Protecting investor interests : an examination of the role of Collective Investment Schemes governance

Abstract

The growth of Collective Investment Schemes (CISs) has been one of the most significant developments in the field of financial intermediation in recent decades. The primary purpose of a CIS is to allow groups of individuals to pool their assets for more effective and efficient management. Consequently, in CISs large amounts of assets are owned by a dispersed group of investors with incomplete information. A corollary of this reality is that the CIS sector is characterised by complex agency relationships as well as asymmetry of information and market power. Good governance is critical to CISs since it helps to ensure better organizational performance, fewer conflicts of interest, higher probability that goals and objectives are attained, and less opportunity for misuse of fund assets. More recently CIS governance has been assigned greater significance due to the serious financial crisis and grievous investment fraud cases uncovered during the past few years, most notorious being that of Madoff. In effect, Bernard Madoff, a prominent hedge fund operator and founder of Bernard L. Madoff Investment Securities LLC, may have fraudulently lost his clients up to $50 billion. He was accused and eventually found guilty of running the largest Ponzi scheme in history, also described as the largest fraud case since Enron. The consequences of the fraud were widespread and did not merely affect investors and creditors but also depositaries of UCITS funds which had entrusted significant amount of assets to Madoff entities. In the light of the above it has been deemed appropriate to conduct a study in the local scenario that assesses the systems or checks and balances in place designed to ensure adequate investor protection. The purpose of this dissertation is in effect to examine whether in the Maltese scenario investors’ interests are sufficiently safeguarded by a robust regime of CIS governance.