FIN1085B Transfer Agency Assignment: WMAM Case Study on TA Duties, Due Diligence & CDSC Calculation

Background:

Beta Securities Services (BSS) is a relative newcomer to the highly competitive Hedge Fund Servicing sector. Headquartered in Ireland, this disruptor has come to the table backed by a really strong Artificial Intelligence (AI) platform which BSS believes will give it an edge on many of the longer established firms in this space. The business development team in BSS have been very active in approaching the second-tier clients of the opposition firms. Many of these prospective clients feel they were merely a number on the books of these larger, mainly US, institutions in the securities servicing space. To date, BSS has been quite successful, but the team has now been approached by an Asset Manager, We Manage AM (WMAM), which is regarded as a prime-tier target customer and would be a huge coup for BSS.

However, WMAM has a number of areas that they need to ensure the new BSS platform, and personnel, can deal with in an efficient and compliant manner:

1. Carrying out the role of a Transfer Agent and Distribution of Dividends
2. Client Due Diligence – The forms of Due Diligence and covering UBO & PEPs
3. Understanding upfront fee structures and calculating CDSC

The role of Transfer Agent (TA) is an important feature of the services required by WMAM. This aspect of the BSS platform has been built around the principal duties of a TA as outlined by the AIMA / IFA guide. WMAM, sees the TA offering as critical to their decision to appoint BSS, or not, and they want a full description, not just a listing, of the roles of a TA in this respect. WMAM are particularly interested in the role of the dates involved when dealing with the distribution of Dividends – ex-Date, Record Date, Run Date and Pay Date. Each of these dates has to be explained alongside the general role of the TA.

WMAM is aware that they have investors in their funds that would be from well-connected political and governmental backgrounds. This appears to have some impact when it comes to client onboarding in Europe. With the continuing regulatory emphasis on the importance of Due Diligence, when onboarding and managing client relationships, WMAM want a full explanation of the forms of due diligence that can occur and why. These inputs need to cover the basics but also the importance of areas such as Ultimate Beneficial Owner (UBO) and Politically Exposed Persons (PEPs) and what is required regarding these people. WMAM want to ensure that the BSS platform can carry out the required processes.

Finally, WMAM, as a hedge fund, is always looking for ways to reduce cashflows going out and so are not inclined to pay fees until they have to. They are looking for a description of the two main methods of calculating an initial sales commission that can be charged when the shareholder enters a fund. These need to be given a brief explanation. However, the preference for WMAM is to use the Contingent Deferred Sales Charge (CDSC) method and have given BSS a sample set of purchases and redemptions to ensure the platform can calculate the CDSC charge itself and what the net redemption would be after this fee has been paid. The details of the sample fund are given in Appendix 1.

You are the business development lead for new Hedge Fund clients within BSS and have to produce a briefing note for WMAM to cover their requirements. In this context you must cover the following matters in your note:

a) Outline the role of the Transfer Agent and the principal duties that they have to undertake. Picking four or five of the most valid points would be deemed sufficient when accompanied by a clear description of what is involved. Describe the dates involved in the process of paying out dividends on investment funds giving an overview of what occurs at each of these points in time.

b) Outline the various types of Due Diligence processes that can be undertaken. Explain the concepts of Ultimate Beneficial Owner (UBO) and Politically Exposed Persons (PEPs) and where they need to be considered in the context of the DD processes.

c) Describe the two main methods used to calculate an up-front fee for an investor into a fund. Using the sample set of WMAM purchase and redemptions data, given in Appendix 1, please calculate and give brief descriptions of each step undertaken to find the Contingency Deferred Sales Charge (CDSC) and Redemption Proceeds of these sample investments. Please explain why funds would use such a mechanism instead of the up-front versions and give the two final figures you calculate.

Assignment Instructions:

To complete this assignment, you are required to prepare a memo outlining the areas requested in the background given.
This memo should consist of two main parts of 300 words each (plus or minus 10% leeway), in respect of the various inputs looked for in Parts a) and b) given above.

Part c) should reflect calculations needed with appropriate notes to each tranche and not just figures:The answer should be easy to understand and laid out in both a prose style and showing detailed calculations where appropriate. Tables setting out figures and calculations are not sufficient.

Assignment Expectations:

Please ensure that your memo is well-presented and written in a way which will clearly and concisely identify the relevant issues and solutions.

It is expected that you will deliver a clear and precise illustration of why the CDSC process is used, the calculated cost involved, and the Redemption Proceeds which would have to be delivered for clients looking to undertake such a process. It is important that the correct calculations are clearly identified, and full details of the constituent parts are given to accompany the figures. Without a clear description such outputs are not sufficient and just listing the figures is not acceptable.

Note: Please clearly state your word count at the end of each subsection.

Guidelines for completing assignments:

1. Answers should be based on webinar notes, reading of literature assigned, and independent desk-based research;
2. Answers to the essay style questions in a) and b) required is 300 words each, plus or minus 10%.
3. Answers should be in prose/narrative style; well-laid out with a logical structure; clear opening, middle and closing parts; and discernible pattern underlying in terms of core arguments made. Where calculations are required, a step-by-step full workout must be shown.

Skills expected to be utilised:

1. Show your technical knowledge and personal insights whilst illustrating an understanding of the issue of Money Laundering and the regulations and activities in place to combat this activity.
2. The worked example of CDSC should be laid out in a manner that a non-professional could understand. It is vital that all workings are shown, the relevant tranches high-lighted and written explanations are given as to why a certain calculation is being used.

IMPORTANT NOTE: Appendix 1 gives details of the sample test data used and is instrumental in preparing your briefing note. Please use these figures and do not make up your own set as an illustration as you will not gain the marks available for this part of the assignment if you do not use the sample test data.

Appendix 1

The Test Fund

Transaction Data

Sale Instruction

An instruction to sell 19,500 shares was received and executed for value 13 June 2024 when markets had moved to a new high where the applicable NAV was €25.50.