Malaysia Securities Exam Module 9 - Funds Management Regulation

The correct answer is (c) Islamic funds must comply with Shariah principles, and an independent Shariah adviser oversees the fund’s activities.

Explanation:

Islamic funds are mandated to adhere to Shariah principles, ensuring that the investments are in line with Islamic finance principles.

An independent Shariah adviser is appointed to review and supervise the fund’s activities, ensuring compliance with Shariah laws and principles.

Conventional funds are not bound by Shariah principles, and adherence to these principles is a distinguishing feature of Islamic funds.

Relevant Regulations: Securities Commission Malaysia Guidelines on Islamic Funds.

The correct answer is (b) REITs are required to distribute a significant portion of their income to investors as dividends.

Explanation:

REITs are designed to provide regular income to investors, and they are required to distribute a significant portion of their income as dividends.

This characteristic makes REITs an attractive investment for income-seeking investors.

Income distribution is not solely at the discretion of the fund manager; regulations often mandate a specific percentage of income to be distributed.

Relevant Regulations: Securities Commission Malaysia Guidelines on Real Estate Investment Trusts (REITs).

The correct answer is (c) Fund-of-funds invest in a diversified portfolio of other investment funds.

Explanation:

Fund-of-funds invest in a portfolio of other investment funds, providing investors with instant diversification across various asset classes and investment strategies.

This structure allows for professional management of a diversified investment portfolio.

Fund-of-funds are not restricted to a single asset class or geographic region, making them a versatile investment option.

The correct answer is (a) Both the potential growth and the startup’s operating history. The Funds Management Regulation requires fund managers to exercise due diligence in their investment decisions. In this scenario, Mr. Wong should consider not only the potential growth of the startup but also its operating history to assess its stability and past performance.

The correct answer is (D) Communicate transparently with clients and assess risk mitigation strategies. During challenging market conditions, the Funds Management Regulation emphasizes the importance of transparent communication with clients. Fund managers should provide clear information about the market situation and discuss potential risk mitigation strategies to align with the client’s investment objectives.

Correct Answer: b) Comply with the foreign securities regulations of the host country and inform investors about the risks.

Explanation: Engaging in cross-border investments requires compliance with the regulations of the host country. Additionally, informing investors about the associated risks ensures transparency and aligns with regulatory standards.

Incorrect Options:

a) No specific regulatory requirements apply to foreign securities investments.

Incorrect Explanation: Cross-border investments are subject to regulatory requirements, and fund managers need to adhere to the regulations of the host country.

c) Seek approval only from the local regulatory authority.

Incorrect Explanation: Cross-border investments typically require approval from both the local regulatory authority and the regulatory authority of the host country.

d) Disclose the cross-border investment after its completion.

Incorrect Explanation: Disclosing cross-border investments after completion may not be sufficient. Transparency is crucial throughout the process to inform investors about potential risks and compliance with regulations.

Correct Answer: b) Securities Commission Malaysia (SC)

Explanation: The Securities Commission Malaysia is the regulatory body responsible for overseeing and enforcing compliance with the Guidelines on Unit Trust Funds in Malaysia. The SC plays a crucial role in regulating unit trust funds to ensure investor protection and market integrity.

Incorrect Options:

a) Bank Negara Malaysia (BNM)

Incorrect Explanation: BNM oversees monetary and financial stability but is not specifically responsible for unit trust fund regulations.

c) Financial Markets Association Malaysia (FMAM)

Incorrect Explanation: FMAM is an association and not a regulatory body. It does not have the authority to enforce compliance with unit trust fund guidelines.

d) Malaysian Association of Asset Managers (MAAM)

Incorrect Explanation: MAAM is an industry association and does not have regulatory powers. The SC is the primary regulatory authority for unit trust funds in Malaysia.

Correct Answer: a) Exclude any companies involved in conventional banking and finance.

Explanation: Shariah-compliant funds adhere to Islamic principles, which prohibit involvement in conventional banking and finance activities. Excluding such companies is in line with the Shariah principles of avoiding interest (riba).

Incorrect Options:

b) Invest in companies with high levels of debt to maximize returns.

Incorrect Explanation: Shariah-compliant funds should avoid companies with high levels of debt, as excessive debt contradicts Islamic financial principles.

c) Include companies with substantial interest income.

Incorrect Explanation: Including companies with substantial interest income contradicts Shariah principles, as interest is considered impermissible (haram).

d) Focus on companies engaged in the production of alcoholic beverages.

Incorrect Explanation: Shariah-compliant funds should exclude companies involved in the production of alcoholic beverages, as it goes against Islamic ethical guidelines.

Correct Answer: (c) They should communicate the situation transparently to investors and take appropriate actions to protect their interests.

Explanation: Fund managers have a responsibility to communicate transparently with investors in the event of adverse situations. This includes providing information about the failure of the unlisted capital market product to meet financial obligations and taking appropriate actions to protect investors’ interests. Transparency and proactive measures contribute to maintaining investor trust and market integrity.

Incorrect Answers:

(a) They are not responsible as the product’s performance is beyond their control: Fund managers have a duty of care and diligence in managing investments, and transparency is essential in such situations.
(b) They must compensate investors for their losses immediately: While compensating investors may be a consideration, the immediate focus should be on transparent communication and appropriate actions.
(d) They are only required to report the incident to the Securities Commission: While regulatory reporting is important, direct communication with investors and taking protective measures are equally crucial responsibilities.

Correct Answer: (D) Any conflicts of interest involving the issuer and key personnel.

Explanation: The offering document should provide information on any conflicts of interest involving the issuer and key personnel. This ensures transparency and allows investors like Mr. Tan to assess potential risks associated with conflicts of interest, contributing to informed decision-making and investor protection.

Correct Answer: (c) Conduct thorough due diligence and seek expert advice to understand the risks associated with the financial instruments.

Explanation: When dealing with complex financial instruments, fund managers, like Mr. Lim, should conduct thorough due diligence and seek expert advice to understand the associated risks. This approach ensures that fund managers have a comprehensive understanding of the financial instruments, contributing to informed decision-making and risk management.

Incorrect Answers:

(a) Rely solely on the issuer’s description of the financial instruments: While issuer information is valuable, independent due diligence is essential to ensure a complete and unbiased understanding of the financial instruments.
(b) Avoid investing in complex financial instruments to minimize risk: While some may choose this approach, fund managers can manage risks effectively through informed decision-making and thorough due diligence.
(d) Delegate the responsibility of understanding complex financial instruments to junior analysts: Fund managers should actively participate in understanding complex instruments to make informed investment decisions; delegation may be part of the process, but active involvement is crucial.

Correct Answer: (D) Suspend or reject the lodgment until all required documents are submitted.

Explanation: In the event of non-compliance with the lodgment process, the Lodge and Launch Framework empowers the Securities Commission to suspend or reject the lodgment until all required documents are submitted. This strict stance ensures that the regulatory requirements are met, promoting transparency and investor protection.

The correct answer is (B) – The client’s investment goals, risk tolerance, and financial situation. According to regulatory guidelines, financial advisers are required to consider these factors when determining the suitability of a UCMP for a client. This ensures that investments align with the client’s individual circumstances and preferences.

Options (A), (C), and (D) are incorrect because:

(A) Relying solely on historical performance neglects the personalized considerations necessary for suitability, as past performance does not guarantee future results.

(C) Depending on promotional material alone may not provide sufficient information about the client’s specific needs and preferences.

(D) Ignoring the client’s preferences and relying solely on the financial adviser’s recommendation goes against the principle of client-centered financial advice.

The correct answer is (C) – Collaborate with the fund manager to promptly update the disclosure and inform investors. According to regulatory expectations, compliance officers should work with fund managers to address non-compliance promptly, including updating inadequate disclosures. This ensures that investors are informed and regulatory requirements are met.

Options (A), (B), and (D) are incorrect because:

(A) Ignoring the non-compliance contradicts the responsibility of compliance officers to address potential regulatory issues promptly.

(B) Reporting the non-compliance only in the next annual report may result in delayed action and potential regulatory consequences.

(D) Delegating the responsibility to the legal team may result in a lack of oversight by the compliance officer, who is responsible for ensuring compliance with regulatory requirements.

Correct Answer:
b) Assess the rights issue’s terms and conditions, ensuring compliance with regulatory requirements.

Explanation:
The correct answer is to assess the rights issue’s terms and conditions, ensuring compliance with regulatory requirements. While rights issues are common corporate actions, fund managers must consider regulatory standards outlined in the Funds Management Regulation of the Securities Commission Malaysia Act 1993.

Option a is incorrect because participating in a rights issue without considering regulatory requirements may lead to non-compliance. Option c is incorrect as rights issues are subject to regulatory scrutiny, and compliance is necessary. Option d is also incorrect as seeking approval from the fund’s investors may not be a regulatory requirement for participating in a rights issue.

Correct Answer:
a) Ensure compliance with the Securities Commission’s guidelines and conduct thorough due diligence on the delisted company.

Explanation:
The correct answer is to ensure compliance with the Securities Commission’s guidelines and conduct thorough due diligence on the delisted company. While investing in delisted companies is not explicitly prohibited, fund managers must consider regulatory standards outlined in the Funds Management Regulation of the Securities Commission Malaysia Act 1993.

Correct Answer:
b) Implement proper risk management and compliance controls to ensure algorithmic trading aligns with regulatory requirements.

Explanation:
The correct answer is to implement proper risk management and compliance controls to ensure algorithmic trading aligns with regulatory requirements. While algorithmic trading is not prohibited, fund managers must use such strategies responsibly, complying with the Funds Management Regulation of the Securities Commission Malaysia Act 1993.

Option a is incorrect because engaging in algorithmic trading without considering regulatory requirements may lead to non-compliance. Option c is incorrect as algorithmic trading is not prohibited but must be conducted within regulatory guidelines. Option d is also incorrect as seeking approval from other fund managers may not be a regulatory requirement for implementing algorithmic trading.

Correct Answer:
D) Report the illegal activities to the Securities Commission and divest from the company.

Explanation:
The correct answer is to report the illegal activities to the Securities Commission and divest from the company. Fund managers have a responsibility to act in the best interests of their clients and to comply with the law, as outlined in the Funds Management Regulation of the Securities Commission Malaysia Act 1993.

Correct Answer: B) It provides an anonymous channel for employees to report potential compliance breaches

The establishment of a whistleblowing mechanism, in line with the Guidelines on Compliance Function for Fund Management Companies, contributes to regulatory compliance by offering employees an anonymous channel to report potential breaches. This encourages a culture of transparency, allowing the compliance function to address issues promptly and prevent further violations.

Incorrect Options:

A) Whistleblowing mechanisms are unnecessary; employees should report directly to senior management – Whistleblowing mechanisms provide an alternative channel, promoting transparency and independence in reporting potential breaches.

C) Whistleblowing is only relevant for employees directly involved in the compliance function – Whistleblowing mechanisms are applicable to all employees, fostering a culture of reporting and accountability throughout the organization.

D) Whistleblowing mechanisms should be limited to external stakeholders, not internal employees – Whistleblowing mechanisms are designed to address both internal and external concerns, ensuring a comprehensive approach to compliance reporting.

Correct Answer: C) Collaborate with HR and legal departments to ensure proper whistleblower protection

The Guidelines on Compliance Function for Fund Management Companies advocate collaboration between the compliance function, HR, and legal departments to ensure proper whistleblower protection. This collaboration aims to create a supportive environment for whistleblowers and addresses concerns while adhering to legal and regulatory requirements.

Incorrect Options:

A) Discourage employees from reporting concerns to avoid unnecessary disruptions – Discouraging reporting goes against the principles of whistleblower protection and transparency, which are crucial in maintaining a compliant and ethical work environment.

B) Independently investigate whistleblower reports without involving other departments – While the compliance function may play a role in investigations, collaboration with HR and legal departments ensures a comprehensive and fair process.

D) Whistleblower protection is solely the responsibility of the fund manager – Whistleblower protection involves multiple aspects, including legal considerations. Collaboration with HR and legal departments ensures a holistic approach to protecting whistleblowers.

Correct Answer: D) Outsourcing is permitted, but the fund manager must maintain ultimate responsibility

According to the Guidelines on Compliance Function for Fund Management Companies, outsourcing compliance functions is allowed, but the fund manager must retain ultimate responsibility. This ensures accountability for compliance matters even when certain functions are outsourced.

Correct Answer: B) Monitor for market manipulation risks and ensure fair trading

Explanation: When handling a high-frequency trading strategy, Mr. Rahman should consider monitoring for market manipulation risks and ensuring fair trading practices, as outlined in the Guidelines on Conduct for Capital Market Intermediaries. Executing trades quickly without verifying client instructions (A) can lead to errors and may not align with the principles of responsible trading. Front-running client orders (C) is unethical and could violate fair trading principles. Ignoring risk factors (D) goes against the responsibility of ensuring a secure and transparent trading environment.

Correct Answer: A) Exchange rate fluctuations

Explanation: When including a foreign security in a Malaysian mutual fund, Mrs. Tan should consider regulatory aspects, such as exchange rate fluctuations (A). The Funds Management Regulation emphasizes the need to assess and manage risks associated with foreign investments. Popularity among international investors (B), historical performance in the home country (C), and social media sentiment in Malaysia (D) are not primary considerations outlined in the regulation.

Correct Answer: C) Advise the client against the purchase to avoid conflicts of interest

Explanation: In compliance with the Guidelines on Conduct for Capital Market Intermediaries, Mr. Lim should advise the client against the purchase to avoid conflicts of interest (C). Executing the order without additional checks (A) could lead to ethical violations. Disclosing the client’s managerial position to the company (B) might compromise confidentiality. Reporting the order to regulatory authorities (D) may not be necessary if the conflict of interest is resolved internally.

Correct Answer:
D) Ensure compliance with the Securities Commission’s guidelines and assess the impact of leverage on the fund’s risk profile.

Explanation:
The correct answer is to ensure compliance with the Securities Commission’s guidelines and assess the impact of leverage on the fund’s risk profile. While leveraging investments is not explicitly prohibited, fund managers must consider regulatory standards outlined in the Funds Management Regulation of the Securities Commission Malaysia Act 1993.

Correct Answer: B) Implement a standardized client suitability assessment process and monitor its effectiveness

The Guidelines on Compliance Function for Fund Management Companies recommend the implementation of a standardized client suitability assessment process. This ensures consistency and fairness in evaluating whether investment products align with clients’ financial objectives and risk tolerance. Additionally, the compliance function should actively monitor and enhance the effectiveness of this process.

Incorrect Options:

A) Allow fund managers to independently determine client suitability based on their expertise – Standardized processes help mitigate subjectivity and ensure a fair assessment. Relying solely on individual expertise may lead to inconsistent evaluations.

C) Base client suitability solely on financial criteria, disregarding non-financial factors – Comprehensive client suitability assessments consider both financial and non-financial factors to provide a holistic understanding of clients’ needs and preferences.

D) Conduct client suitability assessments only for high-net-worth individuals – Client suitability assessments should be conducted for all clients, regardless of their net worth, to uphold fair and equitable practices.

Correct Answer: C) Work with the fund manager to ensure accurate and fair performance fee calculations

The Guidelines on Compliance Function for Fund Management Companies stress collaboration between the compliance function and the fund manager to ensure accurate and fair performance fee calculations. This collaboration helps in adhering to regulatory requirements and maintaining transparency with investors.

Incorrect Options:

A) Compliance independently determines performance fee calculations to avoid conflicts – Collaboration with the fund manager is essential for a comprehensive understanding of fund performance and accurate fee calculations.

B) Collaborate with the marketing department to enhance performance fee disclosures – While collaboration with various departments may occur, the primary collaboration for performance fees is with the fund manager to ensure accuracy.

D) Performance fees are solely determined by external auditors – While external auditors may be involved in the audit process, the calculation of performance fees primarily involves collaboration between the compliance function and the fund manager.

Correct Answer: D)

Under the Funds Management Regulation, investors in closed-end funds typically have the right to vote on significant matters, such as changes to the fund’s investment objectives and termination of the fund. This ensures that investors have a say in key decisions that can impact the fund’s direction and existence. Providing investors with voting rights promotes democratic decision-making and safeguards their interests.

Correct Answer: C

The use of leverage by closed-end funds is allowed under the Funds Management Regulation, but it is subject to regulatory limits to manage risk and protect investors. Utilizing leverage can amplify returns, but it also introduces additional risks. Regulatory limits are in place to ensure that fund managers exercise prudence in employing leverage, mitigating the potential for excessive risk-taking that could harm investors.

Incorrect Options:

A: While leverage is regulated, it is not outright prohibited, as it can be a legitimate strategy when used responsibly.

B: Allowing unlimited leverage could expose investors to undue risk, and regulatory limits are imposed to prevent such situations.

D: The permissibility of leverage is not determined by the fund’s size but rather by regulatory guidelines designed to protect investors.

Correct Answer: B

Closed-end funds can experience liquidity challenges as they do not issue or redeem units daily, unlike open-end funds. The fixed number of units in a closed-end structure means that investors buy and sell units on secondary markets, which may not always provide immediate liquidity. To address liquidity concerns, closed-end funds may implement measures such as share buybacks or tender offers to provide investors with opportunities to exit their positions.

Incorrect Options:

A: The fixed number of units does not necessarily guarantee higher liquidity, as the market demand for the units will influence their tradability.

C: Closed-end funds cannot adjust the number of outstanding units based on demand, as the fixed structure distinguishes them from open-end funds.

D: While liquidity is a consideration, there is no regulatory requirement for closed-end funds to maintain a specific minimum level of liquidity. Measures to enhance liquidity are typically at the discretion of the fund manager.