When an investment manager is appointed to a Fund in order to provide investment management, administration, and marketing services, an investment management agreement must be drafted that includes all necessary terms with regards to the above mentioned services.
It is important that all issues are covered including the terms of the appointment, and the Investment Manager must agree to manage the assets of the fund and have the discretionary power to invest and reinvest in investments at all times in accordance with the necessary laws of the jurisdiction in which the fund is based.
There usually will be some form of prospectus which covers investment guidelines that the investment manager must also abide by.
Though the investment manager often is given full reign of its activities, it must act in accordance with proper instruction (usually written) by the management company managing the fund.
It is not the role of the investment manager to take custody of any assets or have possession of cash or securities of the fund. It is the custodian who will deal with those tasks upon instruction of the investment manager.
Usually the investment manager is not liable for any act of omission of the Custodian.
The management company operates control of the Investment Manager’s procedures and operations based upon the list of policies and procedures provided by the Investment Manager to the management company that are compromised of the Investment Manager’s internal controls and compliance procedures.
So what other duties does an Investment Manager fulfill?
The role of Investment Manager is large and can be extended but generally, an Investment Manager:
- researches and evaluates opportunities for possible investments by the fund and drives the negotiations and suitable terms for the acquisition and disposal of investments,
- issues orders and instructions with respect to the acquisition and disposition of the investments,
- purchases and sells the investments for the account of the fund
- keeps under surveillance and reviews the investments and if necessary, effect changes in such investments
- carries out risk management assessments,
- enters into, makes, and performs all contracts, agreements and other undertakings that are necessary in order to carry out its duties,
- exercises corporate actions conferred by the investments such as creation of reports for including in the fund
- may aggregate transactions in investments with those of other clients and of its employees based on compliance regulations of its jurisdiction
- has a duty to report to the management company about any change in circumstance that would directly have an impact on the performance of its duties towards the fund and in general in accordance with its conditions set out within the investment agreement.
Of course these duties are non exhaustive, and it is up to the managing company to provide further tasks and duties in compliance with regulations. These should be clearly stipulated within an agreement.
Either way, the investment manager should not have a conflict of interest and should take all reasonable steps to prevent conflicts of interest as defined in the compliance rules of the jurisdiction of the fund.
Any conflict of interest needs to be disclosed to the management company before undertaking business for the management company.
What liability does an investment manager have?
The liability of an investment manager is defined within the terms of the investment management agreement.
Once again, in general, the investment manager is liable to either the management company or the fund for any direct loss or damage suffered by them in connection to the investment manager’s actions. This would also include fraud, breach, non-performance, bad faith, and most direct damages. Of course if the Investment manager was following instructions that were believed to be authentic but were fraudulent, they will not be liable.
Investment Managers of Cyprus funds face specific challenges and obligations. For more information you can contact our Law Firm.