What Enhanced Regulations Mean for Your Portfolio by Wentworth Graham
(As published in the Sunday Observer, May 25, 2008, pg. 5)
Creating a portfolio is not walk into the park. Apart from having resources to start a portfolio, you must have an investment appetite and willingness to use professional advisors, and this is where things get tricky. In small developing markets like Jamaica, one may say that in addition to choosing adequate professional help, there are also paradoxes between enhanced regulations and an investor’s portfolio. In the eyes of many, enhanced regulations are hindrances to portfolio management, versatility and growth. The good thing however, is that some people do not share this view. I will expose the possible thinking behind their stance and attempt to rationalize and clarify what enhanced regulations means for your portfolio.
The IPS and Enhanced Regulation
Having chosen your professional advisor, who would be a highly trained, accredited practitioner the engagement would begin with the formulation an Investment Policy Statement (IPS). While this does not necessarily create legal obligations, there are fiduciary responsibilities, which based on governance and ethics, your investment advisor would place high value on and commitment to uphold. If your professional advisor intends to give you high quality services, an IPS must be formulated, and this takes into consideration legal and regulatory requirements. It is important to remember that your IPS is a representation of your Objectives, which should incorporate Return and Risk Objectives; and Constraints, which is a function of Time horizon, Liquidity, Taxes, Unique Circumstances and Legal & Regulatory. Some of the Legal and Regulatory issues that could affect your portfolio or the formation of your IPS include:
1. The market’s settlement cycle
2. Rules pertaining to capital transfer
3. Requirements for becoming an investor in the market
4. Guidelines pertaining to estate planning, trusts management, transfers etc.
5. Market Rules – Reporting periods, mergers/acquisition, takeovers, etc.
Clearly, the list is not exhaustive and do not believe for a short moment that the unstated ones are irrelevant. Equally, don’t excuse yourself from the discourse because you are not an institutional investor or someone with a large portfolio.
Good Regulation is good for Business
Actually, it is this thought that creates the clear path in understanding what enhanced regulations means for your portfolio. Like other developing markets, Jamaica’s financial market has traits of information asymmetry, concentrated or ‘Block’ shareholdings and other circumstances that trigger agency problems. In this regard, the RMOC of the JSE is very keen in creating the necessary market oversight to address issues relating to these traits. Enhanced regulations, undoubtedly, will improve market transparency and efficiency, while fostering the contagion of protecting and promoting your portfolio’s IPS thereby satisfying the needs of all stakeholders.
In the global economy, the United States subprime mortgage crisis, which is rather complex, has an unbroken chorus from US lawmakers on Capitol Hill to leading market experts requiring enhanced regulations. Similarly, the debacle that faces France’s Société Générale, which has similarities to the Singapore based Nicholas Leeson escapade with British based firm Baring Brother & Company Limited in 1992, has echoed the calls for enhanced regulations. And currently, Jamaica has its examples and cries as it relates to unregistered financial organizations. Whether we look aboard or at yard, in the past or in the future, it is undeniable that there is a symbiotic relationship between enhanced regulations and your portfolio. Jamaican investors should feel comforted that the expertise and integrity of the Regulatory & Market Oversight Committee (RMOC) will provide the highest standards of market oversight to transfer added value to your portfolio.
Wentworth Graham is the Chief Regulatory Officer at the Jamaica Stock Exchange.