Predicting Fraud By Investment Managers Flashcards
(8 cards)
Why is it necessary to predict fraud?
- Fraud results in total loss for the investor
- No requirements of investment managers accreditation in US
What is Form ADV?
Based on investment advisors act of 1940, this form requires disclosure of past regulatory and legal violations and possible conflicts of interest.
Investment managers who manage more than 25 million are required to file Form ADV annually or whenever there is a material change.
Predictive variables from Form ADV
- Conflicts of interest of the firm
- Soft dollar arrangements
- Broker dealer relations
- Custodian for the fund
- Registration under investment company act (1940)
- Chief Compliance Officer
- Majority employee owned
- Clients who are agents
- Firms that manage hedge funds
Which variables have a direct relationship with the likelihood of fraud?
- Conflict of interest
- If firm is associated with broker-dealer
- Registered under ICA 1940 (as it may attract vulnerable investors who can be defrauded)
- Not having a CCO
- Investor size
- Past regulatory violations
- Clients who are agents (not direct beneficiary of the fund)
Impact of the firm serving as a custodian for client cash/ securities
Absence of third party oversight
Greater risk of the firm expropriating investor wealth.
However, does not support a higher likeliness of fraud.
Firms that are registered as per ICA of 1940, and have a CCO
Are less likely to suffer from fraudulent representation, due to audit requirements, and internal monitoring from the CCO.
The free rider problem suggests that the costs of obtaining relevant data and estimating fraud risk may be
Lower than the benefits for investors as a whole and higher than the benefits for single investors
SEC
Provides current and prior ADV filings in a standardized format to access for due diligence purposes
