Contents > Bank of New York Fund Focus...
Page last published: 6 March 2007

The Bank of New York Trust & Depositary Co. Ltd.
Fund Focus NEWSLETTER
Autumn 2005
21 September 2005

Bank of New York Home Page

David E L England E: dengland@bankofny.com
T: +44 (0)207 964 6715

Lloyd Dyett E: ldyett@bankofny.com
T: +44 (0)207 964 6741

Ken Getty E: kgetty@bankofny.com
T: +44 (0)20 7964 4832

David Bruce E: dbruce@bankofny.com
T: +44 (0)20 7964 4010

· Introduction

· Review of the enforcement process and Regulatory Decisions Committee

· Hedge Funds and wider range of retail investment products

· The practical impact of COLL

To protect the confidential and proprietary information included in this material, it may not be disclosed or provided to any third party without the prior written consent of The Bank of New York. The information included in this material is provided for general information purposes only and does not constitute legal or professional advice. Neither The Bank of New York nor any of its affiliates accept any liability or responsibility for any losses arising or resulting from any reliance on information included in this material. This limitation of liability applies to all claims and losses of any kind, including (without limitation) loss of profits, business, revenue, goodwill or anticipated saving; and/or consequential or indirect loss.

Introduction

Welcome to the autumn edition of Fund Focus. The second half of the year has commenced with yet another raft of consultation and discussion papers adding to the perception of ever increasing volumes of regulation. In this issue we comment on some of these consultation papers and take a further look at COLL. Articles included are:

· Review of the enforcement process and Regulatory Decisions Committee

· Hedge Funds and wider range of retail investment products

· The practical impact of COLL.

The enforcement process and role of the Regulatory Decisions Committee of the Financial Services Authority has recently attracted considerable coverage in the press following an internal review by the FSA. This was prompted by concern over whether the current process was equitable and effective. The findings of this internal review and their implications are contained within Consultation Paper 05/11.

Continuing with the same theme I am also sure that you will find our article entitled 'Poacher turns Gamekeeper' of interest, in which Tim Herrington as head of the Regulatory Decisions Committee talks about his new role and the changes which will take place following the recommendations of the internal review.

We have also included a practitioner's overview of Discussion Papers DP 05/03 'Wider range retail investment products' and DP 05/04 'Hedge funds: A discussion of risk and regulatory engagement'. This article is written by David Miller of Meteora Partners LLP and we hope it will stimulate thought and debate in advance of the deadline for comments on the 28th October.

As COLL is ever in our thoughts as the industry moves inexorably towards the conversion deadline of February 2007, we have included an article on some of the practical implications for certain business units.

Finally on a light hearted note, we end the issue with a competition, in the format of a regulatory crossword which we hope will not be too onerous.

Poacher Turns Gamekeeper

Tim Herrington
FSA Chairman,
Regulatory Decisions Committee

Some of you may remember me as a Partner at Clifford Chance who for many years specialised in providing advice to Financial Institutions on corporate and regulatory matters, with particular emphasis on the asset management industry, including collective investment scheme issues for both managers and trustees/depositaries.

My friends at The Bank of New York, having discovered that I had moved on from Clifford Chance after 29 years to become a poacher turned gamekeeper at the FSA, taking up the job of Chairman of the FSA's Regulatory Decisions Committee, asked me to explain why I decided to make this move and what my job entails, involving as it did only a short physical move from one side of the impressive Canary Wharf estate to the other but a very significant role change.

I very much welcome the opportunity to write this article and describe the very important but little understood post that I now fill, which has been in the spotlight recently with the publication of the FSA's report and recommendations deriving from the review that it has just undertaken of its Enforcement Process. Before I do that, some historical background will be useful.

Administrative decision making process V Judicial decision making process

The word "Enforcement" may send shivers down the spines of some of you. You may recall that the FSA's Enforcement powers created considerable controversy when the Financial Services and Markets Act ("FSMA") was being considered by Parliament. Basically the Treasury decided to opt for a system that involved the FSA Enforcement Division investigating rule breaches and then deciding what, if any, penalty to impose as a result. This contrasted with the old IMRO system under which IMRO's Enforcement Committee would investigate the facts and then, if it felt there was a case to answer, the matter would be determined by a separate tribunal headed by a senior legal figure assisted by practitioner and lay representatives. This tribunal operated in a very similar way to a court of law, receiving detailed evidence from witnesses and allowed cross examination. The proceedings were however in private, so only if there was a finding against the firm would there be publicity at the end of the case. This system engendered a fair degree of confidence from the regulated community as it involved a body independent of the investigator determining the facts and the penalty. However it was criticised by the consumer lobby as not being sufficiently transparent and could also be extremely expensive and time consuming from both the firm's and the regulator's perspective, as it usually involved a significant use of costly legal resource.

The previous model could accurately be described as a judicial decision making process involving all the trappings of a court. The FSMA model, investigating and making the decisions, is legally classified as an administrative decision making process. The difference is that the duties imposed on the FSA in this model derive from administrative law and not the strict rules of evidence and procedure associated with the judicial model. When administrative decisions are made, the decision maker is simply under a duty to act fairly in assessing the facts and making an appropriate decision based on those facts. Before it makes the decision it is however, bound to inform the person affected the broad outline of the evidence against it on which the FSA relies and give the person affected the right to make representations on that evidence before the decision is made. The decision maker must also be free from any bias which could affect the quality of his decision. This is quite different from how a court or judicial tribunal makes a decision. On the administrative model, the decision maker is not bound to allow live evidence or the right to call and cross examine witnesses but is required to look dispassionately at the case and base the decision on material which tends logically to show the existence or non-existence of facts relevant to the issue to be determined. The decision maker must act fairly both in the process of carrying out the investigation on which the decision is based and in making the decision itself.

The clear advantage of the administrative model is that it offers a quicker and more cost effective method of resolving regulatory disputes than can be achieved under the judicial model. The drawback is that this model raised concerns at the time it was proposed that it cast the FSA in the omnipotent role of "investigator, judge, jury and executioner" and therefore the system was unfair to the firm.

Two significant safeguards were added to the administrative model to address these concerns. First, the FSMA provided that the FSA's arrangements had to ensure that the person who took the decision on a matter was different to those who had investigated the matter and prepared the case on the basis of which the decision would be made. Secondly, provision was made in the legislation for an independent tribunal. This is part of the court system, to which a person subject to an FSA decision not to their liking could refer the matter for an entirely fresh hearing. This would be like the old SRO tribunals, examining all the evidence in detail and allowing cross examination of witnesses in the usual manner. The main difference with the old SRO tribunals was that these hearings would be in public. Thus anyone who felt that the FSA's administrative process, designed to offer a swift and cost effective method to resolve disputes, had not dealt with the matter adequately could refer the matter to the independent tribunal, although obviously that would attract considerable cost and the glare of publicity.

It was therefore important that as far as possible firms had confidence in the FSA's administrative process and its ability to ensure it dealt with cases fairly. That is where my role comes in. It was decided that the FSA's decision maker, that is the person separate from the Enforcement Division who has to make the decisions on the basis of the material gathered by Enforcement, should in fact be constituted as a committee of the FSA Board, comprised of 24 external members, a mixture of practitioners and non-practitioners from a variety of backgrounds. This Committee, to be known as the Regulatory Decisions Committee, ("RDC") was to be chaired by an FSA employee who was expected to have a legal background and significant knowledge of the financial services industry but who was outside the normal FSA management structure and who reported directly to the FSA Board. That is the position that I now fill.

Operation of Regulatory Decisions Committee

I will give you a flavour of how the Committee operates. This is based on the new procedures we are just introducing as a result of the Enforcement Review Process referred to below. The FSMA requires that if the FSA wishes to impose a penalty on a firm for rule breaches it must issue the firm with a Warning Notice, setting out the penalties the FSA wishes to propose, the facts relied on and the reasons for the proposal. The Enforcement Division, having concluded their Investigation Report on which the firm will have been given the opportunity to comment before it is finalised, will submit their report to the RDC with a draft Warning Notice. I will convene a panel consisting of myself (or one of my deputies if I am not available) and 2 other Committee members to consider the evidence presented by Enforcement and decide whether the issue of a Warning Notice is merited. I will try to choose a practitioner with some experience of the business in question together with a non-practitioner to sit with me on the panel. So for example, if it were a collective investment scheme case (you will be relieved to know that no such cases have yet passed my desk) I would involve a Committee member like Jeremy Willoughby, a senior figure in the fund management industry. Alongside the key evidence we will have an Enforcement Submissions Document, in which Enforcement will analyse the material and explain why in their view the rule breaches are made out and the proposed penalty justified. Under the new process, I have my own legal team to review this document and give independent advice to the Committee on the strengths and weaknesses of the FSA's case. It should be noted that we do not examine every piece of evidence and we rely on the Enforcement Division to present a balanced case to us and they of course, being part of the administrative process, are bound to act fairly in presenting the case and ensuring the firm's views on it are properly reflected in the material put to us. Our lawyer can ask to review more of the underlying material if he feels there are any concerns on that issue.

If we think a Warning Notice is justified, it is issued to the firm with any amendments we think are appropriate. We do of course from time to time reject requests for Warning Notices or suggest substantial modifications to the case, often resulting in the proposal of a lower penalty. The firm has the right to make representations to us on the Warning Notice. It can do that either in writing or through oral representations to us at a meeting. Usually it is a mixture of both. At this stage, the original panel of 3 will be increased to 5 by the addition of 2 further members who have not looked at the material before to counter the criticism that our minds will be closed against the firm if we have already issued a Warning Notice.

The oral representations meeting will be as informal as possible, and except in the most complex of cases is expected to last no more than 2 hours. Even the most complex cases will be allocated no more than one day. As mentioned previously, we are not a court of law so we just expect the meeting to concentrate on the key issues. We do find those face to face meetings valuable in assisting our decision making process. This is particularly so in authorisation cases where we are asked to judge whether an individual is fit and proper to fill a particular position or whether a firm has sufficient quality of management to justify authorisation where hearing directly from the individual himself can often give a different perspective from what you can judge from the papers. In quite a significant number of cases the oral representations will result in us giving a different decision than we did at the Warning Notice stage.

If we decide after the representations stage that a finding against the firm or individual is still justified we will issue a Decision Notice, which will be drafted by our lawyer and will show how we have dealt with the firm's representations. If the firm does not like the decision it has the right within 28 days to refer the matter to the Financial Services and Markets Tribunal. A small number of cases are referred, the most significant having been the Legal and General case referred to below. I have to accept it as an occupational hazard that some of my Committee's decisions will be called into question. In some of the more complex cases, there may be a concern that the administrative process I have described above cannot possibly explore all the issues in the depth required and that a more judicial approach is necessary. If the firm comes to that view, then it has the safeguard of the Tribunal to cover that. We do not seek to duplicate the work of the Tribunal and the RDC process is capable of resolving most cases satisfactorily. It is all a question of balance between cost and speed on the one hand and fairness on the other.

Internal review of enforcement process

I mentioned that the whole Enforcement process, including the operation of the RDC, had been recently reviewed. In fact the Review was established the day after I joined the FSA, and I was pleased to be asked to join the FSA Board Committee that oversaw the review process and made the recommendations that were subsequently accepted in full by the Board.

The FSA Board commissioned the Review because in the words of Sir Callum McCarthy, the FSA's Chairman, "our Enforcement process had been subject to criticism by the Tribunal in the Legal and General case and because it was evident that many affected by Enforcement actions had doubts about the fairness of the process".

The main criticisms had revolved around two areas. First, there was a feeling that the investigation process within the Enforcement Division was not sufficiently rigorous, resulting in unbalanced cases being presented to the RDC. Secondly, there was a feeling that the divide between the Enforcement Division and the RDC was not clear enough. In particular, the RDC had to rely on advice from the Enforcement Team or its outside counsel on the sufficiency of evidence and interpretation of the rules. There were also significant communications between the Enforcement Team and the RDC about the case which were not disclosed to the firm. For example, it was the practice after the firm had made its oral representations for the Enforcement Team to express its views to the RDC in private on the strength of the firm's representations.

Investigation process needs to be rigorous

As far as the first issue is concerned, the Review recognised that to ensure the decision making process functions most efficiently investigations must be of a high quality and any breaches alleged must be properly supported by the evidence. To assist this it was recommended that before a case is referred to the RDC there be a thorough legal review by lawyers in the Enforcement Division who are not part of the investigation team.

Clearer divide needed between enforcement and RDC

As far as the second issue is concerned the Review recommended that the RDC model be retained in its current form but with its numbers reduced from 24 to 16 to ensure consistency in decision making and that members spend more time on the Committee's affairs. In order to strengthen the RDC's objectivity and independence and bring greater transparency to the process, the following measures are to be implemented:

· the creation of a small, dedicated legal function to assist the RDC in its decision-making which will mean that the RDC will no longer have to look to the Enforcement Division for legal advice and support. Confidential communications between Enforcement and the RDC should therefore cease

· all substantive communications (whether oral or written) between the Enforcement case team and the RDC will be disclosed, to deal with criticism that those subject to enforcement action are not completely clear about the case

· the current practice whereby the Enforcement case team has direct access to the RDC after the conclusion of the representations meeting without the firm or individual being present will end. Instead, RDC representation meetings will be conducted on a more interactive basis than now. Any further submissions to be made either by the case team or the firm or individual(s) involved will be disclosed to the other party

I am very pleased with the results of the review which as Sir Callum McCarthy has said "demonstrates the FSA's determination to respond carefully and fully to well founded criticism".

So what sort of cases do I get involved with?

What makes my new job so interesting is the range of subject matter. In the same week I can be considering the implications of a complex series of securities transactions by a large wholesale firm in the context of the market abuse regime, or an issue as to whether a listed company has misled the market through a late announcement of a trading slump, as well as whether a sole trader operating on the high street in a small market town is fit and proper to carry on the business as a broker selling car insurance and advising on mortgages.

So why did I agree to do it?

The short answer is that I felt that I had achieved all my ambitions as a financial services lawyer and that the time was right to put something back into the system which had given me such great opportunities. This job enables me to build on my previous experience and apply it in an important public sector appointment. I also think it is vital for the effectiveness and public confidence in the financial services regulatory system that it is able to attract senior industry figures to perform these important roles and I am pleased to be able to contribute to that alongside other recent recruits such as Hector Sants, the FSA's Managing Director for Wholesale Markets and Margaret Cole, a leading City litigation lawyer who has recently joined as Enforcement Director.

I do miss my former clients but I am thoroughly enjoying my new role. I hope that I do not see too many of you over the next few years other than in a purely social context!

Regulating Hedge Funds - What Should The FSA's Approach Be?

By David Miller of Meteora Partners LLP

Background

On 23rd June, The FSA released two discussion papers: DP05/3 "Wider-range Retail Investment Products" and DP05/4 "Hedge Funds: A discussion of risk and regulatory engagement".

It is surprising to see these two discussion papers issued at the same time because, on the face of it, they appear to point in different directions. DP05/3 seems to be asking how hedge funds or at least the techniques utilised by hedge funds can be made available to the wider retail market, while DP05/4 appears concerned about a wide range of possible risks with hedge funds.

The issue of these discussion papers follows a prolonged period of "hedge fund bashing" from sources as diverse as the SEC, Herr Schroeder, leading industrialists and the general press to name a few. The alleged role played by hedge funds in the SEC mutual fund scandals, the unseating of Rolf Breuer from Deutsche Borse and the widely predicted meltdown following the GM and Ford credit crisis earlier this year seem to feature high in the list of hedge fund "crimes". The SEC has recently mandated that hedge fund managers with more than 14 US clients on a "look through" basis must register as investment advisers before 1st February 2006.

At the same time, a number of countries, notably France and Germany, have recently been making efforts to encourage the distribution of hedge fund products to a wider public in their own countries.

One can't help thinking that the FSA in publishing these two papers is merely reacting to external forces such as these above, most of which are not UK-based.

The Hedge Fund Industry

The hedge fund industry is a very diverse and, on the whole, well-controlled industry. Just consider this:-

Hedge Fund Managers

All UK-based hedge fund managers must be authorised by the FSA like other investment managers. The hedge fund industry undoubtedly contains some of the most-talented investment managers of all. This is unsurprising since hedge funds allow talented managers the best platform to operate their own business models and offer them the best economic rewards. What may be more surprising is that most of these investment managers are very far removed from the rampaging pirates as portrayed in the press but are very mature and ethical individuals.

Hedge Fund Investment Styles

A frequent error of commentators and hedge fund pundits is to lump all managers in the hedge fund industry together, which is very far from the truth. There is a very large diversity in the investment styles of managers in the hedge fund industry, including top-down, bottom-up, growth, value, macro, CTA's and so on. There is value in this diversity since it tends to reduce (though of course not eliminate) correlation and the risk of contagion.

Hedge Fund Counterparties

Prime brokers, who provide various services including basic settlement and custody services as well as stock borrowing, select the best new hedge fund manager prospects. "No hopers" usually don't make it to the start line.

They also provide a check on their hedge fund managers by calling in margin and even forcing hedge fund manager close down if necessary.

Despite some imperfections as noted by the FSA in DP05/4, fund administrators also normally provide a further check by independently valuing the fund.

Hedge Fund Investors

Many fund of funds managers impose a very thorough due diligence process on hedge fund managers. Whilst a large portion of that due diligence is investment-related, a substantial portion is also directed to probe operational procedures and controls.

So, in summary, the hedge fund industry is a very diverse one and, whilst it is not perfect, it does have a series of in-built controls and checks which are arguably just as strong as those in the long-only investment industry.

What should the FSA be concerned about in relation to Hedge Funds?

Market risk

In my view, the main concern of the FSA ought to be whether there is any undue risk to the markets from hedge fund single or multiple failure and whether this risk is so much greater than that posed by the risk of failure of other investment managers as to justify a different regulatory focus for hedge fund managers than other investment managers.

DP05/4 offers no evidence whatsoever that hedge fund managers are likely to cause any more disruption to the market than other players. Instead, it contains a number of apparently unsupported assertions about possible risks.

The lack of evidence does not surprise me. Over my own 18-year experience of the industry, there have been only 4 occasions where there has been any real crisis: 1987, 1994, 1998 and 2005. In each of these periods, with the exception of 1998, some hedge funds may have underperformed, experienced major redemptions and even closure, but with no disruption to the market.

Only in 1998, did the failure of LTCM require major regulatory intervention. In the most recent events of 2005 and despite continual bad press coverage, there has still been no serious market disruption. A number of hedge funds and their investors have suffered reversals in market performance, some fairly dramatic, but is that not what a free market is about and is that not entirely healthy?

Having said that, given the experience of LTCM, I do think there is a "market impact" argument in favour of enhanced supervision by the FSA for the larger hedge fund managers. This might take the form of requiring a more intensive "team supervision" approach to regulation. An alternative approach would be to gather more detailed and regular information via the prime brokers directly. From a market impact viewpoint, this latter approach would have the advantage of being independently sourced.

Other risks

Although the other possible risks outlined in DP05/4 could occur in individual hedge fund managers, they are unlikely to have a great impact for the FSA, since hedge fund investors are not retail, but institutions or high net worth sophisticated individuals. Such investors do not need the same consumer protection as retail customers

Can Hedge Funds safely be distributed to retail customers?

I rarely encounter a hedge fund manager in the UK who has any desire whatsoever to distribute his hedge fund directly to the retail market. The pressure seems to come solely from others further up the distribution chain. The best hedge fund managers are not therefore going to make their funds available to retail customers.

Conversely, the suggestion in DP05/3 of opening up hedge fund techniques to long-only onshore investment managers, who have had no experience of hedge fund techniques such as shorting and leverage to practise their newly acquired arts on retail customers is surely a recipe for disaster.

The way to distribute hedge funds in the UK retail market therefore, is through "wider range" funds of hedge funds (like the initiatives in other European jurisdictions). These would capitalise on the due diligence, experience and skill of the onshore, regulated fund of hedge fund managers. They would permit investment in unregulated hedge funds; otherwise they will deny the retail customer access to the best talent. Risk can be limited through a simple diversification limit, perhaps similar to the 5% and 10% for 40% UCITS limit.

David Miller is a partner in Meteora Partners LLP ("Meteora") which provides compliance, accounting and administrative services to a number of small to medium-sized hedge fund managers located in the UK. The views expressed in this article are personal.

The Impact of COLL

Regulatory change has always presented challenges for our industry. Today the new FSA collective investment schemes sourcebook (COLL) is starting to have an impact. COLL sets out the rules for UK authorised funds and is mandatory for all funds from February 2007.

Until then, funds (both existing and new) can operate under either the existing rules (CIS) or the new rules (COLL).

The industry has already commenced the transition to COLL and although gradual to begin with, the momentum is beginning to pick up. This article looks at the impact of COLL on the services provided by some of the more important business areas including Fund Accounting, Depositary, and Transfer Agency.

Fund administration

COLL impacts all areas of fund administration, including investor servicing, pricing, valuation and reporting to investors. The administration function, whether outsourced or in-house, needs to create a plan of action that includes analysing the rule changes, deciding what amendments are required to systems and procedures and then implementing the necessary changes within the mandatory timetable outlined above.

The new rules allow greater flexibility for fund managers. They are now able to manage their funds to take advantage of new opportunities to invest in property, gold and certain non-approved securities, depending on the type of scheme managed. All new authorised funds issued under COLL must be either a UCITS retail scheme, a non-UCITS retail scheme or a Qualified Investor Scheme (QIS).

COLL also provides the opportunity to use derivatives more widely in retail funds and this could challenge the desire for much greater degree of automation than in the past, in respect of trading, portfolio valuation, position monitoring and reporting.

QIS funds have the widest investment and borrowing powers. They can invest in precious metals, commodity contracts and derivatives based on commodities and can short-sell securities. To the extent that these instruments have not been used in the past, new procedures for trade capture, new sources for pricing and new methods for valuation will all be required.

Generally the new rules allow wider and more flexible investment and borrowing powers. For example, dependent on the scheme type, up to 20% of a scheme can be invested in non-approved securities; up to 20% in unregulated schemes; up to 35% invested in any one other regulated collective investment scheme; up to 10% in gold; and borrowing of up to 100% of the scheme and no longer just on a temporary basis. The accounting function needs to cope with measuring and reporting what funds can and cannot hold.

These changes will need careful re-setting of monitoring parameters and potentially greater reporting requirements.

COLL funds can now charge a performance-related management fee. These have been extensively used in the offshore and hedge fund world, but only now are they accepted in the retail funds market. The options to support this are to interface with a stand-alone system, or to integrate the fee calculation into the main accounting engine, however there are complexities for daily priced retail funds.

The signs are that managers are using the new rules creatively, to build mixed fund types and more complex multi-manager structures, perhaps mixing fund-of-funds with multi-manager funds. These structures need stronger reconciliation and reporting procedures, with a higher degree of automation and processing power for the daily pricing cycle.

There are other changes under COLL that impact the fund pricing process. As the COLL rules currently stand only single pricing, and not dual pricing, is proposed for all funds beyond 2007. As the deadline approaches the FSA may yet decide to continue to permit dual pricing beyond 2007. Nevertheless it is anticipated that compared to the present day many more funds will switch to single pricing as part of the conversion process. On a point of caution, although different share classes for OEICs have existed since their inception in 1997, under COLL it will be possible to have multi classes within an authorised unit trust other than merely for accumulation of income. Where dual pricing is used, as is indeed possible under the transition arrangements until 2007, this can present a raft of pricing problems with no clear preferred approach that deals effectively with all of the issues raised. In any event multi class dual pricing may not be supported under some accounting systems without significant development and associated costs.

Under COLL, managers are expected to give due consideration to Fair Value Pricing if circumstances dictate. New review procedures, governance and documentation will be required to support valuation decisions.

COLL also impacts the process of reporting to investors. Short Reports are a new document introduced by COLL and their production and issue to all investors is compulsory. Not to be confused with short-form accounts which have effectively been made redundant, Short Reports are intended to be a user friendly document to provide a concise readable document for investors, but they do require administrators to collate information from wider sources.

Overall, the impact of COLL is that managers have more freedom to develop innovative products but this will challenge the administration and accounting functions to respond in tandem both in respect of systems and business procedures. These changes could influence the choice of a fund group of whether to invest in the technology needed or to outsource and avoid the future spend.

Regulatory change can often be seen as a burden on business development. However, in this case, there is competitive advantage to be gained from managers working in tandem with their service provider to develop joint solutions that meet the challenges and new opportunities presented by COLL.

Depositary Services

The impact of COLL on depositary services is, in a practical sense, much less than for Fund Administration. This is because the Depositary role is that of custodianship of assets, with other fiduciary duties mainly requiring oversight of the other parties.

One of the more obvious differences between the CIS Sourcebook and the COLL Sourcebook is that of relative size.

The COLL Sourcebook is thinner. This is a direct consequence of it being less prescriptive in nature, and the fact that many of the rules previously within the CIS Sourcebook have deliberately been left out of the COLL Sourcebook as they are now deemed to be matters that ought to be the subject of interpretation and/or agreement between the Depositary and Manager, or alternatively are matters that might more appropriately reside within the scheme documents themselves. The relegation of rules from the rulebook into the scheme documents will lead to more bespoke schemes which in turn will challenge the oversight role of the Depositary.

It can be appreciated from the above that for the Depositary there is a definite requirement / emphasis on education, training, and development of technical expertise. The Depositary needs to have staff with expertise in all areas. Staff need to have a comprehensive knowledge of the new rules and also an understanding of their application, whilst never losing sight of the overall context of investor protection. The Depositary therefore also needs to be able to negotiate effectively with the manager on behalf of the interests of investors.

From the aspect of systems and procedures, the Depositary needs to update its monitoring tools to reflect the new investment and borrowing powers possible under COLL and to oversee certain other matters that have become possible under COLL such as the use of performance fees. Systems and procedures for processing creations and cancellations may also need updating in preparation for any adoption of the powers of limited issue or limited redemption.

Transfer Agency Services

The impact of COLL on the Transfer Agency or Registrar function is rather less than on both Fund Accounting and Depositary Services.

The first and foremost impact of COLL is neither operational nor systems related but instead affects the regulatory responsibility for the register. Currently the trustee is responsible for the register of a unit trust and the ACD is responsible for the register of an OEIC.

Under COLL there is no prescription indicating responsibility for the register of either type of fund and instead it is left to the agreement of the Trustee/Depositary and Manager/ACD to decide regulatory responsibility.

The other primary areas impacted by COLL will be the addition of multi classes for unit trusts and box management processes. Box management will be impacted by any use of the powers of limited issue or limited redemption, and procedures and systems will need amending accordingly. Changes to the current notification periods for creations and cancellations will also have to be agreed with the Depositary. The introduction of multi classes for unit trusts might have an impact on systems, but this should not be severe.

Contents

The Bank of New York Trust & Depositary Co. Ltd. Fund Focus NEWSLETTER Autumn 200521 September 2005 Bank of New York Home Page

The Bank of New York Trust & Depositary Co. Ltd.
Fund Focus NEWSLETTER
Autumn 2005
21 September 2005

Bank of New York Home Page