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 Introduction 2 General Principles of Conduct Asset Manager Code of Professional Conduct A Loyalty to Clients B Investment Process and Actions C Trading D Risk Management, Compliance, and Support E Performance and Valuation F Disclosures 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 IFT Notes for the Level III Exam www.ift.world Page Asset Manager Code of Professional Conduct IFT Notes Introduction Section 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.” General Principles of Conduct Section 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: 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 Asset Manager Code of Professional Conduct Section addresses LO.c and LO.d IFT Notes for the Level III Exam www.ift.world Page Asset Manager Code of Professional Conduct IFT Notes 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: 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 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 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 not exceed a maximum limit  They guidelines of what is acceptable and what is not acceptable should be very clearly defined IFT Notes for the Level III Exam www.ift.world Page Asset Manager Code of Professional Conduct IFT Notes B Investment Process and Actions Managers must 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 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 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 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 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 When managing separate accounts and before providing investment advice or taking investment action on behalf of the client: IFT Notes for the Level III Exam www.ift.world Page Asset Manager Code of Professional Conduct IFT Notes 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: 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 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 not happen before the transactions of a client 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 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 IFT Notes for the Level III Exam www.ift.world Page Asset Manager Code of Professional Conduct IFT Notes acknowledgement from the client of receiving this information 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: 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 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 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 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 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 IFT Notes for the Level III Exam www.ift.world Page Asset Manager Code of Professional Conduct IFT Notes used is also sufficient 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 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: 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 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: Communicate with clients on an ongoing and timely basis 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; IFT Notes for the Level III Exam www.ift.world Page Asset Manager Code of Professional Conduct o IFT Notes the characteristics of the investment strategies being used 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 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: Act in a professional and ethical manner at all times IFT Notes for the Level III Exam www.ift.world Page Asset Manager Code of Professional Conduct 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 IFT Notes for the Level III Exam www.ift.world Page Asset Manager Code of Professional Conduct IFT Notes 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 IFT Notes for the Level III Exam www.ift.world Page 10 ... markets Asset Manager Code of Professional Conduct Section addresses LO.c and LO.d IFT Notes for the Level III Exam www .ift. world Page Asset Manager Code of Professional Conduct IFT Notes LO.c:... 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. .. guidelines of what is acceptable and what is not acceptable should be very clearly defined IFT Notes for the Level III Exam www .ift. world Page Asset Manager Code of Professional Conduct IFT Notes