Regulatory framework and conduct standards for fund management
Scope of this section
Module 9 tests whether you can apply the licensing and conduct rules that govern a person who manages other people's money in the Malaysian capital market, and whether you can spot a breach inside a short scenario.
Core rules
- Fund management is a regulated activity under the Capital Markets and Services Act 2007. The firm needs a Capital Markets Services Licence (CMSL) for fund management; the individual who performs the activity needs a Capital Markets Services Representative's Licence (CMSRL).
- The activity covers managing a portfolio of securities or derivatives for another person, and managing a collective investment scheme (CIS). Discretion is the hallmark: the manager decides, the client does not approve each trade.
- Duties owed to the client: act honestly and in the client's best interests; exercise skill, care and diligence; keep client assets segregated from the manager's own; maintain records; disclose fees, conflicts and risks in terms the client can understand.
- Suitability: collect know-your-client information (objectives, horizon, risk tolerance, financial position), document an investment policy statement or mandate, and invest within it.
- Personal account dealing by staff is restricted: pre-clearance, no front-running client orders, no preferential allocation of hot issues, no leaking of order information.
- AML/CFT duties run alongside: customer due diligence, source of funds, ongoing monitoring, suspicious transaction reporting.
Worked example
A portfolio manager learns at 9am that her fund will buy a large block of Stock X. At 9:05 she buys Stock X for her own account, then executes the fund's order at a higher price. Analysis: two breaches - personal dealing without pre-clearance and front-running, which puts her interest ahead of the client's. The conduct breaches the best-interests duty regardless of whether the fund still made a profit.
Marks that are usually lost
- Mixing up the firm licence (CMSL) with the individual licence (CMSRL).
- Treating best efforts as the standard - the standard is best interests of the client.
- Assuming a conflict is cured by disclosure alone when the rule requires it to be managed or avoided.
- Forgetting that client money must sit with a custodian or trustee, not on the manager's own balance sheet.