CAIA Level II Glossary

marketing passport

A marketing passport permits marketing across the EU as a single marketplace for the marketing of AIFs to professional investors.

positive model

A positive model attempts to describe how people and prices actually behave.

qualified purchaser

A qualified purchaser is either (1) a natural person with at least $5 million in investments, (2) an institutional investor with at least $25 million in investments, or (3) an entity of which each beneficial owner is a qualified purchaser.

Form PF

A registered investment adviser with regulatory assets under management attributable to private funds exceeding $150 million is required to file Form PF with the SEC. The form requires information on fund size, leverage, investor types and concentration, liquidity, and fund performance. Hedge fund managers must also include information regarding their investment strategy, counterparty credit risk, and use of trading and clearing mechanisms.

AIFMD key features

AIFMD key features include, among others: (1) AIFMs managing AIFs must be authorized, unless an exemption is available, (2) restrictions are placed on the levels of remuneration for senior management and risk-takers, (3) AIFMs are required to set a maximum level of leverage for each AIF, and (4) AIFMs are required to manage and monitor liquidity risks and conduct regular stress tests.

abstract models

Abstract models, also called basic models, tend to have applicability only in solving real-world challenges of the future.

access persons

Access persons include the adviser's directors, officers, partners, and supervised persons who have access to nonpublic information regarding securities transactions.

twelve matters regulated under the Advisers Act

Among other matters, twelve matters regulated under the Advisers Act are (1) advisory agreement terms, (2) performance fees, (3) client solicitation, (4) political contributions, (5) trading practices, (6) advertising, (7) record-keeping, (8) personal securities reporting, (9) custody, (10) proxy voting, (11) compliance program, and (12) gifts and entertainment.

advertisement

An advertisement includes any written communication addressed to more than one person, or any notice or other announcement in any publication or by radio or television, that offers any analysis, report, or publication regarding securities; any graph, chart, formula, or other device for making securities decisions; or any other investment advisory services regarding securities.

Section 13(d) of the Exchange Act

An adviser who beneficially owns, in aggregate, more than 5% of a class of publicly traded voting equity securities may be required to file disclosure reports identifying, among other things, the source and amount of funds used for the acquisition and the purpose of the acquisition.

adviser's legal obligation includes

An adviser's legal obligation includes delivering Form ADV Part 2 to its clients initially, annually, and when certain disclosure items are updated.

endogenous variable

An endogenous variable is determined inside a model and therefore takes on whatever value the model prescribes.

exogenous variable

An exogenous variable is a value that is determined outside a model and is therefore taken as a given.

Section 13(f) of the Exchange Act

An investment adviser managing discretionary accounts, that, in aggregate, hold publicly traded equity securities with an aggregate fair market value of $100 million or more may be required to file reports disclosing those holdings and the type of investment and voting authority exercised by the manager.

anti-fraud prohibitions

Anti-fraud prohibitions include that it is unlawful to employ any device, scheme, or artifice to obtain money or property by using material misstatements or omission, or to engage in any transaction, practice, or course of business that operates or would operate as a fraud or deceit upon the purchaser.

arbitrage-free models of the term structure

Arbitrage-free models of the term structure (also referred to as second-generation models) use a different approach to model bond prices and the yield curve that is parametrized based on observed current interest rates.

SEC's responsibilities

As the primary overseer and regulator of the US securities markets, the SEC's responsibilities include protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.

asset stripping rules

Asset stripping rules prevent an AIF from making a controlling private equity investment, having the nonlisted company take a loan, and then distributing the loan proceeds to themselves, and thereby creating leverage that may or may not create unnecessary risk.

blue sky laws

Blue sky laws in the US are a state's own set of securities laws designed to protect state interests and prevent fraudulent activities within its borders.

cap and trade

Cap and trade is a government program regarding pollution or other externalities that specifies caps (allowances) on the activity for each entity but allows each entity to trade its rights (e.g., its allotment of pollution).

cause exams

Cause exams are triggered by tips, complaints, and referrals.

cross-sectional models

Cross-sectional models analyze relationships across characteristics or variables observed at a single point in time such as when investment returns are used to explain the differences in risk premiums.

cybersecurity

Cybersecurity concerns include a broad range of risks such as threats through cyber intrusion, denial of service attacks, manipulation, misuse by insiders and other cyber misconduct. An adviser is required to safeguard client information, thus advisers are expected to properly consider and address cybersecurity related risks.

equilibrium models of the term structure

Equilibrium models of the term structure (also referred to as first-generation models) make assumptions about the structure of fixed-income markets and then use economic reasoning to model bond prices and the term structure of interest rates.

Financial Industry Regulatory Authority (FINRA)

Financial Industry Regulatory Authority (FINRA): Overseen by the SEC, FINRA is a non-governmental, self-regulatory organization (SRO) that supervises and regulates the broker-dealer industry to ensure that it operates fairly and honestly, including writing and enforcing rules governing the activities of all registered broker-dealer firms and registered brokers in the US.

greenwashing

Greenwashing occurs when investment promoters mislead prospective investors with overstated claims regarding the likely social impact of an investment opportunity.

host state

Host state refers to the EU country (other than the home country) where the AIF is being marketed.

illegal insider trading

Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security and may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information.

impact investing

Impact investing is the inclusion of ESG and related issues in the asset allocation and security decisions of the investor with the goal of generating positive environmental and social influence alongside financial returns.

engagement strategy

In an engagement strategy, an investor with a long position in the stock starts a dialogue with the company with a specific agenda on how to improve the ESG standing of the company.

tragedy of the commons

In economics, the tragedy of the commons is the problem that individuals or entities will tend to overconsume or undervalue natural resources and other assets that are available for common use (i.e., shared or non-excludable) since the costs are borne by all.

normative model

In financial economics, a normative model attempts to describe how people and prices ought to behave.

investment adviser

In the US, an investment adviser is any person or firm that, for compensation, is engaged in the business of providing advice to others or issuing reports or analyses regarding securities.

negative or exclusionary screening

Investors focused on negative or exclusionary screening, choose not to invest in entire industries of publicly traded companies due to the firm's involvement in activities deemed objectionable, often based on the morals or religion of the investor.

marketing of AIFs by AIFMs

Marketing of AIFs by AIFMs is allowed by: (1) using a marketing passport available under the AIFMD that provides that once a fund is approved in one EU member country, the AIF can be marketed to professional investors located in other EU countries, and (2) marketing in a specific EU member country in accordance with that country's private placement regime, subject to certain conditions being met.

mission-related investments (MRI)

Mission-related investments (MRI) are investments viewed as offering a combination of ESG impact as well as financial return.

National Futures Association (NFA)

National Futures Association (NFA): The NFA was designated a registered futures association in 1981 and charged with the role of a self-regulatory organization (SRO). The NFA is responsible for the regulation of firms and individuals that engage in futures trading with and for investors.

national private placement rules

National private placement rules impose rules for selling non-EU funds in the EU at an EU level, but also each EU member country may impose their own requirements on any sale of fund interests within their own border.

negative externalities

Negative externalities are adverse consequences on third-party entities caused by contracts or transactions controlled by two or more primary parties and can include pollution, noise, congestion, and other potentially deleterious consequences to parties that did not have control of the contract or transaction.

Open Protocol

Open Protocol provides a standard and consistent framework around: (1) Data and inputs, (2) calculations and methods, (3) timely and regular reporting, and (4) protocols and standards, where appropriate.

panel data sets

Panel data sets combine the two approaches by tracking multiple subjects through time and can also be referred to as longitudinal data sets and cross-sectional time-series data sets.

private interest theories of regulation

Private interest theories of regulation view regulation as primarily emanating from self-interested motivations of various parties including legislators and other government employees as well as business competitors and industry groups.

program-related investments (PRI)

Program-related investments (PRI) are investments offering ESG impact and no financial return or offering a combination of ESG impact as well as a sub-competitive risk adjusted financial return.

proxy voting

Proxy voting is where shareholders vote on issues put up for election by management, typically focused on routine elections of board members and service providers.

qualified opportunity zones

Qualified opportunity zones are geographical areas in the US designated for special income tax breaks for investors funding private equity projects and real estate developments in those zones.

SEC registration requirements for non-US hedge funds

SEC registration requirements for non-US hedge funds is triggered for funds with more than 15 US clients and investors with assets under management of more than $25 million unless exempted for an adviser solely advising private funds with less than $150 million in assets under management (i.e., the private fund adviser exemption).

sin stocks

Sin stocks include firms profiting from products and services such as gambling, tobacco, or alcohol sales.

sweep exams

Sweep exams (or theme inspections) are used to review a compliance issue that the SEC considers a risk across multiple firms.

European Banking Authority (EBA)

The European Banking Authority (EBA) has as its main objective to safeguard the integrity, efficiency, and orderly functioning of the banking sector.

European Insurance and Occupational Pensions Authority (EIOPA)

The European Insurance and Occupational Pensions Authority (EIOPA) is responsible for occupational pensions and insurance.

European Securities and Markets Authority (ESMA)

The European Securities and Markets Authority (ESMA) is responsible for safeguarding the stability of the EU's financial system by enhancing investor protection and promoting orderly markets and financial stability, and has the power to write technical standards and bring about systems of mutual recognition. ESMA's role in the AIFMD is one of legislation.

European Systemic Risk Board (ESRB)

The European Systemic Risk Board (ESRB) is an independent body within the EU responsible for macro-prudential oversight of the financial system within the EU.

Financial Instruments and Exchange Act (FIEA)

The Financial Instruments and Exchange Act (FIEA) and The Act on Investment Trust and Investment Corporation (ITIC) are the primary legislation for the regulation of asset management activity in Japan.

The Act on Investment Trust and Investment Corporation (ITIC)

The Financial Instruments and Exchange Act (FIEA) and The Act on Investment Trust and Investment Corporation (ITIC) are the primary legislation for the regulation of asset management activity in Japan.

Financial Investment Services and Capital Markets Act (FSCMA)

The Financial Investment Services and Capital Markets Act (FSCMA) and its regulations are the primary legislation for the regulation of asset management activity in South Korea.

Financial Services Commission (FSC)

The Financial Services Commission (FSC) is the primary regulator in South Korea and directs the Financial Supervisory Service (FSS).

Financial Supervisory Service (FSS)

The Financial Supervisory Service (FSS) in South Korea is responsible for inspection of financial institutions as well as enforcement of relevant regulations as directed by the FSC.

G4 Materiality Principle

The G4 Materiality Principle asserts that: "[An ESG-related] report should cover aspects that: reflect the organization's significant economic, environmental, and social impacts; or substantively influence the assessments and decisions of stakeholders."

The Global Reporting Initiative (GRI)

The Global Reporting Initiative (GRI) is a non-governmental organization (NGO) that promotes improved reporting principles and disclosure of ESG-related issues through the development of the GRI Standards.

Ho and Lee model

The Ho and Lee model is a single-factor model that assumes that the short-term interest rate follows a normally distributed process, with a drift parameter that is chosen so that the modeled term structure of interest rates fits the observed term structure of interest rates.

The Investment Advisers Act of 1940 (Advisers Act)

The Investment Advisers Act of 1940 (Advisers Act) provides for the registration and regulation of persons and entities who are engaged in providing advice to others regarding securities investments by the SEC and defines the role and responsibilities of an investment adviser.

The Investment Company Act of 1940 (40 Act)

The Investment Company Act of 1940 (40 Act) regulates the organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public.

The Kanto Local Finance Bureau of Ministry of Finance Japan (KLFB)

The Kanto Local Finance Bureau of Ministry of Finance Japan (KLFB) is the regulator for the purposes of disclosure in Japan under the FIEA.

Monetary Authority of Singapore (MAS)

The Monetary Authority of Singapore (MAS) is the regulator responsible for administering the SFA.

Principles for Responsible Investment (PRI)

The Principles for Responsible Investment (PRI), formerly known as the UN PRI or United Nations Principles for Responsible Investment, is a non-exhaustive set of six proposals designed to "provide a global standard for responsible investing as it relates to environmental, social, and corporate governance (ESG) factors."

SASB Materiality Map

The SASB Materiality Map analyzes ESG-related issues along two major dimensions: ESG category (e.g., environment) and industry (e.g., consumer goods).

principles-based disclosure requirements

The SEC disclosure regime includes principles-based disclosure requirements, which are intended to provide investors with the material information they need about companies and their securities offerings to make informed investment decisions.

The Securities Act of 1933 (Securities Act)

The Securities Act of 1933 (Securities Act) requires registration of securities with the SEC, unless an exemption is available, to ensure that investors receive financial and other significant information concerning the securities being offered and prohibits deceit, misrepresentations, and other fraud in the sale of securities.

The Securities Exchange Act of 1934 (Exchange Act)

The Securities Exchange Act of 1934 (Exchange Act) provides governance of securities transactions on the secondary market (i.e., after the initial public offering) and regulates the exchanges and broker-dealers in order to protect the investing public.

Securities and Futures Act (SFA)

The Securities and Futures Act (SFA) is the primary legislation for the regulation of asset management activity in Singapore.

Securities and Futures Commission (SFC)

The Securities and Futures Commission (SFC) is the regulator responsible for overseeing the SFO in Hong Kong.

Securities and Futures Ordinance (SFO)

The Securities and Futures Ordinance (SFO) is the primary legislation for the regulation of asset management activity in Hong Kong.

three characteristics of a program-related investment

The US Internal Revenue Service specifies three characteristics of a program-related investment: (1) 1. "The primary purpose is to accomplish one or more of the foundation's exempt purposes, (2) production of income or appreciation of property is not a significant purpose, and (3) influencing legislation or taking part in political campaigns on behalf of candidates is not a purpose."

accredited investors

The definition of an accredited investor includes a natural person who either has a net worth (along with his or her spouse) that exceeds $1 million, excluding the value of the person's primary residence; or income in excess of $200,000 (or joint income in excess of $300,000 with spouse) in each of the prior two years with a reasonable expectation of reaching the same income level in the current year.

two tests for the private investment fund exemption

The fund must meet two tests for the private investment fund exemption: (1) it must have no more than 100 beneficial owners; and (2) it must not make or propose to make any public offering.

home member state

The home member state is the EU country where the AIFM is authorized. Once an authority is delegated to perform a certain act, only the competent authority is entitled to take accounts therefrom and no one else.

public interest theory of regulation

The public interest theory of regulation proposes that people act through government for the benefit of the society and seek to prevent and control problems associated with free markets such as imperfect competition, environmental damage, and other market failures with potential dangers to the public.

three phases of the impact of adverse ESG events

The three phases of the impact of adverse ESG events are: (1) In the emerging, or "pre-financial" phase of an ESG lifecycle, a shift (subtle or overt) commences that ultimately has environmental, social, and/or governance consequences for a sector. (2) In the "transitional" phase, the ESG shift becomes increasingly visible, but neither its timing nor its ultimate financial impact are particularly clear. (3) In the ultimate phase of the lifecycle - the "financial" phase - the full financial impacts of the ESG event are felt.

theoretical models

Theoretical models describe behavior using deduction and assumptions that reflect well-established underlying behavior.

Vasicek's model

Vasicek's model is a single-factor model of the term structure that assumes constant volatility and that the short-term interest rate drifts toward a prespecified long-term mean level.

initial coin offerings (ICOs)

While an IPO sells shares of a company for the first time, initial coin offerings (ICOs), which sell ownership of an asset as tracked through a coin or a digital token, may be securities offerings and thus the securities laws would apply, such as registration of the securities with the SEC (unless an exemption is available).

P-Measure

A P-Measure indicates a probability or other value that reflects an actual statistical probability, meaning that the probability is an unbiased indication of the chance occurring.

code of ethics

A code of ethics sets forth standards of conduct and requires compliance with federal securities laws and is required to be established in writing, maintained, and enforced in the US for any fund manager registered under the Advisers Act, and must include requiring access persons to: (1) report personal securities transactions and holdings periodically, and (2) obtain the adviser's preapproval before investing in reportable securities, including but not limited to IPOs or limited offerings (such as interests in hedge funds).

competent authority

A competent authority is any regulator or other authority that possesses the authorized power to regulate or otherwise exert control

positive screening

A later version of screening was positive screening, where an investor's portfolio was designed to focus on publicly traded firms that were judged to have operations that performed in an exemplary manner on one or more ESG issues.

ESG materiality

ESG materiality is the property of being likely to be considered important (i.e., potentially having a substantial impact) from the reasonable perspective of stakeholders in the context of ESG principles.

ESG

ESG stands for environmental, social, and governance, and refers to the use of these three issues as key factors when making decisions including investment and business decisions.

empirical models

Empirical models tend to explain complex behavior relatively well when there are many data points available and when the relative behavior of the variables is fixed or is changing in predictable ways.

enviropreneurship

Enviropreneurship is an emerging branch of entrepreneurship that deals with a mixed motive of profit-seeking and concern regarding ESG-related issues, specifically using entrepreneurship to address environmental issues.

AIFMD sovereignty exception

The AIFMD sovereignty exception provides that member states may refuse to cooperate if "cooperating adversely affects the sovereignty, security, or public order of the member state addressed."

Alternative Investment Fund Managers Directive (AIFMD)

The Alternative Investment Fund Managers Directive (AIFMD) regulates alternative investment managers - meaning any whose regular business is managing one or more alternative investment funds (AIFs).

Black-Derman-Toy Model (BDT model)

The Black-Derman-Toy Model (BDT model) is a popular interest rate model useful for valuing fixed income derivatives consistent with both the observed term structure of interest rates and the implied volatilities of interest rate caplets.

Chief Compliance Officer (CCO)

The Chief Compliance Officer (CCO) has the role of being primarily responsible for overseeing and managing regulatory compliance issues.

Coase theorem

The Coase theorem asserts that, in competitive and frictionless markets, economically efficient production and distribution will occur regardless of how governments divide property rights.

Cox, Ingersoll, and Ross model

The Cox, Ingersoll, and Ross model (CIR model) is a single-factor model that alters the Vasicek model to make the variance of the short-term interest rate proportional to the rate itself, thereby disallowing negative interest rates.

Dodd-Frank Act

The Dodd-Frank Act was enacted to promote the financial stability of the US by improving accountability and transparency in the financial system, to end "too big to fail," to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.

three types of SEC exams

There are three types of SEC exams: (1) regular periodic inspections, (2) cause inspections, and (3) sweep inspections. Regular periodic inspections are generally based on an adviser's promotional materials, including what is written in Form ADV, and are looking to ensure that there are no misleading or fraudulent statements.

time-series models

Time-series models analyze behavior of a single subject or set of subjects through time.

US Commodity Futures Trading Commission (CFTC)

US Commodity Futures Trading Commission (CFTC): The derivatives market is overseen by the CFTC. The CFTC oversees individuals and organizations, including commodity pool operators and futures commission merchants, and seeks to protect market users and their funds, consumers, and the public from fraud, manipulation, and abusive practices related to derivatives.

Undertakings for Collective Investments in Transferable Securities (UCITS)

Undertakings for Collective Investments in Transferable Securities (UCITS) is the main European framework covering collective investment schemes.