MARKETING

The extent to which funds can be marketed within a state or country or across state or national borders varies from country to country and depends on local laws and the nature of any federation or other affiliation which determines where the ultimate authority lies.

Most jurisdictions permit the marketing of mutual funds, but the only funds they will allow to be marketed freely are those they have authorised or which have been authorised by a federated or affiliated jurisdiction as eligible for marketing or promotion to the general public and registered as such. The marketing of other funds or securities will be either prohibited or restricted to promotion to professional or institutional investors only.

The prospectus

FundsThe documents submitted to the regulator when seeking authorisation or registration include a comprehensive disclosure document - the prospectus. This must meet prescribed requirements regarding the form and content and, after authorisation, be offered or supplied to each prospective investor. Investors must be supplied with current information concerning the operation and performance of a fund and so rules governing disclosure 0f information are usually in addition to, and separate from, those governing content and registration of the initial prospectus.

mutual funds and financial adviceThis is especially relevant with respect to promotional advertisements and particularly if it is permissible to solicit investment ‘off-the-page’. Practice varies: for example, off-the-page advertisements are prohibited in the US, whereas they are allowed by UK authorities. However, all jurisdictions seek to regulate the type, form and content of investment advertisements and have specific rules governing advertisements of or by mutual funds, including nowadays, promotion and investment via the Internet.

A further aspect of regulation concerns the employment by the fund of salesmen or by investors of independent advisers. In either case, most jurisdictions impose requirements that salesmen and advisers are demonstrably competent to perform the function for which they are employed. Again, practice varies but to be approved or licensed, an adviser must generally present:

  1. a combination of formal written examinations;
  2. observed and recorded performance ‘on the job’ against pre-set criteria;
  3. continuing professional development or training.

ADMINISTRATION

The administration of a mutual fund extends to all areas of its operation, including fund management and marketing discussed above. However, the term is more usually applied to the `back office’ procedures, includingmutual funds and financial advice the accounting and reporting associated with:

  1. buying and selling of securities comprising the investment portfolio;
  2. receipt, custody and delivery of securities and associated settlement payments;
  3. collection of income arising from holding securities;
  4. valuation of holdings and other assets and liabilities to determine fund dealing prices;
  5. creating, cancelling, issuing and redeeming of shares or units and associated charges and payments;
  6. maintaining a register of holders;
  7. dealing with complaints, errors and breaches of regulations;
  8. allocating income and its distribution to accumulation on behalf of holders;
  9. paying fees, charges, taxes and other expenses arising from operation of the fund;
  10. keeping investors informed about the activity, standing and performance of the fund;
  11. organising and holding annual general meetings and extraordinary meetings of holders to approve changes in constitution or operation of the fund;
  12. ensuring adequate resources and controls (physical and financial) and regulatory compliance, including maintenance of records, written procedures and fund documents

Each of these topics is typically the subject of some regulation and . Management companies must demonstrate sound administration capabilities alongside investment skills and financial resources to be considered fit and proper to operate an authorised mutual fund.

The purpose of such wide-ranging regulation is to ensure that the interests of investors are protected as far as possible and appropriate throughout the life-cycle of their investment:

  1. at entry into the fundmutual funds and financial advice;
  2. whilst holding shares or units in the fund;
  3. upon exit from the fund, against unscrupulous or incompetent managers or maladministration. Protection in these respects is not protection against loss caused by poor choice of fund or by market movements - investors must retain responsibility for their own investment judgement!

The regulations also seek to ensure as far as is possible that all investors are treated fairly in relation to each other. For example, the price paid by incoming investors or to outgoing investors should not he set at too high or too low a level such that its use dilutes the interests of the existing or continuing holders. Restrictions are also imposed upon the manager and other parties involved with the operation of the fund to ensure that they gain no special advantage from their dealings with the fund or with each other.

Regulation is enforced by a variety of means including: ‘

  1. periodic inspection visits by the regulator and the custodian or trustee;
  2. filings of reports, accounts and investment and tax returns;
  3. annual audits by independent auditors; occasionally, by the actions of vigilant shareholders.

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Mutual Funds Marketing and Administration