Friday 27 March 2020

CFA Institute Investment Foundations Program: Chapter 20 – Investment Industry Documentation



In a previous article, we introduced the CFA Institute Investment Foundation Program (Read more here).  It is a free program designed for anyone who wants to enter or advance within the investment management industry, including IT, operations, accounting, administration, and marketing.  Candidates who successfully pass the online exam earn the CFA Institute Investment Foundations Certificate.

There are total of 20 Chapters in 7 modules, covering all the essential topics in finance, economics, ethics and regulations.  This series of articles will highlight the core knowledge of each chapter.

Chapter 20 provides an overview of the investment industry documentation. The learning outcome of chapter 20 is as follows:

·       Define a document;
·       Describe objectives of documentation;
·       Describe document classification systems;
·       Describe types of internal documentation;
·       Describe types of external documentation;
·       Describe document management.

As illustrated in Exhibit 1, documentation in the context of the investment industry does the following:

·       Educates—informs or provides instruction
·       Communicates—conveys ideas, concepts, or information
·       Authorises—provides the basis, and often the authority, for action
·       Formalises—establishes roles, deliverables, and obligations
·       Organises—ensures thoroughness and consistency of action, allowing the company to function more efficiently and effectively
·       Measures—provides a benchmark for measurement and audit
·       Records—preserves learning within the company (also known as institutional memory)
·       Protects—provides assurance of a system to safeguard interests and manage risks


Origin relates to the source of the document. Documents can be classified by their source as
·       original documents,
·       derived documents, or
·       associated documents.

Internal documents are generally administrative and are used to formalise policies, procedures, and processes. Important features of internal documents include context, version control, and regular review.

Policy broadly sets the rules, procedures help apply policies, and processes divide procedures into manageable actions.

Laws and regulations require the creation of a number of policy documents. Some policy documents reflect professional standards that are considered “best practices”. Others are “fit for purpose”, meaning that they meet the company’s needs and requirements.

Procedure and process documents communicate how best to undertake an activity while taking into account internal and external constraints. They are critical for mitigating risk.

Policies, procedures, and processes can be supplemented by useful tools, such as registers and process flow diagrams, to aid users in understanding and completing a chain of linked activities.

External documents are often contractual and enforceable by law, providing protection of rights as well as imposing obligations on the parties involved.

A typical client interaction cycle includes documents related to marketing, on-boarding (including know-your-client and anti-money-laundering processes), funding, reporting, investment events, and redemption.

Client on-boarding is the process by which a company accepts a new client and inputs the client’s details into its records to enable the company to conduct transactions with and on behalf of the client. Companies in the investment industry usually have a legal obligation to verify the identity of a potential client by means of a know-your-client (KYC) process before commencing a relationship with the potential client. The typical KYC process requires the client to

·       complete a questionnaire and provide personal background information, including documentary proof of identity (for instance a passport), addresses, and other personal details.
·       be screened against various global databases to ascertain whether he or she is known or wanted by local or international law enforcement agencies.
·       submit to anti-money-laundering checks at on-boarding and thereafter to identify any potential suspicious transactions that the company would be obligated to report to a regulator.
·       provide proof of the source of funds to verify that the money does not originate from an illegal or criminal source.

Companies must constantly monitor activities and transactions to ensure that they are not suspicious. If something suspicious does arise, companies must report that activity or transaction to the authorities. The heavy penalties imposed by most regulators globally help combat identity theft, criminal activity, and the flow of money from illegal sources into the financial services industry, including the investment industry.

The KYC process also serves to define the client’s level of knowledge and sophistication, assign associated and specific risk profiles, and assess any possible restrictions. Depending on the type of client and the purpose of the relationship, different types of information might be required to ensure that the company provides appropriate products and services for the client’s needs.

Moreover, the KYC process is important in setting the basis for the relationship, in particular to differentiate between discretionary and non-discretionary relationships. Discretionary relationships permit the service provider to act on behalf of the client—for example, as an investment manager with a specific mandate or as a trustee of a trust. In such cases, the service provider must act in the best interest of its clients. In contrast, a non-discretionary relationship permits the service provider to undertake only specific tasks that are authorised by the client on a per task basis.

Document management requires information technology to access, secure, retain, and dispose of documents. It is usually subject to legislative and regulatory constraints.



Client on-boarding documentation refers to:
 
pollcode.com free polls

No comments:

Post a Comment