Tài liệu THOUGHTS FROM THE BOARDROOM PWC MUTUAL FUND DIRECTORS ROUNDTABLE 2012 HIGHLIGHTS ppt

Directors shared their views on matters including compliance with new regulatory initiatives, risk management and valuation, questions surrounding the review of management contracts and

Thoughts from the Boardroom

PwC Mutual Fund Directors Roundtable

2012 Highlights

October 2012

Contents

Introduction 1

Risk management 2

Regulatory change 6

Valuation 11

Contract review process 13

Board effectiveness 15

Concluding thoughts 18

Contact information 19

Introduction

PwC invited independent directors from the boards of some of the nation’s leading mutual fund complexes to participate in an informal discussion of current issues facing the industry The exchanges, facilitated by members of PwC’s asset

management practice, generated important insights into what directors are thinking about in today’s evolving marketplace

Directors shared their views on matters including compliance with new regulatory initiatives, risk management and valuation, questions surrounding the review of management contracts and the effectiveness of boards themselves The perspectives provide a summary of leading practices in mutual fund oversight, explain how

directors are meeting the challenges they face and provide insights into the evolving role of directors and boards in the funds industry

Risk management

Background

The recent financial crisis has raised questions about the effectiveness of current risk management practices Today, nearly four years after the beginning of the financial crisis, the mutual fund industry continues to explore how to identify, manage and mitigate risks and develop a more consistent, proactive and adaptive approach to risk management

Because of their fiduciary responsibilities, mutual fund directors have a keen interest

in facilitating effective management of the risks undertaken by the adviser in the funds they oversee

Within the scope of their responsibilities, there is significant room for directors to exercise their oversight function How they are doing so in a period of market

volatility and uncertainty, and the concerns they and their peers are seeing, was the opening subject of this year’s PwC Mutual Fund Directors Roundtable

How directors oversee the management of risk in their funds is among the most

topical items on the agendas of many boards Directors expressed their belief that they need to understand the key risks that affect their funds and strategies as well as the steps that management is taking to control and mitigate the risks; understand how the risk framework processes work, especially with regard to escalation of issues

to the board; and set and reinforce the tone and culture around sound risk

While some directors question whether they are doing enough to fulfill their risk management oversight and influence responsibilities, others are concerned over whether they may cross a line and become too involved in fund management

decisions Often, this tension is exacerbated by lack of clarity around roles and

responsibilities between the board and the adviser

Other times, the board may feel that advisers also may not be proactive around what the board needs in its oversight role If the board does not receive the information it believes it needs, it often feels compelled to become more directly engaged In order

to avoid this situation, the board and the adviser need a robust dialogue about

expectations in which the board communicates what it wants to know, and the

adviser provides the information to address any information gaps

The right amount of information is also important In some cases, boards receive so much information that they cannot effectively put it into context Similarly, some directors are concerned that advisers are taking a legalistic approach to risk

management, with their efforts focused more on regulatory compliance and less on whether the adviser has the right people and processes in place for oversight

Further driving the need for board oversight is that investor due diligence

increasingly focuses on the risk management aspect of a fund’s operations Beyond the implications for a fund’s ability to gather assets, the efficacy of risk controls has

an enormous impact on reputational risk This risk directly affects the brand, with implications across the platform for companies with multiple lines of business

The directors think that boards generally need simple, clear views into risk processes and better guidance about tested risk management processes that actually work, especially in times of stress Part of the problem is that many senior people in

advisory firms lack the requisite background in risk and often have not thought

through the implications of risk management decisions

Ultimately, directors need relevant information that is provided in ways that are comprehensible and actionable Having people in management trained and

motivated goes a long way towards reducing the risks to which the fund is exposed Tone at the top is crucial

Other risk management-related observations by directors:

 Risk management should not be a siloed function but instead operate across the organization However, enterprise risk management processes and frameworks may appear to provide greater oversight than really exists Enterprise risk

management is only as effective insofar as it is able to produce a “risk radar” that

is meaningful and forward-looking

 Risk dashboards, a popular way of presenting risk information, can demand

considerable resources and may not highlight underlying issues Many current models of dashboards either have too many metrics to be comprehensible or, at the other extreme, do not have much data backing them The well-designed risk dashboards synthesize key qualitative and quantitative data and generate

meaningful and actionable information for the board

 Because of regulations, banks have traditionally been forced to have more

structure and scrutiny around risk management than investment advisers

However, regulatory changes such as those included in Dodd-Frank (including the Volcker Rule) will result in at least some areas of asset management, such as

money-market funds, facing heightened risk oversight and some risk

requirements similar to those which govern banks A key distinction between banks and asset managers, however, is that traditional measures of banking risk including capital and balance sheets are not applicable to asset management firms which are typically funded by client assets

 While the focus of risk management oversight is primarily on the adviser and the investment management process, directors recognize they also need to devote time to other potential sources of risk For instance, information and data

security, operational processes and client service are key risk areas to monitor In addition, the role of third-party providers such as transfer agents, custodians and pricing services sometimes receives too little attention

Risk management roles for directors and fund advisers

 Director responsibilities should include maintaining awareness of the most

significant risks to the fund (including risks of the adviser or its affiliates that may affect the fund) and the steps being taken to manage those risks

 Directors should understand the current risk management processes, ask

questions where appropriate and obtain assurances that the processes are

reasonably designed to manage and control the fund’s material risks

 Perhaps most importantly, boards should encourage and reinforce a strong “tone

at the top” at the adviser by, among other things, sustaining an appropriate focus

on risk management

 In addition, directors should be reassessing their tax functions, which are being asked to address new compliance requirements, more complex processes, smaller tolerances for error and expectations that they be a part of risk management

 Advisers should support the board in its oversight role, providing educational sessions on risk management generally or on specific topics, providing regular, periodic reports on the fund’s investment risks They also should identify and report on the most significant business operational risks and escalate material risk-related issues and events to the board when appropriate

 The adviser also should demonstrate to the board the effectiveness of its risk

management processes to identify, measure, control and monitor the most

significant risks to the fund

The conditions that have led to a greater focus on risk management, such as

economic uncertainty, volatile markets and new regulatory regimes, are likely to continue In response, mutual fund advisers are seeking to enhance their risk

management programs, especially to focus on newer, emerging risks or those that might be considered less probable – so-called “black swan” events In order to do this, they are trying to identify emerging trends, understand interconnections

between risks and develop relevant risk mitigation strategies

Advisers and boards will probably continue trying to take an enterprise-wide

approach to risk management that would bolster the linkages between risk,

regulation, investment performance and business strategy As part of this, advisers should acquire a more nuanced approach to risk, distinguishing among operational risk, compliance risk, tax risk, et cetera, and developing more targeted mitigation initiatives

Although there are still significant differences in how advisers implement risk

management, leading practices are gradually becoming accepted across the industry Given the history of the past several years, when risks and correlations arose

unexpectedly, more attention will be devoted to managing currently unknown risks While the likelihood of many risks may have been deemed low, their impact can be significant, and potentially franchise-destroying For example, many risk managers

focus on vulnerabilities such as the European debt crisis and its implications, but only on the primary exposure, and not the downstream implications and exposures

In addition to economic risks, managers are recognizing that tax risks need to be a part of the overall risk management function No longer is tax simply an adjunct to a firm’s day-to-day operations; instead, it is becoming a fully integrated part of the firm’s risk management function This requires some asset managers and their tax departments to approach the tax function differently

More focus also will be placed on continuously monitoring the environment to spot developing trends, understand interconnectedness with other risks and plan

responses The focus will be on identifying the vulnerabilities rather than on trying to predict risk events Once vulnerabilities are identified, worst outcomes can be

developed, risk assumptions detailed and scenarios for external events projected A particularly effective way to understand such “unknown” risks is through reverse stress-testing Unlike scenario analysis, which starts with a risk event, reverse stress-testing begins with the outcome and identifies circumstances that may cause it

financial services industry The impacts of these initiatives have been more

significant in some sectors, such as banking, than on others Yet most areas,

including mutual funds, are seeing the effects of the most ambitious regulatory

initiatives in decades

While Dodd-Frank and other major legislative packages have received the greatest attention, less visible measures, such as the Foreign Account Tax Compliance Act of

2009 (FATCA) and the US Securities and Exchange Commission’s proposed changes

to 12b-1 fees, are likely to have a greater direct impact on mutual fund governance and operations The following table identifies key issues

The new regulatory and compliance reality for mutual funds

 Concept release on use of leverage and derivatives

by mutual funds; potential new rules

 Incentive-based compensation rules for certain large advisers

 More to come: Proposed rules on target date funds, distribution expenses (i.e 12b-1 plans) and dark pools

 Systemic risk reporting

 Monthly reporting requirements to Treasury on Form SLT

 Foreign jurisdiction laws and rules

The new regulatory and compliance reality for mutual funds

concerning compliance programs and breaches

 Clients/shareholders request information about contacts from enforcement investigators and examination results, including copies of deficiency letters

 Sub-advisers are seeing more vigorous due diligence and ongoing monitoring and reporting requests from primary advisers; diligence is moving beyond certification process

 Examiners may expect robust testing that identifies potential problems, annual reporting and use of available technological tools

 Examiners may expect a governance process that assures reporting up and timely action to resolve problems and address their root cause; information flow to and from the fund board is key

More examinations  Increase in staffing and budget

 Risk-driven examinations, cause exams, sweeps Consequences of non-

the SEC is targeting firms with a special unit of investigators focused solely on the asset management industry in coming years

 Joint investigations by the SEC and the Department

of Justice

 Cooperation among regulators: SEC, CFTC, FinCEN, IRS, FBI, Department of Labor, state AGs/securities divisions

 More cooperation agreements between SEC and foreign counterparts (FSA, SFC, CSRC)

 Cooperation and non-prosecution agreements between SEC and witnesses

The new regulatory and compliance reality for mutual funds

 Use of data analysis

 Ability to analyze hundreds of millions of electronic trading records to identify groups of traders who repeatedly made similar well-timed bets

 Trained, experienced investigators and examiners (industry experience, Chartered Alternative Investment Analysts, Certified Fraud Examiners)

The participants in the Mutual Fund Directors’ Roundtable believe that FATCA is currently one of the top regulatory issues from a compliance standpoint While the banking sector has been focused on FATCA for a long time, asset managers had been less certain about both its final adoption and its applicability to them; now that the regulations were issued in February 2012, boards and advisers are focusing on

building a path to compliance

One of the first and most relevant questions directors are considering is: Who owns FATCA? While it is a tax matter, other staff beyond the tax function – operations, data, compliance and information technology – should be closely involved in

implementation of FATCA programs Banks and insurers have come to this

conclusion and focus on implementing FATCA across their business lines The

directors in attendance at the roundtable understand that both boards and

management need to be engaged on FATCA compliance and know what the

framework will be There is a window in which they can focus on this, but it closes with the 2013 deadline for companies to enter into foreign financial institution

agreements

With proposed SEC regulations on money-market funds expected shortly, the

management and future of these funds is also an issue of growing importance

Federal officials think there is risk in the money-market arena that has not been mitigated by previous reforms In turn, the directors see less certainty about the direction of the proposed reforms and significant potential impacts on the economic viability of these investments

Among the proposals under consideration are floating net asset values, increased capital requirements or buffers or shareholder redemption holdbacks Each of these proposals brings with it sizeable implementation, programming and accounting

issues that could affect the viability of these funds Funds are looking closely at

whether and how they could manage each of these sets of requirements

If the impacts are as great as has been anticipated by some, certain money-market funds could need to close or exit the US market There also could be a sizeable

downstream effect in terms of corporate financing, especially on the trillion-dollar short-term commercial paper market

While only the SEC has the statutory authority to impose regulations on

money-market mutual funds, the Federal Reserve could assume certain oversight

responsibilities in the case of funds receiving systemically important financial

institution (SIFI) designation under Dodd-Frank Regardless of which entities are involved, regulators are not likely to walk away completely from money-market funds and their oversight

While 12b-1 reform had been on the front burner for a long time, the issue has lost some focus lately with the SEC concentrating on other matters, including money-market fund reform However, the question of who pays for what remains

unanswered The lack of transparency and documentation by some funds in

allocating expenses remains a hot button issue for the SEC In advance of 12b-1

reform, transparency is on the list of issues in SEC exams, along with insider trading and material nonpublic information

Expert firms and networks are another issue that continues to attract attention SEC examiners have identified a number of such firms and are looking to see whether advisers have a relationship with them If the advisers do have such relationships, then the SEC may make further inquiries about the relationship and the information that is provided This is not simply an issue affecting hedge funds; it also can have an impact on other asset managers

Some advisers are already recording conversations with expert firms and having counsel present during calls Despite the added scrutiny, advisers see these

interactions as useful and an important part of their analytical process Yet this is something that boards should understand and inquire into, to attempt to avoid

potential issues Ultimately, expert firms are part of a much broader question of what

is considered material nonpublic information and what the adviser’s controls are surrounding it

Although their focus has been on Dodd-Frank and other US-originated regulation, the participating directors recognize the increasing importance of understanding and being able to comply with global regulation Some of these regulatory initiatives do not appear to be coordinated globally; others go beyond what is contemplated in the

US, such as the separation of manufacturing and distribution that could result from European regulatory initiatives, including the possible ramifications of UCITS IV Facing such challenges, directors say they need to step back and think about their advisers’ processes for evaluating and understanding prospective regulatory change The directors then should evaluate whether the adviser has the right processes in place to manage this change

Two years after passage of Dodd-Frank, the pace of regulatory releases has increased significantly, creating enormous challenges for mutual fund managers and directors who should understand the impacts of these new rules and regulations on the adviser