Determining whether a decision-maker is a principal or agent (2)12
A decision-maker establishes, markets and manages a fund that provides investment opportunities to a number of investors. The decision-maker (fund manager) must make decisions in the best interests of all investors and in accordance with the fund”s governing agreements. Nonetheless, the fund manager has wide decision-making discretion. The fund manager receives a market-based fee for its services equal to 1 per cent of assets under management and 20 per cent of all the fund”s profits if a specified profit level is achieved. The fees are commensurate with the services provided.
Analysis
Although it must make decisions in the best interests of all investors, the fund manager has extensive decision-making authority to direct the relevant activities of the fund. The fund manager is paid fixed and performance-related fees that are commensurate with the services provided. In addition, the remuneration aligns the interests of the fund manager with those of the other investors to increase the value of the fund, without creating exposure to variability of returns from the activities of the fund that is of such significance that the remuneration, when considered in isolation, indicates that the fund manager is a principal.