Achieving the investment returns isn’t enough . . .
All of you portfolio managers, proprietary traders and research analysts accepting positions with new firms or striking out on your own should know that your track records are not automatically portable to your new situations.
The more influential you are with your clients, the greater your legal duty
Say all you do is recommend investment ideas to your clients and charge them brokerage commissions. You don’t execute their trades without their prior consent and you don’t charge them an advisory fee.
If you’re seeking an asset management mandate from a foreign government agency or if a private equity investee of yours is pursuing a foreign government license or contract, beware of a dangerous pitfall that could cost your firm and its principals dearly.
A principal trade is a securities transaction between an asset manager and a client account over which the manager exercises discretion. Such trades can be advantageous to a client in situations where its manager either is the only available counterparty to a transaction or can save the client a market spread or brokerage commission by dealing with the client directly.
Okay only if all the benefits are passed on to your investors
Who owns the trades an investment adviser executes for its clients? Obviously, your clients own the profits and losses from the trades, but what if a third-party offers to pay you for combining its trades with yours so that it can take advantage of your favorable commission rates?
It goes without saying that false or misleading statements are prohibited in performance presentations. But money managers should also be aware of the following specific legal restrictions in reporting their track records to existing or prospective investors:
• no client testimonials •
• no ‘cherry-picking’ of securities or clients •
• no graphs, charts or formulas for investors to follow •
• no gross returns only •
• no simulated results •
All but the first of these prohibitions have exceptions, but each should be treated as a hard-and-fast rule unless you have explicit advice from counsel or a compliance professional to do otherwise.
If you are thinking about forming a UCITS fund in the EU, it may interest you to know that EU distribution platforms expect to be paid a minimum fee equal to 50% of your management fee for allowing retail shares of your funds to be made available to their so-called sub-distributors.