- investment managers – to manage the portfolio of investments;
- marketing companies – to advertise and promote the funds;
- selling agents – to actively sell the funds‘ shares or units;
- administrators – to perform accounting and servicing functions;
- registrars or transfer agents – to maintain the registers of share- or unit holders.
Sometimes, it is the trustee of a trust who not only has responsibility for the safe custody of fund assets but also has responsibility for maintenance of the register of holders. More typically it is the manager who fulfils that duty, if necessary by delegated appointment by the trustee. Regulations typically require that the manager does not perform the function of custodian of fund assets, and that this is the responsibility of an independent custodian, depositnry or trustee, in whose name the fund‘s assets are to be held or registered.
Though these third parties are usually regulated firms themselves and appointed by the manager, they are accountable to the shareholders and the regulators for the safe-keeping of the fund‘s assets, whether under their control directly or via the services of a sub-custodian. This is one function that may not normally be delegated to the manager, any more than the manager may delegate the function of investment management to the custodian, depository or trustee. This separation of responsibility is at the heart of investor protection, although, of course, protection is limited to safe-keeping and does nothing to protect against falling markets or incompetent portfolio management.
Another usual regulatory requirement is for the manager‘s obligations to maintain records and to prepare accounts to be subject to audit by a qualified person or firm, typically a’registered auditor’. The frequency of an audit may vary but auditors are usually required to examine the books and records at least once a year and to report to the fund‘s shareholders annually.
Compliance with detailed regulations governing the operation and marketing of a fund is the direct responsibility of the manager but the auditor and, in certain key respects, such as valuation, pricing and investment constraints or limits, the custodian/ depositary/trustee will have duties of oversight.
A number of factors and considerations determine the extent to which a manager will `outsource’ functions, including restrictions imposed by regulations. Much will depend upon the background of the management firm and why it has become involved with investment funds. Managing its clients’ investments, particularly its smaller clients’ portfolios, through the medium of a mutual fund, is a natural, economic and administratively convenient step for a stockbroker or asset manager to take and it is likely that it will perform all the necessary functions itself. By contrast, a firm that has established a mutual fund on the back of its reputation in a non-investment field will almost certainly rely on specialist third parties to provide it with all the necessary functionality. Examples from the UK include Marks & Spencer and Virgin, together with several of the banks and building societies that set up investment funds as a defensive measure to avoid the loss of deposit funds when investment returns are superior. As a general matter, outsourcing administrative functions, particularly registration/transfer agency and fund accounting but also dealing and investor servicing, has seen significant growth in recent years.