Chapter 4 - Roles Of The Parties To A Fund Flashcards Preview

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Flashcards in Chapter 4 - Roles Of The Parties To A Fund Deck (13):

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:

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

Enshrined in legislation - secondary legislation

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