Automate manual checks/controls:
Improve accuracy
Improve efficiency
Improve recordkeeping
IMA's are legally binding - proving full compliance is essential!
Challenge
Investment managers and their clients negotiate complex agreements detailing the manager’s duties and responsibilities as well as the limits to their investment objectives/discretion.
Any failure by the investment manager to comply with the terms of the agreement they entered could result in expensive compensation as well as client defection.
Maestro-Solution
There are a range of IMA Governance and Compliance solutions determined by investment manager/investor requirements:
Investment Managers/Advisors need to have a controlled process for managing their client portfolios in accordance with each IMA:
- Take-On: ensure the firm managing the fund has rigorous internal controls.
- Securities Analysis: how individual investments are assessed and selected, including restrictions/guidelines.
- Portfolio Management: how the overall portfolio is managed, including restrictions/guidelines.
- Communications: notifying the client of specified events, e.g. regulatory issues, senior departures, changes in process, etc..
- Others: covering a wide range of IMA clauses including: valuation methodology, authorised signatories, etc..
Where an IMA specifies and investment process it is necessary to evidence this process. In some occasions the investment process is specified in an investment fund’s prospectus (the prospectus is a contract between the fund and it’s investors).
Examples of an investment process include:
- Security Selection: Investments are selected from the manager’s “top 50 buys”.
- Periodic Portfolio Review: The Portfolio Manager (PM) will review the holdings monthly and rebalance as required.
Where an IMA or fund prospectus specifies an investment process then the Investment Manager/Advisor has to evidence that they have followed the contractual process.
IMAs usually contain a section on investment restrictions and guidelines. Most quantitative guidelines/restrictions can be monitored by specific systems such as CRD, ThinkFolio, Bloomberg POMS, Aladdin, etc. However, there are a range of investment restrictions/guidelines which can’t be automated due to a range of reasons, including:
- Judgement: terminology which requires judgement, such as “low risk”, “environmentally sensitive” or “high quality” have to be manually checked.
- Missing Data: in some instances, the Investment Manager/Advisor doesn’t have the data specified by an IMA.
- Complexity: some guidelines/restrictions are too complex for systems to calculate and have to be calculated in spreadsheets.
Before making any investment decision/recommendation Investment Managers/Advisors are required to have performed due diligence.
When investing in funds the Investment Manager/Advisor needs to conduct due diligence on the:
- Fund Manager: ensure the firm managing the fund has rigorous internal controls.
- Fund’s Investment Team: assess the fund’s investment team to ensure there is continuity and key person cover.
- Fund: evaluate the fund to ensure it meets the investment objectives.
Due diligence should be conducted before making an investment decisions/recommendations and periodically thereafter.