CFA CFA Level 3 Asset Manager Code of Professional Conduct-Summary

Asset Manager Code of Professional Conduct-Summary

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    • Avatar of RaviVoodaRaviVooda
        • CFA Level 3

        Below is some notes I have prepared for exam. Please do verify for mistakes. Hope it helps. @alta12, @ajfinance, @vincentt, @jwa, @sophie, @zee, @edulima and other level 3 candidates and who have passed. please point to any mistakes you guys have found

        Asset Manager Code of Professional Conduct

        There are six components to the Asset Manager Code of Professional Conduct (the “Code”):
        1. Loyalty to Clients.
        2. Investment Process and Actions.
        3. Trading.
        4. Risk Management, Compliance, and Support.
        5. Performance and Valuation.
        6. Disclosures.

        Related to these six components are ethical responsibilities:
        1. Act in a professional and ethical manner at all times
        2. Act for the benefit of clients
        3. Act with Independence and Objectivity
        4. Act with skill, competence and diligence
        5. Communicate with clients in timely and accurate manner
        6. Uphold the applicable rules governing capital markets.

        – Asset Manager Code is for Firms. Firms referred to as “Managers”
        – Partial compliance is not allowed similar to GIPS
        – “[Insert name of the firm] claims complains with the CFA Institute Asset Manager Code of Professional Conduct. This claim has not been verified by CFA institute.”

        Loyalty to clients

         1. Place client interests before their own interests.
             –    Enforce policies such that manager interests supersede client interest.
             –    Implement compensation and incentives agreements such that it does not conflict with client interests.
         2. Preserve confidentiality of information communicated by clients in the scope of manager-client relationship
             –    This rule is not to prevent from policies such as AML and other illegal ones
             –    Create a privacy policy on how to address confidentiality issues.
         3. Refuse to participate in any business or accept gift that impairs independence, objectivity or loyalty
             –    Refuse to accept gifts or entertainment from service providers, potential investment targets or business partners for more than minimum value.
             –    Managers should define what minimum value is, establish limits and they should also be within regulatory limits.
             –    Employees should document and report it to Manager/supervisor/Compliance officer
             –    This rule not meant to prevent managers from having multiple business relationships as long as conflicts of interests are disclosed.

        Investment Process and Actions

            –    Use reasonable care and prudent judgment when managing clients assets
            –    Exhibit prudence, care, skill, diligence, caution, discretion.
            –    Follow the investment parameters set by the client and balance risk and return.
            –    Not engage in practices to distort price or volume with intent to mislead
            –    Information manipulation includes false rumors, Pressurizing sell side analysts that indirectly or directly benefits Managers or Managers clients
            –    Deal fairly, objectively when providing information/recommendations/actions
            –    Not give preferential treatment to clients that is detrimental to other clients
            –    Different levels of service is ok as long as it is disclosed to all clients
            –    Not intended to prevent management from engaging secondary investment opportunities like sidecar or tag-along as long as such opportunities as fairly allocated among similarly situated clients for whom opportunity is suitable.
            –    Have reasonable and adequate basis
            –    Can rely on secondary or third party research as long as they have a reasonable basis (assumptions, independence, thoroughness of analysis)
            –    Have understanding of strategies and securities which are placed on behalf of clients
            –    Managers who implement complex and sophisticated investment strategies should conduct statistical analysis, understand potential vulnerabilities, risks and structure and should also communicate to clients in an understandable manner.
            –    When managing portfolio stick to IPS or Mandate
            –    When opportunities/events exist to take advantage, and if it is not improper, strategy is understood by managers, to act of them communicate and take consent from clients before acting on it. Best practice is disclose such events when they occur or at least report in normal reporting
            –    When managing funds or to mandate, when investment strategy or style is changed, inform in advance, give sufficient time for clients to understand or to get out without incurring any undue penalties
            –    When managing separate accounts before providing advice/action/recommendation
            –    Evaluate all constraints such as tax, liquidity, needs etc and any other that would affect investment policy.
            –    Formulate IPS, review it regularly (at least annually or when appears to be required)
            –    Take decisions in context of total portfolio considering all the assets declared by client though not managed by manager and is also those are also written in the IPS.

           –    Not act or cause others to act. This one is not to prevent from using Mosaic theory
           –    Give priority to investments made by clients on those to investments made by managers
           –    Do not engage in trading that will disadvantage other clients
           –    Investments of managers where they invest along with clients are permissible as long as they do not cause disadvantage to clients
           –    Managers should limit personal trades, make rules to take approvals for trades, monitor personal trading, take prior approval for IPO or private placements, Create restricted lists
           –    Make employees to provide compliance officer with copies of trade confirmations each quarter and annual statements of personal holdings.
           –    Use commissions from client trades to assist in managers research that benefits clients and not management of firm
           –    Disclose to clients on how benefits are evaluated and used for client’s benefit.
           –    If managers choose to take soft dollars or bundled brokerage, disclose to client.
           –    Maximize client portfolio by seeking best execution for all client transactions
           –    If client directs to go for specific brokerage, alert client that it will detriment him from seeking best execution. However client’s decision is final. In such case we cannot use other client’s soft dollar for this type of client.
           –    Establish policies to ensure fair and equitable trade allocation procedures like average price, pro rata allocation among client’s accounts.

        Risk Management, Compliance, and Support.

        • Risk Management, Compliance, and Support.

        • Maintain policies and procedures so that code and all legal and regulatory requirements are not violated.

        • Appoint compliance officer to administer and procedures to investigate complaints regarding Manager and also its personnel.

        • Compliance officer should be competent, knowledgeable and credible and be empowered to carry out his duties

        • Where possible, compliance officer, should be independent from investment and operations personnel and should report to CEO or board of directors

        • Compliance officer / Manager should regularly communicate and make clear all policies to employees and make sure they follow.

        • Make sure employees have received the code.

        • Compliance officer should document and act with speed and efficiency to address any compliance breaches and work with management to take disciplinary action

        • Ensure portfolio information provided to clients by Manager is accurate and complete and arrange for independent third party confirmation or review/audit of such info.

        • Maintain records for appropriate time in accessible format – In case no rule, default is 7 years.

        • Employ qualified staff and sufficient human and technological resources to thoroughly investigate, analyze, implement and monitor investment actions and decisions.

        • Make sure enough controls are in place to prevent any fraudulent behavior.

        • Managers have responsibility to deliver to clients the actual services they claim to offer.

        • Establish business continuity plan (BCP) to address disaster recovery or periodic disruptions in financial markets.

        • Should have minimum of [Remember all]

                – Adequate backup, preferably off-site, for all account information.

                – Alternate plans for monitoring, analyzing and trading investments if primary systems become unavailable.

                – Plans for communicating with critical vendors and suppliers

                – Plans for employee communication and coverage of critical business functions in event of facility or communication disruption and

                – Plans for contacting and communicating with clients during a period of extended disruption

        • Ensure that employees and staff are aware of BCP plans and are trained for responsibility

        • Plans should be tested firm wide at different intervals to promote employee understanding and identify any needed adjustments

        • Establish firm wide risk management process that identifies, measures and manages risk position of Manager and its investments, including the sources, nature and degree of risk exposure

        • Risk management should be complement rather than compete with investment management process.

        • Have independent 3rd party to review/audit portfolio assets. (Increases client’s confidence).

        • Consider outsourcing if separate wing not appropriate/feasible

        • Risk models should be continuously challenged and evaluated

        • Managers should be prepared to explain models to clients

        Performance and Valuations

        • Performance presentation should be fair, accurate, complete, relevant, and timely. Do not misrepresent performance of individual portfolios or of their firm.
        • Good to use GIPS.
        • Any hypothetical models should be disclosed.
        • Use fair market prices to value client’s holdings and apply, in good faith, methods to determine the fair value of any securities for which no independent, third party quotation is available.
        • Conflicts may be avoided by transferring valuation to independent 3rd party. (Ex: For pooled funds without independent directors)
        • Use widely accepted methods of valuations and techniques to appraise holdings and use these on a consistent basis.


        • Communicate with clients on an ongoing and timely basis.
        • Ensure disclosures are truthful, accurate, complete and understandable and are presented such that it communicates effectively.
        • Include any material facts when making disclosures or providing information to clients regarding themselves, their personnel, investments or the process
        • Include all below
        • Conflicts of interests generated by relationships with brokers or other entities, other clients accounts, fee structures, or other matters
        • Regulatory or disciplinary action taken against Manager or its personnel related to professional conduct
        • Investment process including information of lock   –   in periods, strategies, risk factors, and use of derivatives and leverage
        • Management fees and other investment costs that are charged to investors including what costs are included in fees and the methodologies for determining fees and costs
           – Provide clients with gross fee and net of fees and disclose any unusual expenses
           – Explain in plain language in presenting the information, explain the methods for determining all fixed and contingent fees and costs that will be borne by investors and also what transaction will trigger imposition of these expenses
           – When requested by clients, disclose actual fees and other costs charged to clients, together with itemizations. This should include specific management fee, incentive fee and amount of commissions paid on behalf of clients.
           – Also disclose to prospective clients, average/expected expenses/fees clients are likely to incur.
        • Amount of soft/bundles commission/goods/services received in return and how did these benefit the client.
        • Performance of client on regular and timely basis- Reports for every quarter and within 30 days after the quarter has ended.
        • Valuation methods used to make decisions and value clients holdings
        • Shareholder voting policies
          -  Adopt policies and procedures on voting and disclose them to clients
          - Also disclose to clients how to obtain information on manner in which shares were voted.
        • Trade allocation procedures
        • Results of review or audit of fund or account
        • Significant personnel organizational changes that have occurred at the Manager. “Significant” would include personnel turnover, M&A activities of Manager and similar changes
        • Risk Management process
           – Disclose risk management processes
           – Regularly disclose specific risk information and specific information regarding stratagies related to each client.
           – Provide clients information detailing what relevant risk metrics they can expect to receive at individual product/portfolio level.
      • Up

        Thanks much @RaviVooda! It will likely be a while until I get there (since I’ll only start in late November, after my FRM exam), but I’ve saved these notes and will look at them at that point.

      • Up

        Thanks for sharing @RaviVooda‌ !

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