Various issues in compliance that asset managers must adhere to in managing assets?
Asset managers are
responsible not only for the professional and responsible investment
of their clients funds, but also for the correct and accurate reporting
of transactions carried out, fund valuation and performance. They must
also ensure the safekeeping of the clients assets, generally by
making arrangements with a custodian bank specializing in generally
by making arrangements with a custodian bank specializing in this type
of service. Although the requirements of compliance with UK investment
regulations are onerous, the tight regulation of the general investment
business is a cornerstone of the continuing success of the general asset
The asset management companies are regulated by the financial services authority which is a legal body with statutory powers granted under the Financial Services and Markets Act 2000. The FSA is a company limited by guarantee, where this guarantee is made by HM treasury. The regulatory regime is designed to protect the interests on the private investor by imposing stringent regulations upon companies engaging in asset management. It is a criminal offence to provide asset management services without the FSAs. Authorization punishable by upto 2 years imprisonment plus an unlimited fine.
There are a few guidelines which relates to the conduct of the business which specifically applies to the asset managers. They are listed below. These are designed in an organization specifically to ensure that the asset management firms and their staffs / workers / managers are fit and eligible to manage the investors money. These are known as the Financial Service Authoritys principle of business and are summarized below
- Integrity of the
company making profits fairly.
In addition to these client specific rules, asset management firms are obliged to play their part in ensuring that illegal activities such as insider dealing and money laundering do not occur. If the FSA feels that firms are in breach of these guidelines they have the ultimate sanction of withdrawing a firms authorization thereby making it illegal for them to continue to trade.
Compliance Rule Summary
Most of the rules
that asset managers must abide by are common sense. The rules revolve
around acting in the clients best interests, putting your clients
interests before your own as well as ensuring that the firms action
do not break any laws.
Conflict of Interest:
These days most asset managers are part of larger banking groups. There is a clear potential conflict of interest in investing clients money in shares of your own company.
Own Account Trading:
Acting in the Clients Best interests:
Inducements: Both individual fund managers and asset management firms as a whole are restricted in the types of inducements that they are allowed to accept from brokers looking for the fund manager to place orders for securities through them. In general, brokers fal into two categories: that providing background research into securities that fund managers may wish to buy and those not providing this research, but instead paying an amount of soft commission. Under the regulations, this soft commission can only be spent by the fund management organization on data and systems which assist in the making of investment decisions. Thus, fund managers can use this money to pay for research systems such as DataStream and Bloomberg, but may not use it to buy general accounting or personnel system software.
Gifts from brokers to fund manager also need to be kept under control. Any substantial gift must be reported to the asset management companys compliance department, who will decide whether the gift can be accepted.
Churning the Account:
This particularly applies to fund managers who earn all or part of the fees based on the volume of market trades carried out on the clients account. Fund managers are not allowed to generate an excessive number of transactions even if the trades are in the clients interests.
An asset management company is obliged to obtain for his clients the best price in the market when carrying out trades on a funds behalf. Thus, the executive carrying out any trade has to get a series of quotes from different brokers and is obliged to hit the lowest quote if buying, and the highest quote if selling.
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