Asset Manager Code

1. Loyalty to Clients
   1. Place client interests before their own.

      Managers must establish firm policies and procedures that ensure client interests are given precedence over their own. This commitment should encompass all aspects of the Manager-client relationship, including investment choices, transactions, monitoring, and custody. Managers should avoid any situations that might suggest a conflict of interest and should adopt compensation structures that safeguard client interests. It’s essential to take every reasonable measure to prevent potential conflicts of interest.

   2. Preserve the confidentiality of information communicated by clients within the scope of the Manager–client relationship.

      Managers should institute a comprehensive privacy policy aimed at safeguarding the confidentiality of all client information acquired during the investment process. However, any illegal activities must be promptly reported to the relevant authorities. In appropriate cases, Managers should also consider implementing a written anti-money-laundering policy to distance themselves from potential illegal activities.

   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.

      Managers must implement clear policies regarding business relationships and gift acceptance. They should decline any gifts or entertainment that could reasonably impact their impartiality, independence, or loyalty to clients. Managers need to be particularly cautious in their dealings with certain parties, such as service providers and potential investment targets.

      • Service providers: Special attention should be given to relationships with service providers (e.g., trading, brokerage, research) as they could create incentives for Managers that prioritize their own interests over those of the client.
      • Potential investment targets: Managers must not provide favorable treatment to potential investment targets (new clients) at the expense of existing clients.

      To maintain transparency, Managers should establish a defined minimum value for acceptable gifts and entertainment, often aligned with local regulations (e.g., a maximum of $100 per gift). Moreover, Managers should enact a written policy that restricts the acceptance of gifts and entertainment to items of minimal value. Under no circumstances should cash gifts be accepted, even if they are of nominal value, as they can jeopardize a Manager’s fairness and independence.

      Employees must be required to report and disclose any gift or entertainment acceptance to their superiors within the organization.

2. INVESTMENT PROCESS AND ACTIONS
   1. Use reasonable care and prudent judgment when managing client assets.

      Managers must exercise prudence in managing client assets by applying appropriate care, skill, and diligence to the situation at hand. They should adopt the perspective of a highly fair, competent, and motivated manager and consider how such a manager would conduct themselves.

   2. Not engage in practices designed to distort prices or artificially inflate trading volume with the intent to mislead market participants.

      Managers must refrain from engaging in practices intended to manipulate prices or artificially increase trading volume with the purpose of deceiving other market participants. Market manipulation involves dishonest actions where a participant buys or sells securities not for regular trading purposes but solely to mislead other investors. For instance, if two individuals repeatedly trade the same stock between themselves multiple times in a single day, artificially inflating the trading volume, it creates a false perception of market activity. Such practices tarnish the fairness and disadvantage other investors in the financial markets.

   3. Deal fairly and objectively with all clients when providing investment information, making investment recommendations, or taking investment action.

      Managers are obligated to treat all clients fairly without discrimination based on their relationships, the volume of business, or any other arbitrary factors that should not impact their treatment.

      However, an exception exists for clients who opt for different service levels. Managers can offer tiers of services at varying fees if these service levels are clearly disclosed and easily understood by clients. For instance, managers may provide a premium service like a weekly market research letter at a higher fee. Clients who choose this option receive the letters, while those who do not opt for this service are not charged for it.

   4. Have a reasonable and adequate basis for investment decisions.

      Managers are required to have a reasonable and well-founded foundation for their investment choices.

      This means that managers should not base their decisions solely on superficial information, like watching a video online about an investment opportunity. Such shallow research does not meet the due diligence standard expected under the AMCC.

      Managers can use external third-party research, but they must make genuine efforts to comprehend this research, including its underlying assumptions and models, before acting on it.

      Managers must have a deep understanding of the investments they make, and it’s their responsibility to ensure this for each investment.

      Managers employing complex strategies should be aware of the vulnerabilities associated with those strategies and communicate these factors clearly to clients who may not be financial experts, translating technical language into easily understandable terms. This ensures clients are well-informed.

   5. When managing a portfolio or pooled fund according to a specific mandate, strategy, or style:
      1. Take only investment actions that are consistent with the stated objectives and constraints of that portfolio or fund.

         Managers should have an IPS in place for each client. It is the Manager’s responsibility to read the IPS, to know the client thoroughly, and to only take investment actions that are appropriate for that client.

         If managers have lots of flexibility in how they manage portfolios, they must make sure that the clients are aware of this flexibility and the potential pitfalls that it could entail.

      2. Provide adequate disclosures and information so investors can consider whether any proposed changes in the investment style or strategy meet their investment needs.

         Whenever managers need to change the strategy of a portfolio, they must communicate this in an easy-to-understand way to the client. The client must have time to research the change in strategy and to make up their mind about whether the change of strategy is appropriate for them. The client also needs to be able to understand not just the strategy change but also the potential change in fees that will arise. It is always best practice that this is done as far in advance as possible to give clients a reasonable amount of time to go through all the information received and come up with their own opinions.

   6. When managing separate accounts and before providing investment advice or taking investment action on behalf of the client:
      1. 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.

         Managers must have a deep understanding of their clients. Ideally, each client should have an Investment Policy Statement (IPS) outlining their unique financial situation and investment preferences.

         The IPS acts as a guide for the investment relationship between the manager and the client. Managers should regularly review these statements and critically evaluate whether any changes have occurred since the last update.

         It’s crucial for managers to have an in-depth understanding of their clients and their IPS. The more advisors know, the better they can meet their clients’ needs. While ethics don’t always provide strict rules, managers should be truthful with themselves and assess their efforts to understand their clients and their financial situations. Failing to know one’s client can lead to poor investment management.

      2. Determine that an investment is suitable to a client’s financial situation.

         As stated above, a review of the client’s financial and economic situation and a review and potential updating of the IPS is required to provide top-notch investment management services. After the Manager is satisfied that they know the client well enough, they must act only per the knowledge that they have. This means only taking on risks that the client is comfortable and able to handle, for example.

3. TRADING
   1. Not act or cause others to act on material nonpublic information that could affect the value of a publicly traded investment.

      Managers should establish compliance procedures, such as information barriers (like firewalls), to prevent the disclosure and improper use of material nonpublic information.

      “Material” means the information is significant and could impact stock prices, and “nonpublic” means it’s known only to a select few and not accessible to the broader market.

      The Mosaic Theory is permissible. It involves gathering various small pieces of non-material information and combining them. While individually, these pieces may not be significant, when assembled, they can become material. Managers are allowed to conduct research to piece together these non-material fragments, even if each piece is nonpublic. This approach falls within the realm of thorough research and is considered acceptable.

   2. Give priority to investments made on behalf of the client over those that benefit the Managers’ own interests.

      Managers may choose to invest in the same assets as their clients, such as a pooled fund. However, this is acceptable only if it doesn’t put the client at a disadvantage. For example, front-running, where the manager trades for their own benefit first and then for the client, should be avoided.

      Firms are advised to establish restricted lists, which limit the securities managers can trade to prevent potential harm to clients. These lists should be made public and easily accessible to clients. Additionally, managers and their staff should seek compliance approval before participating in IPOs or private placements.

   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.

      Commissions must be used to benefit clients. In other words, Managers cannot bring business to a brokerage firm with the expectation of receiving personal perquisites. Managers should disclose their policies on how these commissions are to be used.

   4. Maximize client portfolio value by seeking the best execution for all client transactions.

      Managers have a duty to their clients to seek the best possible execution. This does not always mean the lowest price. The lowest price may be determined to be the most important aspect of execution, but other factors such as customer support, speed, access to certain markets, and or research provided could also be important. Managers must know their clients and their clients’ trading needs. It is the manager’s responsibility to choose the best execution for each client based on their honest assessment of the client’s needs.

   5. Establish policies to ensure fair and equitable trade allocation among client accounts.

      Oftentimes, trades may initially be made on a ‘block basis’, meaning that large quantities are traded. This often entails a discount for the manager for the large volume of business being done. These savings are the property of the clients and must be sued for their benefit. The Manager must establish policies that support the fair and equitable distribution of block-style trades among client accounts.

      For example, dividing the trade on a pro-rata basis is a best practice. Managers ultimately need to ensure that just because a certain account is small, the client will not miss out on an opportunity to participate in a trade that is suitable for them.

4. RISK MANAGEMENT, COMPLIANCE AND SUPPORT
   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.

      As is often the case, Managers are expected to have written and detailed policies and procedures that ensure the smooth functioning and regulatory compliance of their operations. These policies and procedures can span the entire scope of a manager’s business and must be thorough enough to keep the firm compliant. Compliance here refers to not only the local laws but also the CFA^® Institute Code of Conduct and the AMCC.

   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.

      All firms must have a compliance officer with the necessary experience to fulfill their duties. They must be empowered to ensure firm compliance using a variety of methods. Compliance officers are responsible for training and monitoring a compliance team. This includes, as always, creating a written list of compliance policies and procedures. Compliance officers typically have a staff of employees working in the compliance department, depending on the size of the firm.

   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.

      Pertinent account information must be relayed to clients and must be verified as accurate. This can sometimes entail using an independent audit of the information, but it must at least be reviewed by the Manager’s firm to ensure its accuracy.

   4. Maintain records for an appropriate period of time in an easily accessible format.

      Whether electronic or paper-based, Managers must keep supporting documentation on hand. Best practice often stipulates 7 years but may change depending on the nature of the information. This documentation should leave a trail of evidence that describes the investment management process, including how the research was conducted, what conclusions it yielded, and how those opinions were implemented. They should also contain proof that the firm’s written policies and procedures were being followed at the time.

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

      Managers are ultimately responsible for the investment results they achieve, whether or not they have outsourced some of the firm’s functions are not. A competent staff, including traders, human resources managers, marketers, researchers, etc., is necessary to achieve a professional and compliant firm focused on delivering promised results to clients.

   6. Establish a business continuity plan to address disaster recovery or periodic disruptions of the financial markets.

      Managers should consider having the following:

      • Adequate backup, preferably off-site, for all account information.
      • Alternative 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 the event of a facility or communication disruption.
      • Plans for contacting and communicating with clients during a period of extended disruption.

      This business continuity plan should be designed so that firm operations are uninterrupted in the case of any catastrophes. The amount and type of catastrophes possible depend on the region, but should always include some planning for natural disasters, power outages, pandemics, etc. Plans should be tested on a firmwide basis regularly to identify any needed changes.

   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.

      Somewhat similar to a business continuity plan, a firmwide risk plan focuses its efforts on identifying, monitoring, and mitigating market-specific risks faced by the firm and its clients. The idea here is to consider every possible market risk and to create a plan that seeks to attenuate the damage. The amount and type of risk will depend on which financial securities are most often used by the Manager. It will often be appropriate for managers to perform:

      • Stress tests.
      • Scenario tests.
      • Backtests.
5. PERFORMANCE AND EVALUATION
   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.

      Using the GIPS^® framework is highly recommended. While not a requirement, the GIPS^® framework is designed to prevent all kinds of deceitful investment performance reporting. This could include anything from using performance earned with a previous employer to selecting only the best-performing portfolios to put into a marketing campaign. Mastering the GIPS^® section will give candidates a complete grasp of what constitutes fair and ethical performance reporting.

   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.

      Performance reporting can often leave many gray areas, which can be taken advantage of by an opportunistic manager. Managers may wish to manipulate certain performance details to increase their compensation. This is in direct violation of the spirit of the GIPS^® Standards, but also the AMCC.

6. DISCLOSURES
   1. Communicate with clients on an ongoing and timely basis.

      It is up to Managers to decide how often and in what fashion to communicate with clients. Ultimately clients need to have sufficient information to evaluate their economic situation and evaluate the success of their investment management services. Managers should seek to build trust and confidence with their clients.

   2. Ensure that disclosures are truthful, accurate, complete, and understandable and are presented in a format that communicates the information effectively.

      Managers are responsible for reviewing and verifying all of the information contained within disclosures. If a third party was used to create the disclosures, the Manager must review and inspect the information.

   3. Include any material facts when making disclosures or providing information to clients regarding themselves, their personnel, investments, or the investment process.

      Clients need to be able to assess, on an ongoing basis, the success of the investment management program they are paying for. No information should be purposely withheld from clients. Managers should consider which information they would like to have, were they to be in the clients’ shoes. This includes material changes to office personnel, investment styles, or the process of investing. For example, if a manager had always used fundamental analysis in their buy-and-hold strategy and then suddenly switched to a data-science-driven quantitative analysis style with shorter holding periods, the clients would need to know this fact to properly assess their continued involvement with the investment manager.

   4. Disclose the following:
      1. Conflicts of interests. Managers should avoid even the appearance of a conflict of interest. Examples of some of the types of activities where actual or potential conflicts of interest are common include:
         • The use of soft dollars or bundled commissions.
         • Referral and placement fees.
         • Trailing commissions.
         • Sales incentives.
         • Directed brokerage arrangements.
         • Allocation of investment opportunities among similar portfolios.
         • Manager or employee holdings in the same securities as clients.
         • Whether the Manager co-invests alongside clients.
         • Use of affiliated brokers.
      2. Regulatory and/or disciplinary action the Manager has been subject to.
      3. The investment process, including information regarding:
         • Lock-up periods.
         • Strategies.
         • Risk factors.
         • Use of derivatives and leverage.
      4. Clients should have access to comprehensive information that enables them to assess their investments effectively. This includes not just their returns but also the risks they’ve taken and the costs they’ve incurred. To achieve this, clients must receive detailed information about fee calculations and all relevant data to independently verify the fees they’ve been assessed.
      5. Soft commissions should always be disclosed.
      6. In the realm of ethics, there’s flexibility in how to handle investment performance reporting. Managers should consider what information clients need to evaluate their portfolio’s performance. While there are no strict rules on presentation, following the GIPS® framework is recommended as a best practice. Reporting frequency should strike a balance between providing sufficient information and not overburdening the firm.
      7. Valuation methods used to make investment decisions and value client holdings. Clients should know whether the assets in their portfolios are valued using:
         • Closing market values.
         • Third-party valuations.
         • Internal valuation models.
         • Other methods.

         This type of disclosure should be made in an accessible language and should allow the client to examine the various choices between the valuation methods available and those used. The goal is to allow clients to analyze their portfolios comprehensively, should they desire.

      8. Shareholder voting policies. Managers must vote in the best interest of their clients when holding shares with voting rights.
      9. Trade allocation policies.
      10. Results of the review or audit of the fund or account.
      11. Significant personnel or organizational changes that have occurred at the management firm. Clients should promptly be made aware of significant management changes.
      12. Risk management processes. Managers must have and implement a compliant risk management process. This should be included in the communications to clients to allow them to judge the efficacy of the process/programs.

Question

As part of the firmwide risk-management program, it is recommended that managers perform which of the following?

1. Stress tests.
2. Back tests.
3. All of the above.

Solution:

The correct answer is C.

Both stress testing and back testing are recommended risk-management processes per the asset manager code of conduct.

Ethical and Professional Standards: Learning Module 4: Asset Manager Code of Professional Conduct