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CARNE CLIENT NOTE
FSA Dear CEO letter: conflicts of interest between Managers and Clients
Background

The UK’s Financial Services Authority

has issued a circular http://www.fsa.gov.uk/static/pubs/other/conflicts-of-interest.pdf

following a review of asset management firms’ enforcement of internal conflicts of interest policies#. The review, conducted between June 2011 and February 2012, identified that many firms had failed to establish an adequate framework for identifying and managing conflicts of interest. This included breaches of rules governing the use of customer commissions, the fair allocation of trades between customers and the identification and client reporting of trading errors.

Principle 8 of the FSA’s Principles for Businesses requires that a firm must manage conflicts of interest fairly, both between itself and its customers, and between a customer and another customer. Funds, and their Boards of Directors, as customers of investment managers, can

have an important role to play in helping investment managers to demonstrate that a robust conflicts culture exists across their business, while also representing the interests of the Fund(s)’ investors.

Amongst the FSA’s findings were:

Some firms did not allocate trades between clients in an equitable manner, or could not show that cross-trading was always in the interest of customers. This is particularly critical from the perspective of client funds and their Boards of Directors.

Some firms, particularly in the hedge funds sector, were too reliant on contractual limitations to avoid the identification and client reporting of trading errors to customers.
There were often no adequate controls covering purchase of research and/or trade execution services on behalf of clients.

The FSA said it planned a second round of thematic visits on this subject and will use responses received to inform its selection of firms for follow up assessment visits. Both the FSA and SEC have pointed to the identification and proper management of conflicts as “a core requirement” for asset managers under current regulations in recent rulings.

The role Fund Boards can play in managing conflicts of interest

The FSA has clearly outlined for customers of investment management firms, including Funds, what it now expects in terms of established conflicts of interest procedures. Funds – and their Boards of Directors – will need to ensure they are being provided with the correct information by investment managers, but they also have a role to play in helping investment managers fulfil these requirements.

As clients of investment managers,

Fund Boards http://www.carnegroup.com/oversight

should be enquiring about conflicts of interest policies at the manager level, how they are managed and how they are reported to the

Fund Directors http://www.carnegroup.com/carne-directors
.

Fund Boards should be actively involved with managers and can assist by demonstrating that both the Fund and its investment manager take conflicts seriously and that they are managed properly.

Fund Boards can help to demonstrate a culture of transparency that will benefit the investment management firm. Their documented processes can provide further evidence that the investment manager is honouring conflicts of interest policies established at the firm level.

In short, Fund Boards can help to play an important partnership role with investment managers to ensure they continue to serve the interests of fund investors and meet regulatory expectations.

For further information please contact:

London
Aymeric Lechartier
aymeric.lechartier@carnegroup.com
+44 207 936 9139

Dublin
John Donohoe
john.donohoe@carnegroup.com
+353 1 489 6802

Luxembourg
Justin Egan
justin.egan@carnegroup.com
+352 26 732333

New York
Joe Hardiman
joe.hardiman@carnegroup.com
+1 732 642 5808

About Carne

About Carne

Carne is an international specialist in the provision of

independent governance services http://www.carnegroup.com/governance-services

to the global asset management industry. We advise both hedge fund and traditional fund managers on their governance needs as well as providing

Independent Directors http://www.carnegroup.com/carne-directors

to the boards of some of the most respected hedge funds globally. Carne has Fund Directors resident in the key fund jurisdictions, including the Cayman Islands, Luxembourg, Switzerland, the UK and USA.

Carne also provides additional services in support of funds and fund boards, including fund structuring, registration,

management companies http://www.carnegroup.com/management-companies

and

project management work http://www.carnegroup.com/project-management
. Carne works with many of the leading names in cross border asset management, helping them to fulfil their operational, regulatory and governance commitments.

www.carnegroup.com http://www.carnegroup.com


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Carne Global Financial Services Limited

http://www.carnegroup.com/ http://www.carnegroup.com/

Dublin - Cayman - London - Luxembourg - New York - Switzerland

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