Download I. Supervision of Asset Management Companies Based on Risk

I. Supervision of Asset Management Companies Based on Risk-Based Approach (RBA)
The Office of Securities and Exchange Commission (SEC) has laid out one of its missions
to promote market participants’ confidence and trust in the integrity of asset management
companies (mutual fund, private fund, and provident fund scheme) mechanism as being an
attractive channel to capital market. The asset management companies are required to put in
place standard procedure and qualified service, appropriate fund administration system and
adequate internal control system in order to assure investors that they will receive standard and
fair service in line with the principles of duty of loyalty and duty of care. Following the
mentioned mission, the SEC has developed an asset management company supervision
framework using Risk-Based Approach (RBA). Asset management companies are assessed
based on its risk pose to the SEC’s regulatory objectives. Four areas of regulatory concern are
1. Operational risk: Assessment of risk in relation to the properness of the
organizational structure, operating system, and work procedure. The risk assessment is based
on the following 7 factors.
- Organizational structure and total operating system must be structured to
facilitate effective and efficient management and operations. The assessment is on the setting
of the organizational structure whether it acknowledges counterbalance between different
parties, prevention of conflict of interest, and preservation of confidentiality (Chinese wall).
The asset management companies must also put in place a system to follow and maintain the
qualification of its personnel in accordance to the stipulated law.
- Internal control and conflict of interest prevention measure. The asset
management companies must arrange segregation of duty for the purpose of check and balance,
record keeping procedure and preservation of confidentiality control, conflict of interest
prevention measures, investment ratio control system, fair allocation procedure, and prudent
investment decision making procedure with supporting evidence.
- NAV calculation and NAV announcement system. The assessment is on the
systems and work procedures for, for example, mark-to-market, NAV verification with trustee,
NAV announcement in the newspapers, and incorrect pricing.
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- Accounting system must be in line with the standard and stipulated laws and
regulations.
- Information technology system. The determining factors include the adequacy of
resources allocation to support business operation, the prevention of access to restricted
information and computerized system by unauthorized personnel, the accuracy and reliability
of information, and the integrity of computerized system.
- Roles and responsibilities of compliance unit. The assessment is on the
compliance roles in evaluating the internal control system, the making of compliance
monitoring plan, the monitoring and auditing duties, the preparation of findings report
presented to the Board of Directors, and the follow up of deficiency rectification.
- Human resource management. The assessment is determined based on the
availability and the allocation of competent personnel to facility business operation.
2. Portfolio management risk: Assessment of risks on the investment management
system and portfolio risk management system. Two determining factors are
- Establishment of risk identification and risk control system. All risks arising
from engaging in investment management business must be identified. These risks include risk
arising from market price volatility (market risk), risk of loss due to uncertainty in principal
and interest repayment (credit risk), risk arising from managing liquidity (liquidity risk), and
risk arising from engaging in the unenforceable contract (legal risk). The asset management
companies must formulate risk management policy and arrange risk management tools to
measure and guard against those risks. Analysis review must also be arranged on a regular
basis or whenever significant changes impact the investment climate.
- Proper investment management system. Responsible party must be clearly
defined. In case there is an investment committee responsible for the overseeing of investment
management, the SEC will assess if the process of investment decision making is based on
sufficient and up-to-date information, if there is a clear guideline in asset selection and the
guideline is regularly reviewed, if the composition of investment committee inflicts any
conflicts of interest, and if the investment committee has roles and responsibilities in
supervising fund managers and how it carries out the supervision duty.
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3. Customer relationship risk: Assessment the risk of investor relations if investment
advice given to investors is accurate, adequate, up-to-date and in a timely manner. Assessment
the effectiveness of the asset management companies’ subscription and redemption system and
their complaint handling system. Three determining factors include
- Information disclosure and investor education. The assessment is on the standard
of providing investment advice, the adequacy of information disclosure, the complete and upto-date investment advice materials, and the regard for the characteristics of clients. In case of
giving specific advice, know your customer and suitability must be implemented. In addition,
the asset management companies must provide education to the investors and selling agents,
and also monitor selling agents to act upon stipulated laws and regulations.
- Complaint handling system must be put in place. Assignment of responsible
party, clear setting of work procedure in handling complaint, fair treatment of complaint and
report to management procedure must be well established and followed.
- Subscription and redemption system, customer acceptance system and work
procedures, and procedure in giving investment advice. All these systems and work procedures
must be well defined with clearly assigned responsible party.
4. Prudential risk: Assessment of risk in relation to maintaining sufficient capital
adequacy to carry out business without causing damage to funds under management.
Apart from the fore mentioned risk assessment, the SEC will assess the impact of each asset
management company on the clients and market system as a whole. The impact factors include the
market share, number of funds under management, and number of active customers.
Since each risk factor and impact factor are ever-changing, the SEC will regularly review the
risk and impact assessment as well as promptly review when there is any significant changes that
impact those assessment factors.
II. Measure to supervise high risk asset management company
As aforementioned that the asset management companies must put in place and observe
prudent operations and internal control system, however, in doing so, it may impose a certain
extra cost. Thus, in order to make all asset management companies maintain quality and
standard operations while preventing well established asset management companies from being
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disadvantaged, the SEC will take strict actions to those with below acceptable standard or non
compliance to stipulated regulations or ethics. RBA risk assessment approach will come into
play as a means to assess risk of each asset management company. In dealing with high risk
asset management companies, the SEC has defined two rectification guidelines arranging from
lenient measure to strict measure as followed.
1. Order to rectify high risk areas
(1) Summon senior management or Board of Directors to meet with the SEC
in order to raise their awareness in establishing good operational monitoring system, and the
SEC expectation to their roles in managing and overseeing good operational system. In
addition, the SEC will issue an order letter ordering the asset management company to rectify
deficiency as remarked.
(2) The SEC will impose more frequent on-site visit, or require extra
reports/or more frequent off-site reports, or require submission of audit plan and compliance
report quarterly.
(3) Impose certain conditions requiring the asset management companies to
improve their work procedures and monitoring system.
2. Restrict business operations
To protect investors from exposing to the poor operational and internal control
system asset management companies, the SEC may impose restriction on business operations
during the time they have not yet rectified such deficiencies. The restrictions may include
restriction on business expansion, i.e., non approval for new fund registration, restriction on
accepting new private fund client, restriction on accepting new provident fund employer.
To equip investors with information when choosing among asset management
companies and to make the SEC operation transparent, the SEC has disclosed inspection
findings based on RBA approach where investors may visit the link below.
http://capital.sec.or.th/webapp/invest/serv_p1.php?type=mut&ref_id=534&licno=5
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