the fund has a board of directors all of whose members are independent of the fund m 611695

Determining whether a decision-maker is a principal or agent (5)¹⁵

Assume the fact pattern and initial analysis in Example 7.28 above.

However, in this example, the fund manager has a 20 per cent pro rata investment in the fund, but does not have any obligation to fund losses beyond its 20 per cent investment. The fund has a board of directors, all of whose members are independent of the fund manager and are appointed by the other investors. The board appoints the fund manager annually. If the board decided not to renew the fund manager”s contract, the services performed by the fund manager could be performed by other managers in the industry.

Analysis

Although the fund manager is paid fixed and performance-related fees that are commensurate with the services provided, the combination of the fund manager”s 20 per cent investment together with its remuneration creates exposure to variability of returns from the activities of the fund that is of such significance that it indicates that the fund manager is a principal. However, the investors have substantive rights to remove the fund manager the board of directors provides a mechanism to ensure that the investors can remove the fund manager if they decide to do so

In this scenario, the fund manager places greater emphasis on the substantive removal rights in the analysis. Thus, although the fund manager has extensive decision-making authority and is exposed to variability of returns of the fund from its remuneration and investment, the substantive rights held by the other investors indicate that the fund manager is an agent. Thus, the fund manager concludes that it does not control the fund.