The supervision of offshore mutual funds

1
The supervision of offshore mutual funds

• Day 2
• Ongoing Supervision of Mutual Funds

2
Ongoing supervision of mutual fundsAgenda

• Objectives of ongoing supervision
• Off-site supervision (including review of
  financial statements)
• On-site supervision
• International standards and best practice

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Ongoing supervision of mutual funds

• What is your role as regulator in the ongoing
  supervision of mutual funds and also of their
  administrators and managers?
• Protection of investors
• Protection of reputation of jurisdiction
• What does that mean in practice?
• Ongoing assessment of fitness and properness
• Is there any scope for supervisory
  differentiation between products being authorised
  or licensed?
• Yes, if a risk-based approach to supervision has
  been adopted

4
Ongoing supervision of mutual fundsYour
processes

• What is required by your legislation?
• What powers do you have available under your
  legislation?
• What resources do you have available for ongoing
  supervision?
• Can you delegate some of the ongoing supervision?
• Do you have the concept of a compliance officer
  for each regulated entity?
• How do you prioritise the use of resources
  vis-à-vis risk?
• What does ongoing supervision comprise?

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Ongoing supervision of mutual fundsSupervisory
Functions

• Most regulators divide their supervisory
  functions into three broad categories
• Licensing
• Monitoring
• Enforcement
• The licensing process is designed to limit entry
  into the financial market to fit and proper
  persons
• Licensed persons are expected to operate in
  accordance with international standards of best
  practice but are given scope in applying these
  standards to the products and services which they
  chose to provide

6
Ongoing supervision of mutual fundsSupervisory
Functions

• Monitoring adherence to the international
  standards requires both off-site supervision and
  on-site inspection
• Off-site supervision activities encompass ongoing
  monitoring and include the following
• Review of changes of directors, business plans,
  etc.
• Prudential meetings to discuss, inter alia,
  operations, performance and future strategies
• Analysis of returns (financial, compliance and
  other)
• Analysis of annual audited financial statements

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Ongoing supervision of mutual fundsSupervisory
Functions

• On-site inspection involves visiting the offices
  of regulated entities, reviewing and assessing
  their operations and risk management processes
  with respect to regulatory compliance
• The inspection cycle depends on the nature of the
  regulated entity and the regulators risk
  assessment of the regulated entity
• The on-site inspection process is used in
  conjunction with the regular off-site monitoring
  system

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Ongoing supervision of mutual fundsSupervisory
Functions

• The role of the regulator is to ensure that
  regulated entities are operated in accordance
  with the law and that weaknesses in procedures,
  systems or operations are identified and dealt
  with
• It is not the role of the regulator to ensure
  that each regulated entity is operated profitably
  and successfully!

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Ongoing supervision of mutual fundsSupervisory
Functions

• The role of the regulator is to enforce
• adherence to reasonable prudential limits to risk
  taking in relation to the products and services
  the regulated entity has chosen to provide and
• accurate disclosure so that the public can judge
  for itself the risk of conducting business
• The regulators goal is to clarify the risks the
  public faces in dealing with mutual fund entities
  and thus to promote public confidence in dealing
  with these regulated entities

10
Ongoing supervision of mutual fundsOff-site
supervision

• Generally compliance based
• Complemented by on-site inspections
• Continuous process
• Objectives
• Review, understand and explain the origin of all
  significant matters disclosed by financial
  statements
• Obtain satisfactory explanations for all material
  variances in relation to year-on-year figures
• Ensure a systematic and consistent approach to
  monitoring
• Detect early warning signs of potential problems
• Assist on-site examiners in focussing work on
  areas of high risk and the greatest weaknesses

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Ongoing supervision of mutual fundsOff-site
supervision

• Objectives
• Assist on-site examiners in following up on
  recommendations made as a result of on-site
  inspection visits
• Determine compliance with applicable legislation,
  regulation, codes and directives
• Provide meaningful reports to the Board of the
  regulatory authority

12
Ongoing supervision of mutual fundsOff-site
supervision

• Activities
• Vetting and approval of changes to directors,
  controllers, shareholders, name, auditor,
  registered agent, etc. (as applicable)
• Analysis of regular returns (financial,
  compliance and other)
• Review of audited financial statements
• Review of complaints
• Review of correspondence
• Prudential meetings
• Review of policies and procedures
• Success depends on timely and accurate
  information from the regulated entity

13
Ongoing supervision of mutual fundsOff-site
supervision

• Important to keep comprehensive notes of meetings
  and telephone calls and to keep filing
  up-to-date
• Care and judgement must be exercised in
  interpreting information (qualitative indicators
  are equally important to quantitative factors)
• If no communication with regulated entity over
  the year request a meeting (if possible) or a
  written update of activities (eg AUM, no. of
  funds, changes in personnel, current list of
  directors, etc.)

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Ongoing supervision of mutual fundsOff-site
supervision

• Where notified of changes always ask for reason
  and determine whether there are implications
  arising from change also note timing of
  notification (which can be indicative of
  compliance culture)
• Note frequency and nature of changes as they may
  indicate serious systemic issues
• Note responsiveness to requests for information
  tardiness and sloppiness or non-response can be
  indicative of a poor compliance culture and/or
  serious problems

15
Ongoing supervision of mutual fundsOff-site
supervision

• Review nature of complaints these can often give
  rise to enforcement action
• Both regulator and the industry need timely and
  reliable statistics in order to conduct effective
  supervision and to make informed decisions these
  are obtained through the filing of regulatory
  returns, annual financial statements and surveys
• Review of financial submissions are an important
  aspect of off-site supervision

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Ongoing supervision of mutual fundsOff-site
supervision Review of Financial Statements

• Do you require the submission of annual financial
  statements?
• Do you require submission of any other financial
  returns?
• How do you review financial statements? What do
  you look for in the statements?

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Ongoing supervision of mutual fundsOff-site
supervision - Review of Financial Statements

• What should be looked for when reviewing
  financial statements?
• Most of the review necessary (given the limited
  resources) is conducted at a high level
• Begin by comparing this years figures to last
  years figures and find explanations for the
  variances (from general knowledge of market
  place, of the regulated entity, of the
  performance of the product, etc.) focus on
  exceptional variances and, if necessary, seek
  explanations from the regulated entity

18
Ongoing supervision of mutual fundsOff-site
supervision - Review of Financial Statements

• Review all notes to the accounts these are very
  useful in indicating changes
• If there has been a change in the financial year
  end/accounting period, seek a reason
• If there has been a change in the auditor, seek a
  reason
• Focus on valuation methodology ensure that
  method used complies with what has been disclosed
  in the offering document/prospectus

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Ongoing supervision of mutual fundsOff-site
supervision - Review of Financial Statements

• Be extremely wary of valuations provided by the
  manager and not verified by an external source
• Determine that fund investments match those
  proposed in the offering document/prospectus
• If there has been a significant change in the
  value of the investments, seek a reason
• Ensure that fees charged are those listed in the
  offering document/prospectus

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Ongoing supervision of mutual fundsOff-site
supervision - Review of Financial Statements

• Review the auditors report follow up on any
  qualifications
• Review accounts to determine that an ongoing
  concern
• Review fund accounts (and other documentation,
  such as advertising materials, performance data)
  to determine whether Ponzi Scheme a good
  indicator is the level of unregistered securities
  in the fund

21
Ongoing supervision of mutual fundsOff-site
supervision - Review of Financial Statements

• Ensure that all information provided in accounts
  (eg in relation to the auditor, the names of the
  directors) tally with those listed in your
  records
• Use a checklist approach to ensure efficiency of
  review
• If anything is of concern or seems abnormal,
  request more information (for example,
  valuations, transactional records)

22
Ongoing supervision of mutual fundsOff-site
supervision - Review of Financial Statements

• Do not review financial statements in isolation
  always look at the whole picture, including
• Complaints
• Promotional material
• Offering document/prospectus
• Past regulatory matters
• www
• Correspondence
• Other regulatory returns
• Timeliness and thoroughness of responses to
  regulators enquiries

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Ongoing supervision of mutual fundsOn-site
supervision

• On-site inspection is fundamental to effective
  supervision by the regulator
• Role of inspectors is to familiarise themselves
  with the regulated entitys operations and
  performance to ensure that it remains fit and
  proper
• Role of inspectors is to identify weaknesses and
  deficiencies and to recommend remedial action

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Ongoing supervision of mutual fundsOn-site
supervision

• Inspectors are the face of the regulator and,
  therefore, must conduct themselves professionally
  and in a manner which enhances trust and
  confidence
• Information obtained during the on-site
  inspection is confidential between the regulated
  entity and the regulator
• It is important to avoid all conflicts of
  interest (eg if an inspector is a relation of the
  managing director of the inspected regulated
  entity that inspector should not be part of the
  inspection team)

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Ongoing supervision of mutual fundsOn-site
supervision

• Use a checklist to ensure consistency of
  approach
• Inspections comprise a number of stages
• Risk assessment
• Pre-inspection planning and analysis
• On-site visit
• Post-inspection assessment and reporting
• Post-inspection follow-up on implementation of
  recommended remedial action

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Ongoing supervision of mutual fundsOn-site
supervision

• There are a number of different types of on-site
  inspection
• A routine full scope inspection
• A limited scope inspection (eg to review a
  particular area of the business)
• A follow-up inspection
• What are the reasons for conducting a limited
  scope inspection?

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Ongoing supervision of mutual fundsOn-site
supervision

• Reasons for conducting a limited scope inspection
  visit may include
• Unusual results found during off-site analysis of
  returns
• Follow-up of findings from previous inspection
  report
• Unusual complaint volume
• Concerns expressed by shareholders or other
  stakeholders
• Key changes in the business
• Regulator wide thematic review

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Ongoing supervision of mutual fundsOn-site
supervision

• What are the objectives of an on-site inspection?
• Review the regulated entitys operations to
  ensure business conducted in a fit and proper
  manner
• Verify the current solvency of the regulated
  entity and form a view on the likely future
  solvency of the regulated entity
• Review for compliance with applicable
  legislation, regulations, codes and directives
• Gather data to form a more comprehensive
  understanding of the regulated entity, its
  operations, business policy and philosophy
• Identify potential problems and issues

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Ongoing supervision of mutual fundsOn-site
supervision

• What are the objectives of an on-site inspection?
• Liaise with management to resolve problems and
  issues at an early stage
• Gather information on management and staff of the
  regulated entity to facilitate the assessment of
  the competency of these individuals
• Gather information from management with regard to
  its plans, the business environment and market in
  which it operates
• Assess technical conduct of the business
• Evaluate the regulated entitys assessment and
  management of risk

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Ongoing supervision of mutual fundsOn-site
supervision

• What are the objectives of an on-site inspection?
• Assess efficiency and reliability of systems and
  adequacy of internal controls
• Gather information on matters identified by the
  regulator as requiring policy consideration
• The regulator can also take the opportunity to
• Encourage the regulated entity to develop written
  policies and procedures
• Provide recommendations to correct deficiencies
  and to avoid potentially adverse situations
• Contribute to the soundness of internal systems
  and controls by encouraging regulated entities to
  follow best practice in all aspects of their
  operations

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Ongoing supervision of mutual fundsOn-site
supervision

• Results of the on-site inspections will influence
  the intensity and frequency of monitoring of the
  regulated entity
• A report should always be written following an
  inspection
• To inform the regulator and the directors and
  management of the regulated entity of weaknesses
  and deficiencies requiring attention
• To effect corrective action
• To provide an accurate and complete assessment of
  the fitness and properness of the regulated entity

32
Ongoing supervision of mutual fundsOn-site
supervision

• It is important to review the findings at the end
  of the on-site inspection visit and to present
  these to management of the regulated entity
• Once the written report has been issued (which
  should contain specific recommendations and
  timeframes for effecting remedial action) it is
  the responsibility of the regulator to follow
  through and ensure all remedial action is taken
• It is often appropriate to then conduct a
  follow-up inspection visit to review the progress

33
Ongoing supervision of mutual fundsLegislative
background to supervision

• What does your legislation permit you to
  undertake by way of ongoing supervision?
• What does your legislation permit you to request
  of a regulated entity (or other connected person)
  and under what circumstances?

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Ongoing supervision of mutual funds BVI
legislative background to supervision

• Under the BVI legislation, the FSC may
• Inspect premises and business (including
  procedures, systems and controls) both in BVI and
  elsewhere
• Inspect the assets (including cash) belonging to
  or under the control of the regulated entity
• Examine and make copies of documents which relate
  to the carrying on of financial services business
  by the regulated entity
• Seek information and explanations from officers,
  employees, agents and representatives (verbally
  and in writing) prior to, during or after a
  compliance inspection visit

35
Ongoing supervision of mutual funds BVI
legislative background to supervision

• Under the BVI legislation, an inspection visit
  may be undertaken for the following purposes
• Supervision of financial services business in or
  from within the BVI to determine compliance with
  legislation, regulations, codes and directives
• Monitoring and assessing compliance with the AML
  requirements
• The legislation requires reasonable notice to be
  given of inspection visits, unless circumstances
  dictate otherwise (eg investors at risk)
• The legislation permits foreign regulators to
  take part in inspection visits where it is
  reasonably required for the effective supervision
  of the regulated entity

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Ongoing supervision of mutual funds BVI
legislative background to supervision

• Under the BVI legislation, the costs of an
  inspection visit may be partially met by the
  regulated entity (up to 75)
• The legislation permits the use of external
  examiners for the conduct of investigations where
  there are grounds for enforcement action or there
  is a possibility of unauthorised financial
  services business being conducted it also
  permits the use of qualified persons to provide
  detailed reports on any aspect of a regulated
  entitys activities

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Ongoing supervision of mutual fundsBVI ongoing
supervision

• Off-site supervision
• Review of all notifications received
• Review and approval of all changes requiring
  approval
• Review of all correspondence and follow through
  with requests for more information/explanation
• Review of annual financial statements (not 100)
• Review and detailed analysis of every complaint
  received
• Routine updates of information (at least every 2
  years)
• Statutory requests for information (eg where
  comprehensive records required for more detailed
  analysis)
• Prudential meetings at the request of the
  regulated entity or of the regulator

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Ongoing supervision of mutual fundsBVI ongoing
supervision

• On-site supervision
• No on-site reviews conducted of mutual funds or
  mutual fund managers and administrators at this
  stage
• On-site reviews conducted of banks, trust
  companies and insurance companies
• Checklist approach
• Electronic system records results and produces
  reports
• On-site inspection co-ordinator appointed to
  ensure
• no duplicative effort
• consistency of approach
• resources allocated on risk basis
• timely conclusions and follow-up

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Ongoing supervision of mutual fundsInternational
standards and best practice

• EXERCISE
• Review your ongoing supervision and assess it
  against the requirements as set down in the IOSCO
  principles.
• What can you do to improve your ongoing
  supervision of mutual funds in order to meet the
  international standards?

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Ongoing supervision of mutual fundsReview of
Day 2

• Questions and Answers?