Question 1

The key principles underlying legislation of financial services are

Answer 1

SICI FOR MICI

Skill care and diligence
Information for customers
Conflicts of interest
Information about customers

Financial resources
Other factors affecting legislation
Relation with regulators

Market practice
Integrity
Customer assets
Internal organisation

Question 2

The key principles underlying regulation of institutional investment are

Answer 2

REPEAT CAFE

Regular reporting
Expert advice
Performance measurement
Effective decision making
Activism

Clear objectives
Appropriate benchmarks
Focus on asset allocation
Explicit mandates

Question 3

Directors are responsible for

Answer 3

MAC D’S Financial Accounts

The solvent trading of the company

Compliance with regulation

The production of accounts

The appointment of management

Approving dividend payments

Safeguarding the assets of the company

Prevent and detect fraud and other irregularities

Question 4

Care needs to be taken to ensure directors act in the shareholders’ interests. This is achieved through:

Answer 4

Formal audit committees

Independent remuneration committees – for senior executives

A proposed extension of directors’ liability

Have non-executive directors

Remunerating management in such a way as to align their interests with those of the shareholders

Question 5

The main aims of IFRS are

Answer 5

Encourage reliable and consistent accounting data

Transparency of accounting data

To have a single set of standards world-wide that enables access to financial markets and prevent companies having to produce results on several bases

Question 6

Describe the issues trustees should consider when reviewing an investment manager’s performance relative to a stipulated benchmark

Answer 6

The scope of the mandate (see notes to expand each section!)

If comparing with other funds then need to ensure they have been subject to the same constraints

Need to decide on the performance criteria

Consider when and how often performance will be measured

Performance should also be looked at net of tax and net of expenses

Trustees should always be aware that past performance is not necessarily a guide to the future

Question 7

Trustees should arrange for measurement of the performance of the fund and should make formal assessment of their own procedures and decisions as trustee. This will include consideration of:

Answer 7

Any changes in the nature of liabilities

Any changes affecting risk appetite

The appropriateness of the performance measures imposed

The trustees’ role and whether they are carrying out their duties to the required standards

Question 8

Financial intermediation

Answer 8

Is the process of channeling funds between those who want to lend and those who want to borrow.

Financial intermediaries sell their own liabilities to raise funds that are used to purchase the liabilities of other corporations

Question 9

Financial disintermediation

Answer 9

Refers to the situation where ultimate borrowers and lenders come directly together