CFA 2018 level 3 schweser practice exam CFA 2018 level 3 question bank CFA 2018 CFA 2018 r04 asset manager code of professional conduct IFT notes

Asset Manager Code of Professional Conduct

IFT Notes

Asset Manager Code of Professional Conduct
1. Introduction .............................................................................................................................................. 2
2. General Principles of Conduct................................................................................................................... 2
3. Asset Manager Code of Professional Conduct .......................................................................................... 2
A.

Loyalty to Clients ............................................................................................................................... 3

B.

Investment Process and Actions ....................................................................................................... 4

C.

Trading .............................................................................................................................................. 5

D.

Risk Management, Compliance, and Support................................................................................... 6

E.

Performance and Valuation .............................................................................................................. 7

F.

Disclosures ........................................................................................................................................ 7

This document should be read in conjunction with the corresponding reading in the 2018 Level III CFA®
Program curriculum. Some of the graphs, charts, tables, examples, and figures are copyright
2017, CFA Institute. Reproduced and republished with permission from CFA Institute. All rights reserved.
Required disclaimer: CFA Institute does not endorse, promote, or warrant the accuracy or quality of the
products or services offered by IFT. CFA Institute, CFA®, and Chartered Financial Analyst® are
trademarks owned by CFA Institute.

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Asset Manager Code of Professional Conduct

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1. Introduction
Section 1 covers LO.a.
LO.a: Explain the purpose of the Asset Manager Code and the benefits that may accrue to a firm
that adopts the Code
The Asset Manager Code of Professional Conduct outlines the ethical and professional responsibilities of
firms (“Managers”) that manage assets on behalf of clients. Just as the Code and Standards are
applicable to individuals, the Asset Manager Code is applicable to firms. The goal of this Code is to set
forth a useful framework for all asset managers to provide services in a fair and professional manner and
to fully disclose key elements of those services to clients. To be implemented effectively, the principles
and standards embodied in the Code must be supported by appropriate compliance procedures. Clients
must be able to count on full and fair disclosure from their Managers.

Adopting the Code and Claiming Compliance
Firms adopting the code have to be in full compliance. Partial compliance or statements of exception are
prohibited. Adoption of or compliance with the Code does not require a firm to amend its existing code
of ethics or other policies and procedures as long as they are at least consistent with the principles and
provisions set forth in the Code. There is specific statement that should be made once a firm is
convinced that it meets all the provisions set forth in the code:
“[Insert name of Firm] claims compliance with the CFA Institute Asset Manager Code of Professional
Conduct. This claim has not been verified by CFA Institute.”

2. General Principles of Conduct
Section 2 addresses LO.b.
LO.b: Explain the ethical and professional responsibilities required by the six General Principles of
Conduct of the Asset Manager Code
The six General Principles of Conduct are given below. These represent the responsibilities that
Managers have to their clients.
Managers must:
1.
2.
3.
4.
5.
6.

Act in a professional and ethical manner at all times.
Act for the benefit of clients.
Act with independence and objectivity.
Act with skill, competence, and diligence.
Communicate with clients in a timely and accurate manner.
Uphold the applicable rules governing capital markets.

3. Asset Manager Code of Professional Conduct
Section 3 addresses LO.c and LO.d.

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LO.c: Determine whether an asset manager’s practices and procedures are consistent with the Asset
Manager Code

LO.d: Recommend practices and procedures designed to prevent violations of the Asset Manager
Code
There are six components of the Asset Manager Code:
A.
B.
C.
D.
E.
F.

Loyalty to Clients
Investment Process and Actions
Trading

Risk Management, Compliance, and Support
Performance and Evaluation
Disclosures

Each component has a set of requirements. These retirements have been taken directly from the Asset
Manager Code and are shown in bold. The bullet points reflect practices and procedures designed to
prevent violations of the Asset Manager Code.

A. Loyalty to Clients
Managers must:
1. Place client interests before their own.
 Managers should put in place policies and procedures that help ensure that client interests
supersede the interests of the firm.
 There needs to be a system of checks and balances and monitoring to ensure that no one in
the firm is putting their own interests or the firm's interests before the client.
 It is important that the compensation structure is set up such that the interests of the client
and the firm are aligned.
2. Preserve the confidentiality of information communicated by clients within the scope of the
Manager–client relationship.
 Managers should create a privacy policy that addresses how confidential client information
will be collected/protected.
 However, if the client is involved in any illegal activities, then information should be shared
with law enforcement authorities.
3. Refuse to participate in any business relationship or accept any gift that could reasonably be
expected to affect their independence, objectivity, or loyalty to clients
 Asset management companies should have policies and procedures in place that gifts from
investment targets or brokerage houses or other entities do not exceed a maximum limit.
 They guidelines of what is acceptable and what is not acceptable should be very clearly
defined.

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B. Investment Process and Actions
Managers must
1. Use reasonable care and prudent judgment when managing client assets.
 Prudent judgement in the context of managing a client's portfolio, means following the
investment parameters set forth by the client and balancing risk and return.
2. Not engage in practices designed to distort prices or artificially inflate trading volume with the
intent to mislead market participants.
 This includes falsely spreading rumours about a particular security in order to inflate prices.
3. Deal fairly and objectively with all clients when providing investment information, making
investment recommendations, or taking investment action.
 Dealing fairly is not the same thing as dealing equally. Managers are allowed to have
different clients with different levels of service.
 The different level of service should be disclosed and made available to all clients.
4. Have a reasonable and adequate basis for investment decisions.
 Before taking any action on behalf of clients managers must carefully analyse investment
opportunities in question. Managers must act only after undertaking due diligence to ensure
there is sufficient knowledge about specific investments strategies.
 It is acceptable to use third-party research as long as the firm has verified the fact that the
third party is doing the necessary due diligence before publishing their reports.

 When dealing with complex investments such as derivative-based strategies, the Manager
should clearly understand the risks associated with the investments are the strategies
before recommending them to their clients.
5. When managing a portfolio or pooled fund according to a specific mandate, strategy, or style:
a. Take only investment actions that are consistent with the stated objectives and
constraints of that portfolio or fund.
o For example, if the stated objective is to invest in large cap value stocks, then it is
necessary for the firm to only make large cap stocks investments, it cannot buy small
cap and mid cap stocks.
b. Provide adequate disclosures and information so investors can consider whether any
proposed changes in the investment style or strategy meet their investment needs.
o If the Manager decides to make a material change in the investment strategy or style,
then clients should be permitted to redeem their investment if desired without
incurring any undue penalties.
6. When managing separate accounts and before providing investment advice or taking
investment action on behalf of the client:

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a. Evaluate and understand the client’s investment objectives, tolerance for risk, time
horizon, liquidity needs, financial constraints, any unique circumstances (including tax

considerations, legal or regulatory constraints, etc.) and any other relevant information
that would affect investment policy.
o A firm needs to ensure that for every client there is an IPS.
o The IPS should be kept up to date.
b. Determine that an investment is suitable to a client’s financial situation.
o Before any investment decisions are made the employees of this firm must consult the
IPS of the client.

C. Trading
Managers must:
1. Not act or cause others to act on material nonpublic information that could affect the value of
a publicly traded investment.
 At a firm level it is necessary that the Manager adopt compliance procedures such as
establishing information barriers (firewalls) to prevent the disclosure and misuse of material
nonpublic information.
 In many cases pending trades or client fund holdings may be considered material nonpublic
information and Managers must be sure to keep such information confidential.
o Mergers and acquisition information prior to its public disclosure is generally
considered material non-public information.
 Managers should evaluate company specific information that they may receive and
determine whether it meets the definition of material nonpublic information.
2. Give priority to investments made on behalf of the client over those that benefit the
Managers’ own interests.
 Manager should have policies and procedures in place which ensure that employee’s
transactions or a firm's transactions do not happen before the transactions of a client.
3. Use commissions generated from client trades to pay for only investment-related products or
services that directly assist the Manager in its investment decision making process, and not in
the management of the firm.
 This is related to soft dollar standards. Any commissions generated from the client should be
used in the best interest of the client and not in the interest of the firm.

4. Maximize client portfolio value by seeking best execution for all client transactions.
 Best execution needs to be taken broadly. Besides brokerage fee, implicit costs and hidden
costs also need to be considered.
 Asset managers should evaluate what is beneficial to clients from an overall perspective.
 If a client directs the manager to place trades through a specific broker, then managers
should inform the client that by limiting the manager's ability to select the broker the client
may not be receiving best execution. The manager should also seek written

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acknowledgement from the client of receiving this information.
5. Establish policies to ensure fair and equitable trade allocation among client accounts.
 When possible managers should use block trades and allocate shares on a pro rata basis by
using an average price or some other method that ensures fair and equitable allocation.

D. Risk Management, Compliance, and Support
Managers must:
1. Develop and maintain policies and procedures to ensure that their activities comply with the
provisions of this Code and all applicable legal and regulatory requirements.
 Documented compliance procedures assist Managers in fulfilling the responsibilities
enumerated in the Code and ensure that the standards expressed in the Code are adhered

to in the day-to-day operation of the firms.
 The appropriate compliance programs, internal controls, and self-assessment tools for each
Manager will depend on such factors as the size of the firm and the nature of its investment
management business.
2. Appoint a compliance officer responsible for administering the policies and procedures and
for investigating complaints regarding the conduct of the Manager or its personnel.
 Depending on the size of the firm the compliance officer can be the individuals whose sole
responsibility is related to compliance. In other scenarios it might be possible that an
individual in the firm does other activities and one of the roles that he plays is that of a
compliance officer.
 The compliance officer ideally should report directly to the CEO or to the board.
 The compliance officer should be charged with reviewing firm and employee transactions to
ensure the priority of client interests
 The compliance officer should document and act expeditiously to address any compliance
breaches and he should work with the management to take appropriate disciplinary action.
3. Ensure that portfolio information provided to clients by the Manager is accurate and complete
and arrange for independent third-party confirmation or review of such information.
 Third-party confirmation has two advantages: (1) in the eyes of the client this will build
credibility and (2) potential issues can be identified when the third party verifies and reviews
information. Thus in the long run this is a win-win for the Manager as well as the client.
4. Maintain records for an appropriate period of time in an easily accessible format.
 The appropriate period depends on what the regulator says. However, if there is no
regulation about the appropriate period, then CFA Institute recommends a minimum of
seven years.
5. Employ qualified staff and sufficient human and technological resources to thoroughly
investigate, analyze, implement, and monitor investment decisions and actions.
 The manager needs to ensure that the staff is well qualified and any technology that is being

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used is also sufficient.
6. Establish a business-continuity plan to address disaster recovery or periodic disruptions of the
financial markets.
 The level and complexity of business-continuity planning depends on the size, nature, and
complexity of the organization. At a minimum, Managers should consider having the
following:
o adequate backup, preferably off-site, for all account information;
o alternative plans for monitoring, analyzing, and trading investments if primary systems
become unavailable;
o plans for communicating with critical vendors and suppliers;
o plans for employee communication and coverage of critical business functions in the
event of a facility or communication disruption; and
o plans for contacting and communicating with clients during a period of extended
disruption.
7. Establish a firmwide risk management process that identifies, measures, and manages the risk
position of the Manager and its investments, including the sources, nature, and degree of risk
exposure.

E. Performance and Valuation
Managers must:
1. Present performance information that is fair, accurate, relevant, timely, and complete.

Managers must not misrepresent the performance of individual portfolios or of their firm.
 A recommended standard that can be used is GIPS.
2. Use fair-market prices to value client holdings and apply, in good faith, methods to determine
the fair value of any securities for which no independent, third-party market quotation is
readily available.
 In cases where a third party market quote is not available, given the inherent conflict of
interest between the Manager and client, the recommended procedure is to hire a third
party to perform the valuation.

F. Disclosures
Managers must:
1. Communicate with clients on an ongoing and timely basis.
2. Ensure that disclosures are truthful, accurate, complete, and understandable and are
presented in a format that communicates the information effectively.
 Managers must not misrepresent any aspect of their services or activities. This includes:
o the Manager’s qualifications and credentials;
o the services provided by the Manager;
o the Manager’s performance records;

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o

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the characteristics of the investment strategies being used.

3. Include any material facts when making disclosures or providing information to clients
regarding themselves, their personnel, investments, or the investment process.
 “Material” information is information that reasonable investors would want to know
relative to whether or not they would choose to use or continue to use the Manager.
4. Disclose the following:
a. Conflicts of interests generated by any relationships with brokers or other entities, other
client accounts, fee structures, or other matters.
b. Regulatory or disciplinary action taken against the Manager or its personnel related to
professional conduct.
c. The investment process, including information regarding lock-up periods, strategies, risk
factors, and use of derivatives and leverage.
d. Management fees and other investment costs charged to investors, including what costs are
included in the fees and the methodologies for determining fees and costs.
e. The amount of any soft or bundled commissions, the goods and/or services received in
return, and how those goods and/or services benefit the client.
f. The performance of clients’ investments on a regular and timely basis.
g. Valuation methods used to make investment decisions and value client holdings.
h. Shareholder voting policies.
i. Trade allocation policies.
j. Results of the review or audit of the fund or account.
k. Significant personnel or organizational changes that have occurred at the Manager.
l. Risk management processes.

Summary
LO.a: explain the purpose of the Asset Manager Code and the benefits that may accrue to a firm that
adopts the Code;





The Asset Manager Code is applicable to firms. The Asset Manager Code outlines the ethical and
professional responsibilities of firms (“Managers that manage assets on behalf of clients”) to provide
services in a fair and professional manner and to fully disclose key elements of those services to
clients.
Similar to GIPS, partial compliance is not allowed.
Adopting and enforcing a code of conduct for their organizations helps Managers to protect and
enhance the reputation of their organizations by demonstrating their commitment to ethical
behavior and the protection of investors’ interests.

LO.b: explain the ethical and professional responsibilities required by the six General Principles of
Conduct of the Asset Manager Code;
Managers must:
1. Act in a professional and ethical manner at all times.

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Asset Manager Code of Professional Conduct
2.
3.
4.
5.

6.

IFT Notes

Act for the benefit of clients.
Act with independence and objectivity.
Act with skill, competence, and diligence.
Communicate with clients in a timely and accurate manner.
Uphold the applicable rules governing capital markets.

LO.c: Determine whether an asset manager’s practices and procedures are consistent with the Asset
Manager Code;
LO.d: Recommend practices and procedures designed to prevent violations of the Asset Manager Code
There are six components of the Asset Manager Code:
A. Loyalty to Clients
Managers must:
I.
Put client’s interests before their own.
II.
Preserve the confidentiality of information communicated by clients.
III.
Refuse to participate in any business relationship or accept any gift that could
reasonably be expected to affect their independence, objectivity, or loyalty to clients.
B. Investment Process and Actions
Managers must
I.
Use reasonable care and prudent judgment when managing client assets.
II.
Not engage in market manipulation practices.
III.

Deal fairly and objectively with all clients.
IV.
Have a reasonable and adequate basis for investment decisions.
V.
Take only investment actions that are consistent with the stated objectives and
constraints of that portfolio or fund.
VI.
Determine an investment which is suitable to a client’s financial situation (i.e. client’s
investment objectives, tolerance for risk, time horizon, and investment constraints).
C. Trading
Managers must:
I.
Not act or cause others to act on material non-public information.
II.
Put client’s interests before their own.
III.
Use commissions generated from client trades to pay for only investment-related
products or services that directly assist the Manager in its investment decision making
process.
IV.
Seek best execution for all client transactions.
V.
Establish policies to ensure fair and equitable trade allocation among client accounts.
D. Risk Management, Compliance, and Support
Managers must:
I.
Develop and maintain policies and procedures to ensure compliance with Asset
Manager Code and all applicable legal and regulatory requirements.
II.
Appoint a compliance officer.

III.
Disseminate portfolio information to clients in accurate manner and arrange for
independent third-party review of such information.
IV.
Maintain records for an appropriate period of time in an easily accessible format.
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V.
Employ qualified staff and sufficient human and technological resources.
VI.
Establish a business-continuity plan.
VII.
Establish a firm-wide risk management process.
E. Performance and Evaluation
Managers must:
I.
Present performance information that is fair, accurate, relevant, timely, and complete.
II.
Use fair-market prices to value client holdings.
F. Disclosures
Managers must:

I.
Communicate with clients on an ongoing and timely basis.
II.
Ensure that disclosures are truthful, accurate, complete, and understandable.
III.
Include any material facts when making disclosures or providing information to clients.
IV.
Disclose the following:
a) Conflicts of interests with brokers or other entities, other client accounts, fee
structures, etc.
b) Regulatory or disciplinary action taken against the Manager or its personnel.
c) Information regarding lock-up periods, strategies, risk factors, and use of
derivatives and leverage.
d) Management fees and other investment costs and the methodologies for
determining fees and costs.
e) The amount of any soft or bundled commissions.
f) The performance of clients’ investments on a regular and timely basis.
g) Valuation methods.
h) Shareholder voting policies.
i) Trade allocation policies.
j) Results of the review or audit of the fund or account.
k) Significant personnel or organizational changes occurred at the Manager.
l) Risk management processes.

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