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F105 > Chapter 8 > Flashcards

Chapter 8 Flashcards

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1
Q

What is the primary objective of the chapter on Applications of the legislative and regulatory framework?

A

To introduce key considerations for the regulation of parties involved in investing funds.

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2
Q

List the areas of application of the legislative and regulatory framework in investment management.

A
  • Trust law
  • Corporate governance
  • Role of the listings authority
  • Environmental and ethical issues
  • Competition and fair trading controls
  • Monopolies
  • Regulators
  • Investment restrictions in investment agreements
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3
Q

What is a trust?

A

A relationship between persons where one manages property and the other receives benefits from that property.

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4
Q

Give examples of different types of trusts.

A
  • Unit trusts
  • Pensions
  • Charitable bodies
  • Trust funds for children
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5
Q

What is the key difference between common law and civil law systems regarding trusts?

A

Common law systems have trusts as a recognized legal concept, while civil law systems have no precise equivalent, although some have adapted trust concepts.

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6
Q

Define legal and beneficial ownership in the context of trusts.

A

Legal ownership is held by the trustee, while beneficial ownership is held by the beneficiary.

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7
Q

What fiduciary duty do trustees have to beneficiaries?

A

To exercise their rights, privileges, and powers in a way that benefits the beneficiary.

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8
Q

What is the standard of care required of trustees in managing trust funds?

A

The standard of care is that of an ordinary prudent person of business.

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9
Q

Fill in the blank: The standard of care for a professional trustee is _______.

A

[higher than that of an ordinary trustee]

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10
Q

What is the role of trustees in a pension scheme?

A
  • Control investment and management of assets
  • Payment of benefits to members
  • Ensure compliance with trust deed and pension legislation
  • Exercise discretionary powers in the interest of members
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11
Q

What is a bond indenture trust?

A

A trust operated by a trustee representing bondholders in dealings with bond issuers.

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12
Q

What is the purpose of trusts in collective representation?

A

To segregate assets for the protection of beneficiaries and provide collective representation for members linked by a common interest.

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13
Q

What is one advantage of operating as a trust in a pension scheme?

A

It protects the scheme’s assets from creditors of the company.

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14
Q

How has the structure of companies changed over time?

A

There has been a shift from small, privately owned companies to large companies that are publicly owned.

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15
Q

What potential conflict does corporate governance address?

A

The conflict of interest between shareholders and the management of the company.

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16
Q

True or False: Corporate governance only addresses conflicts between shareholders and management.

A

False

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17
Q

What is the main focus of corporate governance?

A

Corporate governance focuses on managing conflicts of interest between shareholders and management.

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18
Q

Who is typically responsible for the governance of a company?

A

The board of directors is typically responsible for the governance of a company.

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19
Q

What are executive directors?

A

Executive directors are drawn from senior management and include the Chief Executive Officer (CEO).

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20
Q

What role does the Chairman of the board play?

A

The Chairman is responsible for the successful operation of the board.

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21
Q

What are independent directors?

A

Independent directors have no current or past relationship with the company other than as board members.

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22
Q

What is the aim of good corporate governance?

A

The aim is to manage a company to best meet the requirements of its stakeholders.

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23
Q

Who are considered stakeholders in corporate governance?

A

Stakeholders include shareholders, employees, pensioners, customers, suppliers, and others affected by the company’s operations.

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24
Q

True or False: Good corporate governance requires management to prioritize their own interests over stakeholders’ interests.

A

False

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25
Fill in the blank: Good corporate governance can be enhanced by ensuring that _______ incentivizes management to act in the interests of stakeholders.
remuneration
26
What can be a consequence of poorly structured incentive packages for management?
Directors may leave companies after poor performance with healthy bonus packages.
27
What controversy arose in the UK regarding senior staff remuneration?
The salaries and bonuses of senior staff in major firms have caused public outrage.
28
Who issued a Corporate Governance Code in the UK?
The UK's Financial Reporting Council issued the Corporate Governance Code.
29
What is the role of non-executive directors in corporate governance?
To provide an impartial view and represent shareholders' interests.
30
What is the purpose of the audit committee?
To monitor the financial reporting of the company and its financial controls.
31
Define 'listings authority'.
A listings authority ensures that new share issues are conducted in an orderly and fair way.
32
What is included in the public domain for listed companies?
Public domain includes current and historical share prices, audited company accounts, interim reports, and more.
33
What is the function of listing authorities regarding share issues?
To produce relevant business and financial information on the issue of shares.
34
What does SRI stand for?
Socially Responsible Investment
35
What is required from pension trustees under UK pensions disclosure legislation?
Trustees must disclose their social, environmental, and ethical considerations.
36
What do companies need to do to attract socially responsible investors?
They need to be attractive regarding environmental and ethical issues.
37
True or False: Ethical investment is a declining area in the investment market.
False
38
What do operators of savings products promote concerning environmental and ethical issues?
They promote products that enhance the effect of investment processes on these issues.
39
What is the primary aim of savings product operators like insurers and asset managers?
To enhance the effect of the investment process on environmental and ethical issues. ## Footnote This includes promoting socially responsible products and engaging with company management.
40
What is a 'socially responsible overlay' in investment products?
An additional layer that promotes environmental and ethical objectives alongside financial returns. ## Footnote This often involves engagement with companies to encourage responsible practices.
41
What are some definitions of 'ethical' investing?
* Exclusion of investments in oppressive regimes * Exclusion of certain industries (e.g., tobacco, weapon manufacture) * Inclusion of companies promoting environmental and social issues ## Footnote Definitions vary to meet different investors' requirements.
42
What informal preference do some investors have regarding asset managers?
They may favor managers who appear friendly to environmental and ethical objectives without formal commitments. ## Footnote This reflects a growing awareness of ethical investment.
43
What regulatory requirement exists in several European countries regarding pension funds and SRI?
Pension funds must state their position on socially responsible investing (SRI). ## Footnote Countries include the UK, Germany, Belgium, France, Sweden, and Spain.
44
What is the EU Commission considering for investment funds and financial institutions?
Requiring them to inform clients about ethical or responsible investment criteria they apply. ## Footnote This aims to enhance transparency and accountability.
45
What has increased corporate consolidation raised the profile of?
Competition and monopoly regulation. ## Footnote This is due to the pursuit of economies of scale leading to market share concentration.
46
What is the primary reason for company mergers?
To benefit from economies of scale. ## Footnote Other reasons may include gaining pricing power and accessing new markets.
47
What is a natural monopoly?
A market structure where a single firm can supply the entire market at a lower cost than multiple firms. ## Footnote This is common in utilities, telecommunications, and transport sectors.
48
What is the aim of regulators in competition and fair trading?
To protect the interests of customers and encourage competition. ## Footnote Regulators prevent mergers that would reduce competition through market power.
49
What is a mandate in investment management?
The authority given by the owner of investments to the investment manager to manage those investments. ## Footnote This can include specific investment strategies or restrictions.
50
What are common restrictions in investment agreements?
* Prohibited asset classes * Limitations on derivatives use * Maximum holdings in individual assets * Counterparty exposure limits * Ethical or social limitations ## Footnote These restrictions ensure diversification and risk management.
51
Why might self-investment be restricted in investment mandates?
To avoid conflicts of interest and ensure that the fund manager acts in the best interests of the beneficiaries. ## Footnote Self-investment can lead to biased decision-making.
52
What might local regulation require for investment assets?
* Holdings in government bonds * Matching assets and liabilities by currency ## Footnote These requirements aim to enhance financial stability and risk management.
53
What is the purpose of admissibility regulations in investment management?
To ensure that only certain assets are considered when demonstrating statutory solvency. ## Footnote This encourages funds to hold most assets in categories deemed admissible by regulators.
54
What are the threefold purposes of investment restrictions in fund management?
* Protect ultimate beneficiaries * Prevent gross incompetence * Ensure compliance with regulatory standards ## Footnote These purposes aim to maintain trust and accountability in investment management.
55
What is a trust?
An agreement under which one party (the trustee) has legal ownership of certain property that they must manage for the benefit of another party (the beneficiary). ## Footnote The terms of the agreement are set out in the trust deed.
56
What are the threefold purposes of restrictions on fund management?
* To protect the ultimate beneficiaries from gross incompetence or mismanagement by fund managers * To encourage confidence in investment schemes and the benefits they secure * To promote the accumulation of investible funds.
57
What does corporate governance refer to?
The high-level framework within which managerial decisions are made within a company.
58
What are the two methods of aligning management interests with shareholders in corporate governance?
* Remunerating management in a way that aligns their interests with those of the shareholders * A requirement to have non-executive directors who provide an independent voice on behalf of shareholders.
59
What is the role of the listings authority?
To ensure new issues of shares are conducted in an orderly and fair way.
60
What does the listings authority regulate?
* The financial and business information available to the public at issue * The issue process * The financial and business information available post-issue * The conduct of the listed security market * The conduct of listed companies.
61
True or False: Environmental, social, and ethical issues are becoming less important for investors.
False.
62
What is required from listed companies regarding ethical stance?
They must produce information on their ethical stance, known as Socially Responsible Investment (SRI).
63
What are common restrictions in investment mandates?
* Prohibition on certain asset classes * Limitations on how assets are used * Maximum holdings in certain assets or sectors * Restrictions on self-investment * Ethical or social limitations.
64
What is self-investment likely to be restricted to avoid?
A concentration of risk.
65
What are the main concerns of a trustee?
* To act prudently * To act in the beneficiaries' interest * To demonstrate fairness and equity between beneficiaries * Not to profit directly from action taken * To act in line with the constraints of the trust deed and rules.
66
What are the reasons for a private company to carry out a share issue?
* To have access to investment capital * To enable expansion of the business * To reduce financial gearing * To enable existing owners to realize capital and/or exit the business.
67
What are the reasons for carrying out a merger?
* To benefit from economies of vertical integration * To benefit from complementary resources * To optimize use of tax breaks.
68
What is a natural monopoly?
An industry where a large infrastructure is required, and profitability is strongly linked to achieving economies of scale.
69
What is the rationale behind a requirement to hold government bonds?
Government bonds are viewed as secure investments, enabling a broad match for most liabilities.
70
Fill in the blank: One of the three high-level aims of regulation is to correct market inefficiencies and to promote _______.
efficient and orderly markets.
71
What must regulation ensure regarding the conduct of listed companies?
It must ensure that the conduct is fair to all participants.
72
What are the three high-level aims of regulation discussed in Chapter 7?
* To correct market inefficiencies and promote efficient and orderly markets * To protect consumers of financial products * To maintain confidence in the financial system.

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