Frequently-Asked Questions On Guidelines On Compliance Function For Fund Management Companies - Regulatory FAQs

Frequently-Asked Questions On Guidelines On Compliance Function For Fund Management Companies

What are the SC’s expectations in relation to the 11 core principles?

Examples of the SC’s expectations (non-exhaustive) are as follows:
Core Principles
1. Integrity
Conduct the fund management business with honesty and in an ethical manner e.g. treating its clients fairly and equitably.
2. Skill, care and diligence
Possess adequate controls in ensuring that the fund management functions and processes are carried out with due care, skill and diligence. Such obligation is also applicable in dealings with existing and potential clients.
3. Acting in clients’ interests
Refrain from dealing for own account ahead of clients’ orders.
4. Supervision and control
Ensure key duties and functions are properly segregated. Establish a system of follow-up and review for delegated authority and responsibility. Ensure proper assessment and management of risks, and provision of timely and adequate information to senior management.
5. Adequate resources
Ensure employees are suitably qualified for the positions in which they are employed, and there are sufficient resources to manage business activities and accommodate temporary absence of key personnel. In addition, risks assumed by the fund management company must commensurate with its level of capital.
6. Business conduct
Implement policies and procedures to detect and prevent fraud, market rigging, and other improper activities.
7. Client asset protection
Ensure clients’ assets are credited into a trust account and the fund management company conducts timely reconciliation of trust account balances against third party records.
8. Communication with investors
Must not deliberately mislead or attempt to mislead existing or potential clients.
9. Conflict of interest
Ensure proper policies and procedures are put in place to prevent the company or its employees from taking advantage of confidential price-sensitive information.
10. Compliance culture
Board of directors must establish clear compliance policies and procedures that extend to all operations of the company.
11. Dealing with the SC
Promptly report information that is of material significance to the SC, and provides the SC with documents and information, when requested, in a timely manner.
What constitutes a compliance programme as stipulated in paragraph 4.04(g)?
A compliance programme should comprise a comprehensive review plan that captures the following:
Sufficiency of regulatory filings and relevant deadlines;
High operational risk areas to evaluate the effectiveness of internal controls;
Areas of concern resulting from detection of breaches or incidents affecting the industry that may have a significant impact to the company; and
Specific area of focus for the year that would be target for review and enhancements much like an annual internal audit plan.The compliance programme has to be reviewed at least annually by the compliance officer to ensure relevance and tabled to the board of directors or relevant committees for endorsement.
What are the examples of necessary information required of the client as stated in paragraph 4.04(l)(i)?
Before implementing an investment policy or recommending an investment product to a client, a compliance officer must confirm that there is proper documentation to support that the client has the-
necessary experience and knowledge in order to understand the risk(s) involved in the transaction or in the management of his portfolio; and
financial capacity and risk appetite that commensurate with related investment risk(s).
What is considered as ‘delegating’ as stated in paragraph 5.16 of the guidelines?

‘Delegating’ is primarily associated with the core activities of a fund management company. Where the management of a portfolio i.e. investment decisions are delegated to another fund management company, the CMSRL holder must continue to perform the role of marketing, soliciting, advising, reporting and interacting with the clients on performance of mandates.In addition, it is incumbent for the principal fund management company to evaluate the conduct and performance of the delegate and ensure that such delegation is meeting the requirement of the clients.
Does a fund management company need to obtain the SC’s approval before delegating its fund management function to another fund management company?
No. However, a fund management company must provide a written notification to the SC, at least one month before the delegation arrangement takes place. Such notification would include the following details:
Name and other corporate information of the external fund management company;
Assets under management that is delegated;
Mechanism in place to monitor conduct and activities of the company where the function is being delegated to; and
Confirmation that the client is aware of and agreeable to the delegation arrangement. However, this is not applicable to unit trusts and wholesale funds since the requirement is stipulated in the offering documents.
Confirmation that the client is aware of and agreeable to the delegation arrangement. However, this is not applicable to unit trusts and wholesale funds since the requirement is stipulated in the offering documents.

Subsequent material changes to the delegation arrangement that will have an impact to the clients’ interests e.g. termination of delegation arrangement, has to be notified to the SC as soon as practicable.
Can there be a delegation of fund management function where a unit trust fund invests into a ‘feeder fund’?

No. The management of portfolio of the feeder fund is not deemed as a delegation by the licensed fund management company.
If a fund management company has delegated its fund management function to another fund management company, who is held accountable to the clients?

The fund management company appointed by its client remains responsible for all obligations to its clients. It must continue to ensure compliance with requirements of these Guidelines.
Are spouse and children of directors, investment committee members and employees required to disclose their interests and securities holdings to the fund management company?

Yes, if they have an interest and are holding the securities on behalf of the directors, investment committee members and employees, and such interest or holding will cause a conflict of interest to the client(s) of the fund management company. As a best practice, the compliance officer should obtain declaration of interests and securities holdings from the spouses and children of the directors, investment committee members and employees to ascertain whether there are conflicts of interest arising from such interests or holdings.
What must a director disclose to the fund management company as mentioned in paragraph 6.06?

The disclosure requirement in paragraph 6.06 covers any interests or holdings that the directors own locally and abroad. It also applies to both local and foreign directors.
What are the examples of soft commissions referred to in paragraph 6.16 that a fund management company cannot receive?
Examples of expenses that are not considered as part of soft commission include:
travelling cost;
accommodation and entertainment costs;
expenditure on hardware that is not incidental in providing the research and advisory services; and
membership fees to associations.

Additionally, the practice of accepting reimbursement on the soft commission paid in advance by the fund management company is construed as receiving rebates and would require the fund management company to direct the amount to the clients’ accounts accordingly.
Can a fund management company use different valuation bases for different clients in performing the valuation of clients’ portfolio as stated in paragraph 7.02?

Yes, provided that clients have agreed to the valuation basis and it is documented in the investment management agreement (IMA).
What are the examples of statement that are deemed `unfair and inaccurate’ with respect to paragraph 8.03?
Examples of statement that are deemed `unfair and inaccurate’ are as follows:
The returns are comparable to bank deposits when they are not;
Claims that the investment is guaranteed or protected when no such measures have been undertaken; or
Promises of consistent distribution despite investments not generating constant returns.
Based on paragraph 8.07, can a unit trust management company which is also licensed to carry out the regulated activity of fund management make statements on the future investment performance of its unit trust funds?

No. Disclosure requirements for products are subject to the relevant product guidelines and based on the current framework, statement of investment performance should only comprise past performance instead of future performance.
What kind of process ought to be in place in determining the general and specific risks of any investment products as stated in paragraph 9.02(d)?

In determining the general and specific investment risks, a fund management company has to assess the risk in accordance to the different types of investment products.The risk assessment has to be performed in an on-going manner, and must be structured based on the nature of the product, structure of the underlying asset (if any) and how it fits with the client’s mandate. Any changes identified following the risk assessment process, which may affect the client’s capital and earning, should be reported to the client as stipulated in paragraph 7.04(b).
What are defined as alternative products?
Alternative products are products that are-
not listed on any stock exchanges;
not approved by the SC, Bank Negara Malaysia or any equivalent regulators;
non-conventional securities; or (iv) associated with a SPV structure.
Can a fund management company invest in alternative products?

Any investments in alternative products should be guided by the requirements stipulated in the Licensing Handbook.
What should a fund management company do if it has invested in alternative products or products with SPV arrangement?

If a fund management company has invested into alternative products, the fund management company has to undertake an assessment on whether the client has been provided with sufficient information of the investment as required in paragraph 9.02(b) and risks involved as specified under 9.02(d). If the assessment reveals that the information given to the client does not conform to the requirement stated in 9.02(b) and (d), a fund management company has to immediately provide the client with the necessary information in writing.If clients’ investments are pooled under an SPV or similar structure, a fund management company has to regularise the arrangement in accordance to Guidelines on Wholesale Funds as soon as practicable.
What is the expectation in respect of requirement as stipulated in paragraph 9.02(f)?

Prior to implementing the client’s investment policy or recommendation, the fund management company is expected to have proper arrangements in place to ensure that there is continuous flow of investment information for monitoring purposes. The manner of arrangement is left to the discretion of the fund management company.
Is the fund management company required to change the existing IMA to reflect current requirements as stated in paragraph 9.11?

No. This requirement does not have a retrospective effect as long as the existing IMA does not have any provision that is contrary to the requirements of the guidelines, e.g. the IMA states that reporting to client is on bi-monthly basis but monthly reporting to client is required by the guidelines.
Can a client withdraw from his portfolio voluntarily?

A client’s withdrawal is subject to conditions stated in the IMA as prescribed in paragraph 9.11(j).
What is deemed as ‘best execution’ as stipulated in paragraph 9.18?

Best execution is when the transactions are done on the best available terms with consideration of the order size as well as relevant market conditions at the time of transactions.
In paragraph 9.20, is the 50% limit of total dealings based on fund management company’s level or mandate level and does it cover only equities?

The 50% limit of total dealings in value in any one financial year is based at the fund management company’s level and should cover equities and fixed income transactions.
What are examples of client identification documents as stipulated in paragraph 10.09(d)?

Examples of documents include extract of IMA, letter or board resolution from the client for opening of account or any other documentation which substantiate authorisation from the client for opening of account with the fund management company.
What is the expectation in respect of requirement stipulated in paragraph 10.11 (a)?

A custodian is expected to maintain records of all clients’ assets on segregated basis, including assets which are held with a financial institution or authorised depository. For example, a client has RM10 million in the trust account maintained with the custodian. The fund management company subsequently invest RM2 million into Zero-coupon Negotiable Instruments of Deposit (ZNID) issued by financial institution A.The custodian is expected to maintain records of client’s portfolio/ assets totalling RM10 million, i.e. including the RM2 million ZNID with financial institution A.
Under what circumstances should a custodian provide a notification to the fund manager’s clients as stated in paragraph 10.11 (d)?
The custodian is required to notify the fund management company’s clients, when there is an instruction from the fund management company to-
withdraw cash from the clients’ trust accounts;
perform asset transfer without any cash due to the trust account i.e. a ‘free of payment’ transaction; or
transfer clients’ assets to the fund management company’s account.
What is the naming convention requirement for trust accounts?
The naming convention should be in accordance to the manner stipulated in paragraph 10.13. For example:
“ABC Custodian Sdn Bhd for DEF Asset Management Sdn Bhd for Mr XYZ”; or
“ABC Custodian Sdn Bhd for Mr XYZ”; or
“DEF Asset Management Sdn Bhd for Mr XYZ”.

For account maintained under an omnibus structure, the naming convention should be in accordance to the manner as stipulated in paragraph 10.14(b). For example:
“ABC Custodian Sdn Bhd for DEF Asset Management Sdn Bhd clients’ account / clients’ trust account”; or
“DEF Asset Management Sdn Bhd for clients’ account / clients’ trust account”.
What are the examples of third parties as prescribed in paragraph 12.02 with which a fund management company has to reconcile its records?

Examples of third parties include depositories, banks, custodians, counter-parties or dealers.
What is deemed as ‘comprehensive records of clients’ accounts and transactions’ as stipulated in paragraph 12.03(b)?

The funds received from a client, investments and all the credits to the account of the client must be properly accounted for by the fund management company and details thereof must be reflected in the client’s account.
What is required of a fund management company if it is unable to fulfil the requirements in the guidelines?
A fund management company is required to write to the SC on the following:
Identifying the areas in which they are unable to comply;
Stating reasons for non-compliances; and
Time frame required in enabling compliance with the requirements stipulated in the revised guidelines.

No record found.