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CS Professional · IFSCA - Regulations, Listing and Compliances · Fund Management Services

Himalaya Asset Managers, an FME in GIFT IFSC, proposes to name its Head of Portfolio Management, Mr. Rao, as compliance officer as well, to save cost. Rao would approve the investment decisions that he then checks for compliance. What is the correct assessment?

The proposal is not appropriate. The compliance function has to be independent of investment decision-making. Rao would be checking decisions he approved himself, which is a conflict of interest. Experience, quarterly board reporting or a small size does not remove that conflict.

  1. AAcceptable, because senior investment experience makes compliance checks stronger
  2. BAcceptable, provided Rao reports quarterly to the board
  3. CAcceptable, if the FME is a small non-retail manager
  4. DNot appropriate, because the compliance function must be independent of investment decision-makingCorrect

Explanation

A compliance officer who reviews his own investment decisions has a conflict of interest, so the function must be independent of portfolio management. Seniority, reporting to the board or small size does not cure the conflict.

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