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 management industry.

The regulations that apply to asset managers are summarized below. All staff responsible for the management of clients funds are required to know and understand these rules. Trainee fund managers are required to pass the investment management certificate, a large part of which focuses on compliance rules, before being allowed formally to make and or implement investment decisions on a client’s behalf. This qualification is run by the Society of Investment professionals on behalf of the regulatory bodies.


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 FSA’s. 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 investor’s money. These are known as the Financial Service Authority’s ‘principle of business’ and are summarized below..

- Integrity of the company– making profits fairly.
- Relationship with all the regulators – adopting an open and cooperative approach.
- Safeguarding Assets of Customers – Adequate arrangements must be made for the safekeeping of clients’ assets.
- Communications with the customer – Clients informational needs must be met as far as possible.
- Effectiveness and Efficiency – work must be carried out to a high standard.
- Varied interests of Customers - firms must always act with their clients’ best interests at heart.
- Market standards and adherence – firms must adhere to proper standards of behavior.
- Backup and risk control systems – e.g. having adequate risk control systems.
- Financial backup and adequacy – having adequate resources to meet clients’ requirements.
- Customer / Consumer: Trust establishment – ensuring that products offered to clients are appropriate to their needs.
- Varied Opinions – must be handled fairly by firms.


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 firm’s 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.

Disclosure of Major Share Interests:
In order to ensure that the stock market is fair to all investors, any situation where a single investor (or a group of investors acting together – this being known as a consent party) can exert undue influence over a public company through the size of its shareholding must be reported. The Companies Act requires that any investor, or group of investors acting together, owning 3% or more of the issued share capital of a company must declare their holding. Further any change to holdings falling into this category of 1% or more must also be reported.


Conflict of Interest:
Owning own corporation’s shares:

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:
Since fund managers are controlling large amounts of capital, they can clearly influence share prices through the purchase of sale of large quantities of a particular security. For this reason they are required to declare any positions that are holding, either within a company’s own book or within the fund managers’ own personal position. Fund managers are obliged to report these positions to their firm’s compliance department, who will also monitor the company’s own book. They are also required to execute any client trades before they deal on their own behalf, except where it would clearly be in the client’s interest for trading to be carried out after own account trading.


Acting in the Client’s 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 company’s 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 client’s account. Fund managers are not allowed to generate an excessive number of transactions even if the trades are in the client’s interests.


Best execution

An asset management company is obliged to obtain for his clients the best price in the market when carrying out trades on a fund’s 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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