SOUND SMA PRACTICES FOR MANAGING REGULATORY SCRUTINY EFFECTIVE PROCEDURES FOR ASSET MANAGERS & SPONSORS

Transcription

1 SOUND SMA PRACTICES FOR MANAGING REGULATORY SCRUTINY EFFECTIVE PROCEDURES FOR ASSET MANAGERS & SPONSORS SHARPEN YOUR EDGE SM

2 Financial Research Corporation 100 Summer Street 15th Floor Boston, MA For more information contact: Deborah Wetherbee at Elizabeth Wetherbee at Michael Cain at Canadian-domiciled firms should contact: David Enns at Copyright 2004 by Financial Research Corporation, a company. All rights reserved. Your payment for this report is for one copy only. If you desire additional copies of the report, or copies of any section of the report, you can purchase them separately. Reproduction of any part of this report is illegal under the Federal Copyright law (17 USC 10 et seq.) and is prohibited. Photocopying or transmission of the information in any electronic or mechanical fashion is strictly forbidden, unless the user has purchased an annual usage license from FRC that allows the user the capability to quote directly from the FRC content with attribution to the firm. Contact FRC to learn more about your redistribution/attribution options. Publication Date: July 22, 2004

3 T ABLE OF CONTENTS TABLE OF CONTENTS Scope of Study Key Strategic Considerations Biographies Executive Summary Chapter One Regulatory Landscape I. Overview II. Mutual Fund Issues III. Issues in the SMA Space Chapter Two Industry Overview I. Historical Growth II. Dominant Players III. Industry Projection Chapter Three Trading Practices I. Best Execution II. Trade Rotation III. Personal Trading Policies Chapter Four Fee Disclosure I. Unbundling Benefits II. Downside to Unbundling Chapter Five Sales & Marketing Practices I. Sales Support Payments II. Revenue-Sharing Practices III. Suitability of Fee-Based Programs Page i

4 SOUND SMA PRACTICES FOR MANAGING REGULATORY SCRUTINY Chapter Six Performance Reporting I. To Shadow or Not To Shadow II. AIMR Standards III. Creation of a Performance Committee Chapter Seven NSCC Hub for SMA Programs I. Need for a Central Information Hub II. Structure of the NSCC Service III. Scalability of Current SMA Business IV. Challenges Associated with NSCC Implementation V. Cost Analysis VI. Dissenters to the Proposed NSCC Platform Chapter Eight Operational Practices I. Rule 3a-4 Exemption II. Account Set-Up Procedures III. Handling Restricted Security Positions IV. Proxy Voting & Compliance Reporting V. Other Operational Practices Chapter Nine Patriot Act Compliance I. Money Laundering Aspect of Patriot Act II. Definition of Money Laundering III. Bank Secrecy Act Regulation IV. Prevention of Money Laundering Appendix A: FRC Report on Mutual Fund Regulatory Issues Appendix B: AIMR Performance Presentation Standards Appendix C: NSCC Filing with SEC for SMA Hub Appendix D: CheckFree Comment Letter P age ii

5 DIRECTORY OF EXHIBITS DIRECTORY OF EXHIBITS Exhibit 1 1: Correlation of SMA Asset Growth & Regulatory Concern Exhibit 1 2: Potential Conflicts of Interest Arising From Wholesaler-Advisor Interactions Exhibit 2 1: Retail SMA Assets Exhibit 2 2: SMA, Mutual Fund & Variable Annuity Annual Percentage Change in Assets ( ) Exhibit 2 3: SMA Assets by Sponsor Firm Exhibit 2 4: Current and Projected SMA Assets by Distribution Channel Exhibit 2 5: Market Share by Asset Manager Size Exhibit 2 6: Projected SMA Assets Under Management Exhibit 3 1: Best Execution in Current SMA Operating Environment Exhibit 3 2: Best Execution in an Environment Without Directed Brokerage Exhibit 4 1: Bundled Fee Disclosure Exhibit 4 2: Unbundled Fee Disclosure Exhibit 4 3: Pros & Cons of Unbundled Fee Disclosure Exhibit 5 1: Wholesaling Practices Past, Present, and Future Exhibit 5 2: Potential Conflicts of Interest Arising From Wholesaler- Advisor Interactions Exhibit 5 3: Wholesalers by Firm Size Exhibit 6 1: Advantages & Disadvantages of AIMR Definitions of "Firm" Exhibit 7 1: Current Communication System Between Asset Manager and Program Sponsors Exhibit 7 2: NSCC Platform System with 100% Adoption by Program Sponsors Exhibit 7 3: Likely NSCC Platform Scenario, with Partial Sponsor Adoption Exhibit 7 4: Achieving Cost Efficiency in the SMA Back Office P age iii

6 SOUND SMA PRACTICES FOR MANAGING REGULATORY SCRUTINY Exhibit 8 1: Extent of Account Customization, by Asset Manager Size Exhibit 8 2: Anticipated Increase/Decrease in Account Customization, by Asset Manager Size Exhibit 8 3: Regulatory Hot Spots in Operational Procedures Exhibit 9 1: Timeline of Regulatory Actions in Money Laundering Exhibit 9 2: Level of Vulnerability to Money Laundering by Type of Client Relationship P age iv