A Better Grasp of Non-financial Risks

The European Fund Management Industry Needs a Better Grasp of Non-financial Risks — December 2010

3. Risks and Responsibilities in the Fund Industry

them to finance investment (and growth). These countries, however, have different legal origins, so depositary liabilities and obligations are different as well. Figure 1 summarises how responsibilities for the main tasks are shared in several countries of interest. 3.1.3.1 The United States The United States is the largest representative of the common-law countries, and as

such has high-level principles such as the fiduciary duty of all parties; yet, unlike other common-law countries such as the United Kingdom, the United States has incredibly detailed regulatory requirements, probably because of frequent litigation and because of the SEC’s mission to protect retail investors.

Mutual funds are the regulated 15 American investment funds equivalent to UCITS in

Figure 1: Parties and responsibilities by country InFrm is the investment firm, BoD the board of directors, TA the transfer agent. US UCITS FR UK

LUX

IRL

Custody

Custodian

Depositary

Depositary

Depositary/ Trustee

Depositary

Depositary/ Trustee

Compliance with regulations

Board of directors + chief compliance officer

Depositary + InFrm

Depositary + InFrm

Depositary + InFrm (or board)

Depositary + Board

Depositary/ trustee + Board

15 - The benchmark text for the regulation of open-ended investment funds is the Investment Company Act of 1940 (SEC 1940), supplemented by the federal regulation code (SEC 2003) and the Investment Advisers Act of 1940 that regulates investment firms. The act can be found in the investment company registration and regulation package (SEC 2009).

Bookkeeping

BoD with custodian

Depositary

Depositary/ trustee

Valuation

Fund, but usually with administrator. BoD supervises.

InFrm must produce it. InFrm or laws responsible valuation rules. Depositary supervises (+independent auditor).

InFrm company, depositary validates process

InFrm company, depositary validates process and tools

Fund for guidelines and decisions, valuator for calculations. Depositary supervises; promoters ensure compensation for errors. Fund but usually transfer agent

Fund but usually administrator; depositary supervises (a depositary/ trustee cannot be administrator)

Centralisation Fund, but usually administration services

By or on behalf of an InFrm; compliance monitored by depositary

InFrm but usually depositary

Manager but usually depositary; depositary supervises Manager but usually depositary; depositary supervises

Trustee (in unit trust) under InFrm instructions

(admin or TA/ underwriter) Fund, but usually administration services (admin or TA/ underwriter) BoD even if not accurately defined Investment advisor; compliance monitored by BoD

Unit-holder register

Country regulations apply

InFrm but usually depositary

Fund but usually transfer agent

Trustee (in unit trust) under InFrm instructions

Check and balance

Not defined in regulations

Not defined, limited responsibility from board

Board may be responsible

Board may be responsible

Investment management

InFrm; compliance monitored by depositary

InFrm; compliance monitored by depositary/ trustee

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An EDHEC-Risk Institute Publication