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.
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