The definition of investment firm requires the firm to meet a number of criteria, such as GIPS, Record-keeping, Minimum capital, and Disclosures. ESMA argues that these provisions should be read in conjunction with Article 2(1), as without the latter, persons who fall under this category would not need to be authorised as investment firms.
GIPS requirements for investment firms
The GIPS standards are intended to provide investors with transparency about investment performance and risks. This is achieved through proper firm definitions, compliance with applicable laws, and consistent presentation to prospective clients. In addition, firms must disclose all supplemental information relevant to investors. For more details, consult the GIPS Handbook.
As the investment management industry grows globally, GIPS requirements are increasingly important. In addition to ensuring the accuracy of performance data, GIPS standards also require investment firms to provide investors with a minimum of five years of compliant performance history. If a firm only publishes its last two years of performance history, investors may only see positive results. It is important to provide investors with information on previous years, as this can help them make better investment decisions. GIPS standards also enhance investor confidence.
Smaller managers with private client bases are less likely to be required to follow GIPS. However, after the mid-90s scandals, GIPS gained traction among long-only managers in Europe. Today, more than 50% of hedge fund managers must comply with GIPS. GIPS has been endorsed by the CFA Institute, the National Association of Pension Funds, and sponsoring bodies in 32 countries.
GIPS requirements for investment firms can help investors make better investment decisions. By allowing asset owners to compare performance across different firms, they can easily understand the sources of risk and excess return. These standards are also supported by regulators. The SEC has taken a critical view of managers that claim to be GIPS compliant but haven’t met the standards.
The GIPS standard is designed to measure the performance of investment firms, including the asset performance of sub-advisors. The definition of a firm also defines how to judge which portfolios must be included in a composite. It also requires the firm’s geographical offices marketed under the same brand name.
GIPS compliance also requires firms to make reasonable efforts to provide a GIPS-compliant performance presentation. In addition, firms must provide a complete list of their composites, including any that were terminated within the last five years. Firms must also define their firm and disclose the total assets managed by the firm. This list includes all types of accounts and assets managed by the firm.
Record-keeping requirements for investment firms
As an investment advisor, it is your job to keep accurate and complete records of transactions involving client money. This is required by federal securities laws, MSRB rules, and FINRA rules. Among other things, record-keeping requirements include archiving all written communications with clients, including transactions regarding investment strategies, purchases and sales of securities, and explanations of rebalancing. The rules are designed to ensure that a firm’s clients are aware of every financial transaction involving their money.
RIA firms are also required to keep documents related to marketing and advertising to prospective clients. These materials must be retained for at least three years. When the branch is closed, the records must be transferred to the home office. The firm may choose to maintain electronic copies of these records, but must make sure to retain hard copies when the client requests them.
Investment advisers must put safeguards in place throughout the retention period to protect the records from unauthorized access. They do not need to keep all records in a database for three years, but they must be ready to produce them upon request from an inspector. Routine SEC inspections are not uncommon, so having a strong record-keeping system is crucial.
These regulations also apply to investment advisers and funds. Registered advisers must comply with the requirements set forth by the Investment Company Act. In addition, investment advisers and funds must follow rules governing electronic communication. This includes emails between registered representatives. This rule will affect even small advisers and funds.
Investment advisers are required to retain email correspondence as part of their records. The SEC has broad powers to review emails sent to and from clients. Even an innocuous email inviting a client to a company social event may fall under SEC records-keeping requirements. It is therefore important to retain all emails relevant to these records.
FINRA rules require firms to maintain certain records for at least six years. There are some exceptions to these rules. However, the six-year retention period is the default retention period. This applies to records made by or for the firm while the company is in operation, and for three years after the company ceases operations.
Minimum capital requirements for investment firms
Under the new regime, investment firms will be required to calculate their own capital requirements, based on a set of K-factors. These factors take a number of factors into account, including the need to provide full coverage and the various ways in which investment firms service customers. Each K-factor is multiplied by the total number of client assets under management.
In addition to capital requirements, investment firms are also subject to the Markets in Financial Instruments Directive. The Regulation will also amend existing prudential rules for investment firms, including the Capital Requirements Directive and the Markets in Financial Instruments Directive. The revised regime also includes provisions regarding governance, reporting, and remuneration.
Firms that are Class 2 must report on their capital requirements on an annual basis. These new reporting requirements will cover how they calculate their capital requirements, their activity levels under Class 2 conditions, and their liquidity requirements. Class 3 firms, however, do not have to report on these issues. While the revised requirements will give some relief to firms accustomed to quarterly reporting, there is still no clear guidance on how the new regulations will affect their businesses.
Investment companies must maintain a certain minimum capital level before they can begin offering their shares publicly. These requirements are set forth in the Investment Company Act. A company must have sufficient capital in order to conduct business and meet its obligations to investors. This capital must come from investors who have a bona fide investment purpose and not from the promoters or the owners of the firm.
Under K-CMH, investment firms must hold a specific amount of capital to cover potential harm posed by their portfolios. This capital must be proportional to the balances of their clients’ accounts. The regulation also requires investment firms to report on their concentration risk if they have large amounts of concentrated exposures.
Investment firms must also hold sufficient liquidity to meet their own funds and liabilities. The capital requirements are based on the risk the firm faces and the complexity of their activities. Firms must also have appropriate systems and controls to monitor these requirements.
Disclosures required by investment firms
The introduction of the new prudential regime brings new reporting and disclosure requirements for investment firms. This new framework aims to ensure the orderly management of investment firms while protecting the interests of investors. It also seeks to minimise the burden on firms by ensuring the consistency of reporting and disclosure requirements. But what exactly do the new rules mean?
To comply with the Securities and Exchange Commission (SEC) rules, investment firms must provide detailed information about their business, their investment strategies and their financial data. In addition, companies must provide information about the risks associated with their investments. This information is mandatory for investment firms and brokers, and is subject to SEC regulation.
The proposed new rules will affect all registered investment companies, investment advisers, and BDCs. They will require these entities to provide investors with more information, particularly on ESG factors. These new rules are expected to affect investment firms that offer ESG-focused funds, as well as other types of investment products. The changes are expected to result in significant changes in the way fund managers market their products.
Disclosures required by investment firms vary depending on the type of firm. Class 2 investment firms must provide quarterly reports to the competent authority (DNB), while class 3 firms can only report annually. Nevertheless, firms must disclose their own funds, including a reconciliation. If they don’t provide such information, the FCA may issue a notice.
Regulatory bodies also have differing views on the best way to disclose ESG information. For instance, the EU Taxonomy has a technical screening criterion for sustainable economic activities, and the SEC’s proposal includes a threshold for environmental sustainability. Both approaches provide investors with useful information to help them make an informed decision.
Investment firms also must provide details on the methods they use to calculate ESG-related metrics, such as ESG scores. It is essential to understand how the metrics are calculated and the limitations associated with them. Similarly, a fund must also disclose whether it follows third-party ESG frameworks.