Compliance

George Hallam edited this page Mar 27, 2017 · 11 revisions

Overview

We are dedicated to providing a solution to Melon protocol participants who want setup legally compliant portfolios.

The below is intended simply as an example mirroring some common best industry practice ideas and do not under any circumstances suggest that the below is relevant for users. Each user should research the rules and regulations of their respective jurisdictions and apply them appropriately.

Best practices in compliance might take the form of;

  • Identity management of Fund Manager or Corporate Entity KYC/AML
  • Identity management of Individual Investors KYC/AML
  • Processing Investors eligibility through an Eligibility Engine

Lets start with Identity Management of Fund Manager or Corporate Entity

A Fund Manager KYC/AML might include;

  • Civil ID (eg. passport)
  • Utility bills (proof of residence)
  • Source of funds
  • Proof/ knowledge in financial instruments
  • Multsig info for other authorised parties

A Corporate Entity's KYC/AML might include;

  • Regulatory status (if regulated, move to "light" KYC/AML version)
  • KYC/AML "light" = provide proof of regulatory authorisation and corporate permission
  • Civil ID (eg. passport)
  • Utility bills (proof of residence)
  • Source of funds
  • Proof/ knowledge in financial instruments
  • Multsig info for authorised parties
  • Company information (eg. articles of association)
  • Directors names (KYC/AML preferable on them too)
  • KYC/AML on any company owners with > 20% equity in the entity

Now lets consider; Identity management of Investors KYC/AML Typically, it is important to determine whether an investor is qualified as a retail investor or a professional investor

The qualification of each client will typically determine the regime of protection given to the investor (typically retail investors get maximum protection and professional investors get less protection)

An investor (individual or legal entity) would typically be qualified as a professional if they meet the following criteria;

Individuals At least two of the following criteria should be fulfilled:

  • Individual must hold a portfolio of financial instruments worth more than €500,000;
  • Individual must have carried out an average of at least ten trades per quarter in financial instruments, all of which significant in size, over the previous four quarters;
  • Individual must have held a professional position in the financial sector for at least one year that required knowledge of investments in financial instruments.

Legal Entities The legal entity must be either:

  • Be an authorised legal entity
  • State/public public
  • Large undertakings, fulfilling at least two of the following criteria:
    • A total balance sheet of at least €20 million,
    • Net sales or net revenues of at least €40 million, - Shareholders’ equity of at least €2 million;

Any individual or entity not meeting the above criteria would automatically default to being qualified as a retail investor.

The Eligibility Engine

Now that we have a rough idea which information should be collected from a KYC/AML, we can easily run this through the eligibility engine module to determine whether the investor is suitable or not for the fund structure they want to invest in.

Example: If fund A wants to make itself available only to professional investors in order to adhere by its own legal requirements, they can overlay an eligibility engine which scans for the necessary requirements and only lets investment passes through once it has found all the necessary KYC/AML data to approve professional status.

Expiration and Update mechanism

Rules & regulations change all the time, so one potential solution is for the eligibility engine to have the option to expire every six months or so in order to give the opportunity for updates to be made to the eligibility engine.