All investment management firms in Canada are structured legally as ____________.
Corporations to be considered for, and receive registration from, the appropriate securities regulator
The corporate ownership structure offers investment firms what four key advantages?
- Firm’s owners benefits from protection the structure offers (limited liability) and other tax benefits
- Firms are envisions as long life business ventures therefore the corporate vehicle suits this objective
- Creation of brand identity
- Corporate share ownership is an incentive that attracts and retains key productive staff
What are the two forms of private ownership?
- 100% employee owned
2. employee majority owned with a passive external owner
From a legal perspective, describe the “publicly owned structure”
- there are technically no publicly owned investment management firms
- all publicly owned financial institutions consolidate their investment management personnel and operations within one or more companies (ie. wholly owned subsidiaries of holding companies that are publicly owned)
What are the four elements of compensation available to institutional investment managers?
- Base salary
- Annual cash bonus
- Shares or share purchase options
- Profit sharing
What is the separation of duties principle?
- incorporated into an organizational structure to minimum the potential for employee self dealing via collusion with another individual in the firm
- should be incorporated into the design of all organizations and institutional investment management firms
What are two specific positions of critical importance in the investment management firm?
- the ultimate designated person (UDP)
2. the chief compliance officer (CCO)
What are the responsibilities of the UDP and the COO
UDP: responsible to the SRO for the firm’s conduct and the supervision of its employees
CCO: responsible for designing and implementing a supervision system that will provide the firm’s board of directors with reasonable assurance that compliance standards are being met
What is the difference between an exempt and a non-exempt investor?
Non-exempt: a small individual retail investor. Non-exempt refers to the fact that investment dealers must sell securities to these investors via a prospectus
Exempt: securities regulators permit the sale of securities without a prospectus
What are the three common prospectus exemptions that securities regulators permit?
- Accredited investor exemption
- Minimum investment exemption
- Offering memorandum exemption
What are the qualifications for being an accredited investor?
Institutional: minimum $5M net assets
Individual: financial assets of over $1M or net income of over $200K (or $300K HH income)
What is the minimum investment exemption?
- allows the sale of securities to investors who make prescribed minimum investment
- NI45-106 sets this number to $150,000
What are the four main channels for institutional investment managers to offer their services by?
- pooled funds
- seg funds/managed accounts
- limited partnerships
- sub-advisory capacity
Describe a pooled fund
- an open ended trust in which investors contribute funds that an institutional manager than invests or manages
- like a MF but not required to have prospectus
Describe a segregated/managed fund
-an investment account that is owned by an institutional investor and managed by a third party portfolio manager
What are two reasons why investors prefer segregated account structures over pooled fund structures?
- For safety reasons, certain investors stipulate that their assets remain with the custodian of their choice
- Seg accounts are the preferred investment vehicle for personalized investment portfolios tailored to an investor’s specific needs
What are the 5 most popular investment strategies used by institutional investment managers?
- Growth
- Value
- GARP
- Momentum (sector rotation)
- Technically based
From a business perspective, what is a major drawback of passive investment products?
-they cannot be patented and are very easily replicated
What are 3 key operational changes required by firms that manage alternative investments?
- appropriate legal and accounting services (assessing and negotiating private placements)
- skills and resources for executing and accounting for short sales
- admin staff must be properly trained in all aspects of securities borrowing and financing
- the valuation of non-marketable or publicly traded securities must be performed in an extremely rigorous and documented process
What are the two primary areas of structure and operations that an institutional investment management firm must modify when offering off-shore based investment funds?
- Additional legal and tax counsel
2. Proper custody, safekeeping, security settlement, and fund unit holder services are arranged for the offshore fund
Describe the role of the fund manager
- creator and sponsor of the fund
- primary role is to provide day to day administration of all aspects of mutual funds operations
- the fund manager is a corporate entity
What are the fund manager’s primary responsibilities?
- preparing and filing documents (ie. prospectus)
- ensure all service providers exercise due diligence in creating, managing, and distributing the mutual fund
- negotiating service contracts
- ensure service providers conduct their affairs according to rules, regulations, and best practices
Describe the role of principal distributor
- responsible for a mutual fund’s marketing and distribution
- usually a wholly owned subsidiary of the entity registered as the fund manager
- always must be registered as a mutual fund dealer
Describe the role for the trustee (pertaining to mutual funds)
- mutual fund assets are normally held in a trust
- trustee holds the title to the property on behalf of unit holders
