Portfolio Management in Light of Sarbanes-Oxley

Transcription

1 Portfolio Manaement in Liht of Sarbanes-Oxley June 9, 2004 Presented by Linda Ruiz-Zaiko Zaiko,, President Barbara Williams, CFA Bridebay Financial, Inc. Investment Consultants bridebay.com

2 Sarbanes-Oxley Act 2002 Section 404 Treasury Review Investment Portfolio Review Portfolio Compliance and Internal Controls Accountin Controls for Investments Cash Manaement and Internal Controls Bridebay Financial, Inc. 2

3 Sarbanes-Oxley Section 404 Investment Portfolio Review Investment Policy Third party custodian SAS 70 Pricin sources External manaer contracts Affiliated brokers Conflicts of interest Counterparty risks Concentrations Exposure to other parts of company Evaluate primary and introducin brokers Insurance Clearin Review asset liability manaement Update portfolio risk controls Bridebay Financial, Inc. 3

4 Best Practices Investment Policy Separate authorities and responsibilities Eliible investments Diversification by industry Credit quality scale back based on AAA Reduce issuer exposure to 2-5% Expand types of securities Establish approval criteria Broker/dealer External manaer Broker/dealer Set maximum loss constraints Establish process and authority for policy exceptions and credit downrades Bridebay Financial, Inc. 4

5 Sarbanes-Oxley Section 404 Custodian Internal Controls Safekeepin Client Service Investment Manaers Settlements SAS 70 Annual Review Securities Lendin Cash Administration Forein Exchane Reports Custody / Valuation Performance Measurement Technoloy On-Line Services Bridebay Financial, Inc. 5

6 Best Practices Investment Manaer SEC Form ADV Part II Portfolio Construction Daily Valuation Risk Controls Client Portfolio Reportin SFAS 115 Risk Manaement Policy Compliance Internal Controls Bridebay Financial, Inc.

7 Best Practices Trade Process Custodian Security Delivery vs. Payment Trades matched for settlement Broker Dealer Electronic transmission of trade data notification Payment Electronic transmission of trade data Trader Bridebay Financial, Inc. Aent not principal in all transactions No proprietary transactions All trades executed competitively No conflicts of interest (soft dollars, directed brokerae) 7

8 Best Practices Trade Reconciliation Tradin Account and trade detail confirmed with broker and custodian immediately after trade is placed. Trade differences resolved and corrected before settlement. If a trade is not matched on settlement date, the trade will fail and no moneys will be exchaned. The broker and custodian will notify the trader of any failed transactions. Upon discrepancy resolution new/revised instructions will be provided for settlement. Compliance All purchases screened via automated compliance system to uidelines. Non-compliant trades rejected. The Treasurer monitors all portfolios daily. Any compliance exceptions are addressed with the portfolio manaer. Any exceptions not resolved in a timely manner are reviewed by eneral counsel for corrective action. Reportin Separation of duties. The accountin roup reconciles all portfolio positions and transactions to custodian bank. Differences resolved with bank, independently from trader. Unresolved discrepancies are discussed with tradin/settlement roup. Bridebay Financial, Inc. 8

9 Best Practices Risk Manaement Potential credit problems Check for cliff haners, split ratins Industry concentrations Scale back % for lowest permissible credit quality Expand security types Stress test portfolio for interest rate risk Extension risk of individual securities Scrutinize callable, ABS or MBS Hihliht securities with neative convexity Check for unusual neative duration NO subordinated issues Bridebay Financial, Inc. 9

10 Best Practices Portfolio Monitorin Hih transaction volume Credit drift Securities with neative outlook or credit watch Increased issuer concentrations Exceptions to policy Leverae such as reverse repos Dramatic duration chanes Strane yield to maturity numbers by security Mispricin Derivatives Neative convexity of securities Bridebay Financial, Inc. 10

11 Best Practices Performance Monitorin Volatile or inconsistent returns Returns more neative than benchmark Returns do not track benchmark Manaer chanes return calculations or reported benchmark Money stays in money fund or sweep accounts for weeks Yield not returns 11

12 Best Practices Manaer Monitorin Monthly Review Returns vs. Benchmark Portfolio Characteristics Purchases/Sales Performance Attribution Manaer Stratey Market Outlook Quarterly Review Risk/Return Ratios Benchmark Comparisons Universe Comparisons Manaer Visits Assessment Return consistent with style Firm chanes in leadership, structure, ownership, personnel Lare absolute chanes in assets under manaement Chanes in philosophy, style, sectors or discipline Annual Review Business Plan Oranizational Structure Professional Staff SEC Form ADV Site Visit Investment Policy Review Potential Actions Reaffirm manaer Increase depth & frequency of manaer reviews Initiate manaer chane 12 18

13 Best Practices Manaer Monitorin Chane in firm ownership or structure Reoranizations Merers Divestitures Adverse publicity about the firm Material litiation Senior manaement turnover or retirements Portfolio manaer turnover No direct access to portfolio manaer Dramatic chane in assets Bridebay Financial, Inc. 13

14 Sarbanes-Oxley Section 404 Portfolio Compliance and Internal Controls Investment Compliance Report 0noin reportin cycle Develop performance standards Document all waivers or temporary exceptions to policy Review internal tradin practices Audit trade tickets and confirmation practices Test documented procedures and practices for compliance Separation of authority by initiation, approval, reconciliation Disaster recovery and backup locations Bridebay Financial, Inc. 14

15 Best Practices Portfolio Compliance and Internal Controls Check discrepancies between manaer and custodian Effective maturities and duration Diversification limits Sector Issuer US and forein Muni bond state exposure Type of muni issue Credit ratins Overall portfolio ratin Use lowest ratin on split ratins Credit watch Neative outlook Bridebay Financial, Inc. 15

16 Sarbanes-Oxley Section 404 Accountin Controls for Investments Prepare reconciliation and process to resolve variances amon Investment statements Trade confirmations Custody General leder Review accuracy of sources for investment accountin and eneral leder entries Review FASB 115 and 95 entries Bridebay Financial, Inc. 16

17 Sarbanes-Oxley Section 404 Cash Manaement and Internal Controls Review Cash Manaement Policies & Procedures Review written daily cash procedures Review wire transfer authorization limits/policy and ability to circumvent Bankin system IT security review at user level Create matrix for separation of authority by initiation, approval, reconciliation Bridebay Financial, Inc. 17

18 Sarbanes-Oxley Section 404 Cash Manaement and Internal Controls Conflicts of Interest Check for soft dollar arranements or securities tradin concentrated with 1-2 broker/dealers Review vendor relationships and potential conflicts of interest Ensure that all purchases of finance and related services are from approved "no-conflict of interest" suppliers Consider independent party assessment of procedures, practices and uidelines Bridebay Financial, Inc. 18

19 CFA Institute (AIMR) International, nonprofit oranization Over 60,000 investment practitioners and educators Over 100 countries Mission to set hihest standards of professional interity AIMR awards the CFA desination In May 2004, AIMR chaned name to CFA Institute (CFAI) Bridebay Financial, Inc. 19

20 CFAI The name chane to CFAI will: Brin brand awareness to the CFA charter Brin new levels of interity and disclosure to the markets Creation of CFA Centre for Financial Market Interity in September 2004 New Professional Standards and Advocacy proram Brin public awareness to important industry issues: Stock-option expensin Sinle reulatory system in Canada Standards that prevent firms from retaliatin aainst securities analysts who issue unfavorable stock reviews Bridebay Financial, Inc. 20

21 AIMR Performance Presentation Standards (AIMR-PPS) Widely accepted industry standards AIMR-PPS stress performance presentation Common misconception is that firm is in compliance if their portfolio performance measurement service is in compliance. Misconception is enhanced partly by some industry software vendors who claim their systems are AIMR compliant. Software can t comply with the AIMR standards--it is just a tool that allows the firm to comply. Numerous tasks that must be performed to be in compliance. Some firms will state that they comply with the standards with the exception of one or two items. This is incorrect you either are or are not in compliance. Bridebay Financial, Inc. 21

22 AIMR-PPS Required Disclosures Disclosures and conditions required to be AIMR-PPS compliant: 10 year history of returns Or since inception if the firm is less than ten years old Any periods results not in compliance Must be disclosed Reason why the period not in compliance Annual time-weihted rates of return Measure of dispersion Standard deviations Hih-low Asset-weihted standard deviation Bridebay Financial, Inc. 22

23 AIMR-PPS Required Disclosures Disclosures and conditions required to be AIMR-PPS compliant: List and description of firm s other composites Number of portfolios in the composite Amount of assets in the composite Percentae of assets in the composite relative to the firm s total assets under manaement A material chane in the personnel responsible for investment manaement Bridebay Financial, Inc. 23

24 AIMR-PPS Required Disclosures When balanced portfolios included Must disclose method used for allocatin cash Returns have been calculated ross-of-fess or net-of-fees The firm s fee schedule For net-of-fees returns Must disclose the averae weihted manaement fee Must disclose returns calculated based on settlement date No disclosure necessary for trade date Disclose if any non-fee-payin accounts are included The use and extent of leverae The effective date of compliance Bridebay Financial, Inc. 24

25 AIMR-PPS Return and Composite Calculations For Total Return Accounts Total return, includin realized and unrealized ains plus income, must be used when calculatin investment performance. Time-weihted rates of return must be used. Accrual accountin must be used for fixed-income and all other securities that accrue income. Accrued income must be included in the market value calculation of the denominator and the numerator. Composites must be asset weihted usin beinnin-of-period weihtins. Portfolios must be valued at least quarterly, and periodic returns must be eometrically linked. Performance must be calculated after the deduction of tradin expenses Bridebay Financial, Inc. 25

26 AIMR-PPS Return and Composite Calculations For After-Tax Returns Taxes on income and realized capital ains must be subtracted from results reardless of whether taxes are paid from assets outside the account or from account assets. The maximum federal income tax rates appropriate to the portfolios must be assumed. The return for after-tax composites that hold both taxable and taxexempt securities must be adjusted to an after-tax basis rather than bein "rossed up" to a taxable equivalent. Calculation of after-tax returns for tax-exempt bonds must include amortization and accretion of premiums or discounts. Taxes on income are to be reconized on an accrual basis. Bridebay Financial, Inc. 26