Review of the Managed Investments Act 1998

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 Submissions - Paul Dortkamp


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Managed Investments Act Review
c/o Financial Markets Division
The Treasury
Langton Crescent
Parkes ACT 2600

Dear Sir

I am an external member of three compliance committees and a co-founder of the Independent Compliance Committee Member Forum (ICCMF). I am also the co-author of the Securities Institute course "Compliance in Practice for Fund Managers" launched in 1998.

My comments on the effectiveness of the arrangements introduced under MIA are;

There is now greater certainty of the responsibilities and obligations of the Responsible Entities. The activities that I see in RE's leave me in no doubt that the directors and management of RE's see themselves with the ultimate responsibility for investors assets

From my time as a fund manager with major Australian fund management groups, I have witnessed the growth of a vigorous compliance culture within successful fund management firms. In the early 1990's compliance was mainly centred on adherence to the investment mandate. Over time this was widened to include the wider responsibilities of a fund management firm. I looked back over the titles on my business cards, by the mid 1990's my business card had changed from "Head of Asset Allocation" to "Head of Asset Allocation & Risk Management", reflecting the growing importance of risk management and compliance within a fund management organisation. The compliance function was formalised within the investment management division but was quickly developed into a full time role with a separate reporting line to the senior management. MIA took this responsibility a step further by formalising the compliance plan into a key part of the management process of fund management firms.

There have been many questioning the function of compliance committees and I would like to take the opportunity of outlining the developments in this area

Membership of a compliance committee established under the Managed Investments Act, created many challenges. Independent compliance committee members sought to increase their knowledge and understand their responsibilities.

To assist in dealing with the challenges, Paul Dortkamp of Rivergum Investors and Anne Ridgway of A&G Ridgway, established the Independent Compliance Committee Forum in March 1999. Each month we have an informal lunch where we feature a speaker on a topic of interest. An ASIC representative usually gives an update. While the discussion is oriented towards independent compliance committee members, compliance professionals are welcome to attend.

Sydney
For details on Sydney Forums contact Paul Dortkamp at pdortkamp@rivergum.com or Anne Ridgway at ridgwaya@mpx.com.au. The meeting dates for Sydney Forum meetings in 2001 are available on www.rivergum.com/forumdates Meetings in Sydney are held in the middle of the months and rotate over Tuesdays, Wednesdays and Thursdays to assist members with regular scheduled meetings. For 2001 meetings will be held at Ernst & Young, Meeting Rooms, Level 20, 321 Kent Street, Sydney.

There is no membership fee. Anyone wishing to join the Independent Compliance Committee Forum in Sydney should send an e-mail to Paul Dortkamp at pdortkamp@rivergum.com and you will be added to the email distribution list. E-mail notices with details of the next meeting are usually sent out early each month. There are approximately 220 people on the Sydney distribution list and approximately 80 attend the forum each month. Around half those attending are compliance committee members.

Melbourne
For details on Melbourne Forums visit intertextual at http://www.intertextual.com.au/iccmf.html. Melbourne has around 150 on the distribution list, around 70 people attend each month, and approximately a third are compliance committee members.

Brisbane
For details on Brisbane Forums contact Karen Prentis at karenprentis@one.net.au. Brisbane has around 60 on the distribution list, around 20 people attend each month, and approximately a third are compliance committee members

IFSA Conference
The Independent Compliance Committee Forum ran five concurrent sessions at the IFSA conference in 2000, our final session attracted 120 delegates. We participated again in 2001 at the IFSA Conference held in Brisbane from Tues 31 July - Thurs 2 August and ran five concurrent sessions, including a session where ASIC released its information on its surveillance visits on RE's.

It is my belief that MIA has been the catalyst for a huge lift in the standards of compliance related activities in fund managers. This is not to say that all managers have achieved an optimum level, there is room for improvement at all levels, the model is working well and there is a substantial amount of compliance momentum within RE's.

A significant breakthrough has been the healthy acceptance of compliance breaches as examples of compliance in practice, rather than as evidence of failure. I urge that this healthy acceptance is maintained and that exceptions are not trivialised into marketing or political point scoring directed at individual managers. Running an RE is a demanding role and there will be errors. What is important, is how these are used to make organisations stronger, rather than fostering a culture of fear. I have seen many examples where individuals have "self-declared" compliance plan breaches removing the petty game of "see if you can catch me" and adopting a responsible attitude of "this has happened, how do we remedy it and who will see this through to completion".

My suggestion for refinement is:

An area of concern to members of compliance committees is the issue of professional indemnity insurance under the existing Directors and Officers policy. A minority (including some at ASIC) narrowly interpret the provisions of the MIA to mean that external members have to seek their own insurance. The majority broadly interprets the Act to allow them to be included in the RE's D&O policy, which is my own view. Insurers such as AIG have newer policies framed specifically for the provisions of MIA and clearly cover external members of Compliance Committees. In other cases compliance committee members are added as additions to the standard policy. My suggestion is that the legislation makes clear that external members of Compliance Committees may be coved by the RE's policy. I reject totally the view that external members of Compliance Committees should carry their own insurance. The cost to individuals would be prohibitive and the nature of claims incurred policies would crate a burden for indefinite years following resignation from a Compliance Committees. The incremental cost of adding external members of Compliance Committees to existing policies is close to zero and cover continues after resignation. Individual polices for external members of Compliance Committees, if available, would vastly raise the cost and deter the risk conscious individual that are well suited to roles as external members of Compliance Committees. These changes should be very carefully worded after consultation with external members of Compliance Committees; poor drafting could create a flight of experienced external members from Compliance Committees.

I speak to a large number of external members of Compliance Committees and insurance is an area of continuing concern and is almost always raised by new external members of Compliance Committees.

As a person who has worked in the Australian securities industry for 30 years, my view is that the MIA regime has significantly increased the level of investor protection.

Yours faithfully

Paul Dortkamp

 

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