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| Most financial services regulatory bodies in East Africa are moving toward risk-based supervision models.Miriam Bukenya, CFA, is the head of compliance at Jacaranda Asset Management, a manager of both retail and institutional portfolios. She is currently revising the company's compliance policies to address risk in all areas of the business and is checking different aspects of the firm to ensure that it will be able to meet new risk-based supervision regulations when they become effective in six months' time. The firm recently adopted the CFA Institute Code of Ethics and Standards of Professional Conduct as its own Code and Standards.While reviewing Jacaranda's compliance manual, Bukenya realizes it needs a few changes to comply with the new risk-based regulations. To ensure she uses best practice, she consults with Luc Remmy, CFA, the head of compliance at her former employer, Mercury Advisory Services. Remmy, who now runs an independent consulting firm, e-mails Bukenya the compliance manual he uses for his own firm. While reviewing the compliance manual, Bukenya notices that many sections look familiar. She finds a statement in the document indicating that it is for the "sole use of Mercury Advisory Services." When questioned, Remmy states that he used only the table of contents of Mercury's document and none of the other content in the document to develop his compliance manual.Bukenya looks at the marketing materials Jacaranda uses to communicate to existing and prospective clients to ensure that everything mentioned in the material is factual and complies with the CFA Standards of Professional Conduct. The following statements are examined:Statement 1: Jacaranda looks for investments offering intrinsic value through a top-down approachincluding a review of forecasts of economic and industry performance. We evaluate historical and projected company financials, perform extensive financial ratio analysis, conduct management interviews, and determine target prices using a variety of valuation models.Statement 2: Jacaranda may, at times, hire outside advisers to manage real estate holdings on behalf of clients. These advisers have the necessary expertise to manage property assets.Statement 3: Jacaranda has four CFA charterholders among its senior management. Their participation in the CFA examination program has enhanced their investment management skills. All of these managers passed the three exams in the shortest time possible.The new risk-based regulations also require accurate and complete performance presentations, with all discretionary accounts included in at least one composite. Bukenya believes Jacaranda's performance presentation policy meets these new requirements as well as the CFA Institute Code of Ethics and Standards of Professional Conduct since Jacaranda's single composite includes all current and terminated client accounts and presentations include this statement: "Detailed information regarding the performance presentation is available upon request." While Jacaranda does not currently comply with GIPS Standards, she encourages the firm to do so within the next few years.Bukenya then reviews Jacaranda's record-keeping policy. Currently, the policy requires retention of hard copies of all supporting documentation for investment recommendations and decisions made during the last five years. This policy meets the new risk-based regulations. Client meeting minutes and communication logs are kept electronically and backed up on a remote server. Fund managers and research analysts are responsible for maintaining their own personal notes and research models. This policy also applies to Jacaranda's independent research contractor, Mathew Ochieng, who (for security reasons) does not have access to the company's server. Ochieng, who undertakes research only for Jacaranda, sends his research reports to the Head of Research, who then archives the electronic copies.While reviewing Jacaranda's counterparty risk policy, Bukenya discovers that trader Jackson Gatera recently convinced the back office to override controls designed to prevent overexposure to specific stockbrokers. This was in violation of company rules. The rules state that if the trading allocation to a specific broker is breached, trading through that broker must be suspended until the exposure drops to within the exposure limits. The Counterparty Risk Committee predetermines these limits.The new risk-based regulations also require companies to gather client information as part of "Know Your Client" and anti-money-laundering processes. Bukenya creates a confidentiality policy restricting access to existing and prospective client information. The information is available only to personnel who are authorized by the existing or prospective client. The one exception is if the client or prospective client is thought to be conducting illegal activities. In this circumstance, the information can be released without authorization if the information is demanded through a court order or other legal requirement. |
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