Guideline 26. Operational due diligence for internal investment management

Submitted by Anonymous (not verified) on Tue, 07/10/2018 - 09:46

Sufficient procedures are put in place to ensure an appropriate level of operational due diligence is conducted on investing institutions.

Guideline code

INVEST_03100

Mechanism

A policy and procedures manual should exist that sets the operational due diligence process for internal investment managers.
Throughout the operational due diligence process, three key areas should be considered: business, people and process:

Provides significant structural transparency;
Client and fund investment mix are reasonable;
There are no pending regulatory or litigation issues which are deemed significant;
Terms are sensible and easily reconciled (e.g. expenses).

People. Quality and quantity of operational staff need to match the complexity of the business:

Operational staff have appropriate backgrounds and experience;
Proper segregation of duties is documented and demonstrated;
Operations are mostly centralized;
Remuneration structures promote retention and align incentives of personnel with those of the social security institution;
Key staff are identified and succession planning is disclosed.

Process. Operational processes can be complex and so require a range of control practices:

Key policies and procedures are documented;
There are multiple points of oversight (e.g. independent valuations, agreed procedures);
There is diversified exposure to reputable counter-parties (e.g. administrator, auditor, prime broker);
Independent directors are appointed to the board;
A strong compliance culture exists within the institution;
Standardized technology is used for accounting and trading.

Either a separate independent entity should be established to conduct operational due diligence on the internal manager or the process should be outsourced to an appropriate third party.
Operational due diligence should be conducted by a dedicated team which is independent from the team conducting the investment due diligence.
Where operational due diligence is outsourced to a third party, the mandate for the third party to conduct due diligence should be clearly defined and documented.
The operational due diligence process, whether conducted internally or outsourced to a third party, should comprise the following stages:
First, desk-based review to highlight specific areas of focus and/or concern;
Second, on-site visits and follow-up due diligence;
Third, ongoing monitoring from a due diligence perspective.

The management is responsible for ensuring that appropriate operational due diligence is conducted on the investing institution’s investment managers, with appropriate review by the board.
Where the board, management or investment committee lacks sufficient resource, expertise or governance budget to undertake fully informed operational due diligence, the board, or the management or investment committee with board authorization, should seek expert advice or appoint external professionals to carry out these functions.

Parent

Structure

The board should establish the policy that sets the operational due diligence process for internal fund managers.
The management is responsible for ensuring that appropriate operational due diligence is conducted on the investing institution’s investment managers.
The operational due diligence process should cover three key areas: business, people and process.