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Code of Ethics and Standards of
Professional Conduct
1
Code of Ethics
2
Code of Ethics
Act with integrity, competence, dignity, and in an
ethical manner when dealing with the public, clients,
prospects, employers, employees, and fellow
members
Practice and encourage others to practice in a
professional and ethical manner that will reflect credit
on members and their profession
Strive to maintain and improve their competence and
the competence of others in the profession
Use reasonable care and exercise independent
professional judgment
3
Standard of Professional Conduct
Generalities
4
AIMR Standards Categories
Fundamental Responsibilities
Relationships with and Responsibilities to the
Profession
Relationships with and Responsibilities to the
Employer
Relationships with and Responsibilities to
Clients and Prospects
Relationships with and Responsibilities to the
Investing Public
5
Standards of Practice Handbook
Framework
Purpose and Scope of the Standards
Application of the Standards
Procedures of Compliance
6
Standard of Professional Conduct
Standard I- Fundamental
Responsibilities
7
I - Fundamental Responsibilities
Member shall:
– Maintain knowledge of and comply with all
applicable laws, rules, and regulations (including
AIMR’s Code of Ethics and Standards of
Professional Conduct) of any government,
governmental agency, regulatory organization,
licensing agency, or professional association
governing the members’ professional activities
– Not knowingly participate or assist in any
violations of such laws, rules, or regulations
8
I - Purpose and Scope
Sets minimum standards of conduct in
areas not specifically covered by other
standards (members expected to aim
higher)
Requires members to comply with laws,
rules and regulations governing their
conduct
9
I - Purpose and Scope (cont’d)
International application of Code and
Standards:
– Rule of thumb:
• Must adhere to the strictest between
applicable law and Code and Standards
– What happens if client’s country law differs
from member’s country law? Which law
applies?
• Depend on particular facts and circumstances
of each case
• In doubt, seek legal advice 10
I - Purpose and Scope (cont’d)
Second part applies when members know or
should know that their conduct may
contribute to violation of applicable laws,
regulations or Code and Standards
Not require to report legal violations to the
appropriate governmental or regulatory
organizations (but disclosure may be prudent)
11
I - Applications
If members feel maybe a violation,
should consult general counsel
(competent and unbiased)
If members know a violation, report to
supervisor and dissociate if no action
taken
Even if U.S. citizen and works for U.S.
based firm, must comply with strictest of
country law and Code and Standards 12
I - Procedures for Compliance
Maintain current files (reference copies
of applicable laws)
Keep informed (memo to employees to
inform about changes in applicable
laws)
Review procedures (to ensure that they
reflect current law)
13
I - Procedures for Compliance
(cont’d)
When members suspect client or
colleague of illegal activities should:
– Determine legality (consult counsel)
– Dissociate from the activity (urge the firm
to act to stop the activity)
Inaction + continuing association may
be construed as participation or
assistance in the illegal conduct
14
Standard of Professional Conduct
Standard II - Relationships and
Responsibilities to the Profession
15
II (A) - Use of Professional
Designation
AIMR members may reference their memberships
only in a dignified and judicious manner. The use of
the reference may be accompanied by an accurate
explanation of the requirements that have been met
to obtain membership in these organizations.
Those who have earned the right to use the
Chartered Financial Analyst designation may use the
marks “Chartered Financial Analyst” or “CFA” and are
encouraged to do so, but only in a proper, dignified,
and judicious manner. The use of the designation
may be accompanied by an accurate explanation of
the requirements that have been met to obtain the
right to use the designation. 16
II (A) - Use of Professional
Designation (cont’d)
Candidates in the CFA Program, as defined in the
AIMR Bylaws, may reference their participation in the
CFA Program, but the reference must clearly state
that an individual is a candidate in the CFA Program
and cannot imply that the candidate has achieved
any type of partial designation.
17
II (A) - Purpose and Scope
Responsibility to use the CFA designation or
refer to candidacy in the CFA Program
properly and in a manner that does not
mislead the investing public or others
Applies to:
– Use of Chartered Financial Analysts, CFA mark or
membership in AIMR
– All related explanation or descriptions
(letterheads, cards, oral statements, etc.)
18
II (A) - Purpose and Scope
(cont’d)
To be granted CFA designation:
– Complete CFA Program (3 exams, 3 years
of experience, undergraduate diploma)
– Commitment to abide by Professional
Conduct Program (file annual Professional
Conduct Statement)
– Maintain active membership in AIMR (pays
dues)
19
II (A) - Purpose and Scope
(cont’d)
Failure to meet those requirements:
– CFA designation automatically suspended
Once suspended may not:
– hold themselves as CFA Charterholders
– place CFA after their names
– display CFA Charter in work environment
20
II (A) - Purpose and Scope
(cont’d)
CFA mark must be used as an adjective
not a noun and never be used in the
plural or the possessive
CFA designation to people who:
– passed the 3 exams
– have received their Charters
– are Charterholders in good standing
21
II (A) - Applications
Advertisement limited to statements of facts
regarding the CFA designation and/or AIMR
Cannot say pass exams on first try (obviously
cannot imply better performance for that
reason!)
To be a candidate must be registered to take
the next scheduled exam
There is no partial CFA designation (e.g. no
CFA II)
Must pay AIMR dues to use CFA designation
22
II (A) - Procedures of Compliance
Only CFA or Chartered Financial Analyst
should appear after the name
Designation should not appear in type larger
than the name
May state year when designation was
received and years when active
Charterholders
Description of the designation should be
concise
23
II (B) - Professional Misconduct
Members shall not engage in any professional
conduct involving dishonesty, fraud, deceit, or
misrepresentation or commit any act that reflects
adversely on their honesty, trustworthiness, or
professional competence.
Members and candidates shall not engage in any
conduct or commit any act that compromises the
integrity of the CFA designation or the integrity of the
CFA designation or the integrity or validity of the
examinations leading to the award of the right to use
the CFA designation.
24
II (B) - Purpose and Scope
Extends beyond technical compliance
with laws that govern professional
activities
Addresses personal integrity and
prohibits individual behavior that reflects
adversely on the entire profession
25
II (B) - Purpose and Scope (cont’d)
Violations include (whether or not the
offenses relate to member’s professional
activities):
– Conviction of felony or crime punishable by
more than one year in prison
– Misdemeanors involving moral turpitude
(lying, cheating, stealing,etc.)
– Dishonest activities that do not result in
criminal convictions
– Repeated convictions for misdemeanors or
act reflecting negatively on professional
competence 26
II (B) - Applications
Frequent heavy drinking at lunch violates
II(B)
Frequent convictions for minor offenses
(possession of illegal substances) violates
II(B)
Providing information concerning CFA exams
violates II(B)
27
II (B) - Procedures for Compliance
Matter of the member’s own personal
integrity and moral character
Members should encourage their
employers to:
– make clear that bad personal behavior will
not be tolerated
– adopt a code of ethics to which every
employees must subscribe
– conduct background checks on potential
employees 28
II (C) - Prohibition against
Plagiarism
Members shall not copy or use, in substantially the
same form as the original, material prepared by
another without acknowledging and identifying the
name of the author, publisher, or source of such
material. Members may use, without
acknowledgment, factual information published by
recognized financial and statistical reporting services
or similar sources.
29
II (C) - Purpose and Scope
Plagiarism:
– Copying or using in subtantially the same form
materials prepared by others without
acknowledging the source of the material or
identifying the author and publisher of such
material
Exception:
– Use of factual information published by recognized
financial and statistical reporting services or
similar sources
30
II (C) - Purpose and Scope (cont’d)
Examples:
– Take research reports or study done by another
and change name
– Using excerpts from articles or report prepared by
others without acknowledgment
– Citing specific quotations without specific
reference
– Presenting statistical estimates with source
identified but without caveats used
– Using charts and graphs without their sources
– Copying proprietary computerized spreadsheets
31
II (C) - Purpose and Scope (cont’d)
Plagiarism is a violation of II(C) but also
risk to violates IV(A.1) - Reasonable
Basis and Representations
Plagiarism applies to:
– oral communications
– visit with associates, clients and customers
– use of audio/video media
– telecommunications
32
II (C) - Purpose and Scope (cont’d)
“Recognized” source:
– Source worthy of confidence or one that is reliable
and generally accepted or viewed by the
investment profession globally or regionally or by
a particular industry segment as a recognized
source (Standard & Poor’s, Moodys, etc.)
Whether the information must be attributed to
primary sources depends on whom the
member is representing when disseminating
the information (represent firm vs expert
witness)
33
II (C) - Applications
Using someone report with minor
modifications or additions without
acknowledgment violates II(C)
Using parts of someone else report with
acknowledgment in your report does not
violate II(C)
Models must be acknowledge
Copying marketing materials without
permission violates II(C)
34
II (C) - Procedures of Compliance
Maintain copies
Attribute quotations
Attribute summaries
35
Standard of Professional Conduct
Standard III - Relationships with
and Responsibilities to the
Employer
36
Employer-Employee Relationship
Employee:
– Someone in the service of another who has power
or right to control or direct the work
– written or implied contract
– actual receipt of monetary compensation is not
required
Factors determining the degree of control:
– extent of control and supervision
– kind of occupation and nature of skills
– responsibility for costs of operation
– method and form of payments
– length of job commitment 37
III (A) - Obligation to Inform
Employer of Code and Standards
Members shall:
– Inform their employer in writing, through their
direct supervisor, that they are obligated to comply
with the Code and Standards and are subject to
disciplinary sanctions for violations thereof.
– Deliver a copy of the Code and Standards to their
employer if the employer does not have a copy.
38
III (A) - Purpose and Scope
Requires that member take steps to
notify their employer in writing of the
Code and Standards
In writing includes any form of
communication that can be documented
(e.g. e-mail)
“Employers” means “immediate
supervisor”
39
III (A) - Purpose and Scope
(cont’d)
If employer has publicly acknowledged,
in writing, adoption of Code and
Standards, member need not give the
notification
Each member must assume
responsibility for Standard III(A)
40
III (A) - Applications
Cannot assume supervisor is aware of
Code and Standards, even if the
supervisor is a member
Example of memo
41
III (A) - Procedures for
Compliance
Members should provide a written
notice to their supervisors advising them
of their obligation to abide by the Code
and Standards
42
III (B) - Duty to Employer
Members shall not undertake any independent
practice that could result in compensation or other
benefit in competition with their employer unless they
obtain written consent from both their employer and
the persons or entities for whom they undertake
independent practice
43
III (B) - Purpose and Scope
Does not preclude a member form entering
into an independent business while employed
but must secure written permission from
employer and client
“Practice” means any service that the
employer currently makes available for
remuneration (actual receipt of monetary
compensation is not required)
“Undertaking independent practice”means
engaging in competitive business, as
opposed to making preparations to begin
such practice 44
III (B) - Purpose and Scope
(cont’d)
If members plan to leave employers,
those activities might constitute a
violation:
– misappropriation of trade secrets, clients,
and client lists
– misuse of confidential information
– conspiracy to bring mass resignation
– solicitation of employer’s clients prior to
departure 45
III (B) - Purpose and Scope
(cont’d)
Business relationship: employee vs
independent contractor:
– Determined by the degree of control exercised by
the employing entity over the member
– Factors determining control:
• whether the parameters of the job are set (location,
hours,etc.)
• whether facilities are provided
• numbers of clients or employers the members works for
• whether the member holds himself or herself out to other
employers for additional work
46
II (B) - Applications
Performance of services on own time is not
relevant (still need written consent)
If a transaction could result in compensation
but get caught before the deal violation of
III(B)
Except with consent of employer, may not
leave with employer property (books, reports,
etc.)
Independent contractor responsibilities are
determined by agreement between them and
clients and nature of services 47
III (B) - Procedures for
Compliance
Members should not render services
until receiving written consent from both
employer and client
Members should not contact existing or
potential clients prior to leaving their
employers
48
III (C) - Disclosure of Conflicts
to Employer
Members shall:
– Disclose to their employer all matters, including
beneficial ownership of securities or other
investments, that reasonably could be expected to
interfere with their duty to their employer or ability
to make unbiased and objective
recommendations.
– Comply with all prohibitions on activities imposed
by their employer if a conflict of interest exists.
49
III (C) - Purpose and Scope
Deals with conflicts of interest in any actions
or decisions of members and focuses on
responsibilities to the employer
– Standard IV(B.7) deals exclusively with conflicts
arising from investment advice and focuses on
protecting the client
Requires that members obey internal
directives and use their own judgment to
report any potential conflicts that are not
covered by their employers guidelines
Mere appearance of conflict may create
problems 50
III (C) - Applications
Ignoring employer’s trading prohibitions
violates III(C)
Not disclosing to employer
responsibilities with charity or
foundation violates III(C)
Directing trades violates III(C) because
is in conflict with employer’s interest
(maybe also client’s interest)
51
III (C) - Procedures of
Compliance
Members should report any beneficial interest
that could reasonably be considered a conflict
of interest with their responsibilities to their
employer:
– securities
– corporate directorships
– trustee positions
– other special relationships
52
III (D) - Disclosure of Additional
Compensation Arrangements
Members shall disclose to their employer in writing all
monetary compensation or other benefits that they
receive for their services that are in addition to
compensation or benefits conferred by a member’s
employer
53
III (D) - Purpose and Scope
Compensation and benefits include
direct and any indirect compensation or
other benefits received from third
parties
“In writing” includes any form of
communication that can be documented
(e.g. e-mail)
54
III (D) - Applications
Clients offers manager a free vacation if
good performance: must be disclose to
employer (will be probably reject to
avoid partiality)
Even if no monetary compensation is
received, must disclose benefits
received (e.g. free membership)
55
III (D) - Procedures for
Compliance
Members should make written report to
employer about any compensation
receive or propose to receive
Written report should state:
– nature of compensation
– amount of compensation
– duration of the agreement
56
III (E) - Responsibilities of
Supervisors
Members with supervisory responsibility, authority, or
the ability to influence the conduct of others shall
exercise reasonable supervision over those subject
to their supervision or authority to prevent any
violation of applicable statutes, regulations, or
provisions of the Code and Standards. In so doing,
members are entitled to rely on reasonable
procedures designed to detect and prevent such
violations.
57
III (E) - Purpose and Scope
“Supervisor” is any investment professional
who have employees subject to their control
or influence (whether or not employees are
members)
Delegation of supervisory duties is
authorized; such delegation does not relieve
members of their supervisory responsibilities
(need to instruct the delegates about the
method to prevent and detect violations)
58
III (E) - Purpose and Scope
(cont’d)
Reasonable supervision if:
– establish and implement written
compliance procedures
– ensure that those procedures are followed
through periodic review
If reasonable supervision is respected but
unable to detect violations : comply with III(E)
Members may be in violation if knows or
should know that the procedures designed
are not being followed 59
III (E) - Purpose and Scope
(cont’d)
Supervisor expected to understand what
constitute an adequate compliance system
“Adequate” procedures are those designed to
meet:
– industry standards
– regulatory requirements
– requirements of Code and Standards
– circumstances of the firm
Supervisor must ensure the procedures are
monitored and enforced 60
III (E) - Purpose and Scope
(cont’d)
Supervisor should bring an inadequate
compliance system to attention and
recommend corrective action
If no or inadequate compliance system,
member should decline in writing to accept
supervisory responsibility until problem
solved
61
III (E) - Purpose and Scope
(cont’d)
If supervisor learns a violations:
– initiate an investigation
– relying on employee’s statements that
violation will not recur is not enough
– reporting misconduct and warning to cease
activity is not enough
– take steps to ensure the violations will not
be repeated
62
III (E) - Applications
Adequate procedures should inform
subordinates of their duties
Supervisors should be sensitive to
conflicts between their own self-interest
and their supervisory duties
Failure to take steps to prevent further
violations violates III(E) (should
increase supervision and place
appropriate limitations) 63
III (E) - Procedures of
Compliance
Should adopt clear written compliance
procedures
Should designate a compliance officer
with clear authority and responsibilities
Should define procedures to report
violations
Should define procedures for sanctions
64
Standard of Professional Conduct
Standard IV - Relationships with
and Responsibilities to Clients and
Prospects
65
Standard of Professional Conduct
Standard IV - Relationships with
and Responsibilities to Clients and
Prospects
A. Investment Process
66
IV (A.1) - Reasonable Basis and
Representations
Members shall:
– Exercise diligence and thoroughness in making
investment recommendations or in taking
investment actions
– Have a reasonable and adequate basis, supported
by by appropriate research and investigation, for
such recommendations or actions
– Make reasonable and diligent efforts to avoid any
material misrepresentation in any research report
or investment recommendation
– Maintain appropriate records to support the
reasonableness of such recommendations or
67
actions
IV (A.1) - Purpose and Scope
Perform diligent and thorough
investigation appropriate to
circumstances for an investment
recommendation or action:
– establishing a reasonable basis for
recommendation
– exercising diligence in avoiding any
material misrepresentation
– maintaining record to support
recommendations 68
IV (A.1) - Purpose and Scope
(cont’d)
Members are in compliance if make a
recommendation on the basis of:
– their firm’s research
– the research of another party who
exercised diligent and thoroughness in
arriving at that decision
– research prepared by brokerage firm,
bank, or investment services
– quantitatively oriented research
69
IV (A.1) - Purpose and Scope
(cont’d)
For general recommendations:
– members may depend on reliable sources
both within and outside the member’s firm
For individual investment transactions:
– same sources but also obligation to
consider the transaction within the context
of the client’s entire portfolio
70
IV (A.1) - Purpose and Scope
(cont’d)
Must make reasonable effort:
– to ensure recommendation is accurate (if reason
to suspect information, do not use that
information)
– to cover all pertinent issues (even if different
investment style)
Should take in consideration accounting and
disclosures differences among countries
Obligation to identify differences between
foreign and domestic markets (consider in
work and inform clients) 71
IV (A.1) - Applications
Must consider each investment within
the context of the entire portfolio
Poor research violates IV (A.1):
– not enough data
– not disclosing limitations
– etc.
72
IV (A.1) - Procedures of Compliance
Analyze basic characteristics:
– written records should indicate the
characteristics and the basis for
recommendation
Analyze portfolio needs:
– written records should indicate the
characteristics and the basis for
recommendation
Maintain files (paper or electronic form)
73
IV (A.2) - Research Reports
Members shall:
– Use reasonable judgment regarding the inclusion
or exclusion of relevant factors in research reports
– Distinguish between facts and opinions in
research process
– Indicate the basic characteristics of the investment
involved when preparing for public distribution a
research report that is not directly related to a
specific portfolio or client
74
IV (A.2) - Purpose and Scope
Have to include in each research report
those key factors that are instrumental
to the investment recommendation
“Report” is not only a written report; it
can be made via:
– in -person recommendation
– telephone conversation
– media broadcast
– transmission by computers (internet)
– “one word or in depth reports” 75
IV (A.2) - Purpose and Scope
(cont’d)
Report may be general or relate to specific
security
Should outline known limitations of the
analysis and conclusions contained in the
report
Opinions must be separated from facts
In cie analysis, duty to gather comprehensive
information about cie:
– may ask cie to review the report for factual
inaccuracies
– should review and analyze information provided
76
by cie
IV (A.2) - Applications
Must include all the relevant factors
behind an investment advice
Analyst estimating a figure and using as
a fact violates IV(A.2)
Must discuss upside and downside
potential (balanced discussion)
May ask a cie to review a researh report
77
IV (A.2) - Procedures for
Compliance
Maintain record indicating the nature of
research (should be able to supply additional
information covering factors not included)
Take reasonable steps to assure themselves
of the reliability, accuracy, and
appropriateness of the data included in report
Acknowledgment of the source should be
made when appropriate (II(C))
Members strongly urged to encourage their
firms to develop such procedures if they do
not have them in place 78
IV (A.3) - Independence and
Objectivity
Members shall use reasonable care and judgment to
achieve and maintain independence and objectivity in
making investment recommendations or taking
investment action.
79
IV (A.3) - Purpose and Scope
To maintain independence and
objectivity so that client will have benefit
from work and opinions unaffected by
any potential conflict affecting judgment
Perks: gifts, tickets, favor, job referrals,
allocation of shares in IPOs, etc.
Modest gifts less than $100 are
acceptable
80
IV (A.3) - Purpose and Scope
(cont’d)
Gifts from clients may exceed $100 but
must be disclose
Members should maintain
independence from their own firms (e.g.
issue favorable reviews)
Professional or social activities within
AIMR may subtly threaten
independence or objectivity
81
IV (A.3) - Applications
Travel accommodations for visit site should
be assume by analyst except when out of the
way
Recommendations should not be influence by
business security or by any pressure within
the firm (must keep integrity of opinions)
Even if disclose, gifts exceeding $100 might
not be judge acceptable by employer
Even if disclose, gifts exceeding $100 by
entities able to gain influence over the analyst
violates IV(A.3) 82
IV (A.3) - Procedures of
Compliance
Protect integrity of opinions
Disclose all corporate relationships
Disclose personal holdings/beneficial
ownership
Create a restricted list
Restrict special cost arrangements
Limit gifts
Restrict investments
Review procedures 83
Standard of Professional Conduct
Standard IV - Relationships with
and Responsibilities to Clients and
Prospects
B. Interactions with Clients and
Prospects 84
IV (B.1) - Fiduciary Duties
In relationships with clients, members shall use
particular care in determining applicable fiduciary
duty and shall comply with such duty as to those
persons and interests to whom the duty is owed.
Members must act for the benefit of their clients and
place their clients’ interests before their own.
85
IV (B.1) - Purpose and Scope
Understand and adhere to the fiduciary
responsibility they assume with each
client
Fiduciary:
– individual or institution charged with the
duty of acting for the benefit of another
party in matters coming within the scope of
relationship between them
Duty required in fiduciary relationships
is greater than many other business
relationship (position of trust) 86
IV (B.1) - Purpose and Scope
(cont’d)
Relates to members who have:
– discretionary authority
– responsibility for the management of a client’s
assets
– other relationship of special trust
Fiduciary responsibility includes:
– duty of loyalty
– duty to exercise reasonable care
To whom the duty is owed:
– individual clients : the clients
87
– pension plans or trusts: the beneficiaries
IV (B.1) - Purpose and Scope
(cont’d)
“Custody control” : fiduciary has any direct
access to client’s funds
In those case, heightened level of fiduciary
duty arises:
– fiduciaries must manage any pool of assets in
their control in accordance with the terms of the
governing documents
Exact fiduciary duties depend on the nature
of the relationship with client or type of
account
88
IV (B.1) - Purpose and Scope
(cont’d)
Individual clients:
– different knowledge between professional
and client (vulnerability)
– manager has responsibility to ensure:
• client’s objectives and expectations are realistic
and suitable
• that risks involved are fully understood and
appropriate
89
IV (B.1) - Purpose and Scope
(cont’d)
Trusts:
– subject to the Prudent Man Rule:
• a fiduciary shall exercise the judgment and care, under
the circumstances then prevailing, which men of
prudence, character and intelligence exercise in the
management of their own affairs, not in regard of
speculation but in regard to the permanent disposition of
their funds, considering the probable income as well as
the probable safety of their capital (Model Prudent Man
Investment Act)
– Trustees must achieve an equitable
balance between current income and the
preservation of principal in real terms 90
IV (B.1) - Purpose and Scope
(cont’d)
Charitable organizations and public pension
plans:
– Duties different from trusts even though many
have been placed under ERISA
– Members who hold a fiduciary position for these
organizations must examine applicable law, client
agreement, and client guidelines for guidance as
to their duties
– Subject to Uniform Management of Institutional
Funds Act:
• fiduciaries are held to a standard of ordinary business
care and prudence at the time of their actions 91
IV (B.1) - Purpose and Scope
(cont’d)
Corporate pension plans:
– Governed by ERISA; the fiduciaries must:
• act solely in interest of beneficiaries
• act with care, skill, prudence and diligence of a prudent
person acting in like capacity
• diversify the plan’s investment (protect from big loss)
• act in accordance of plan documents
• refrain from engaging in prohibited transactions
– Decisions are judged in context of total portfolio
rather than individual investment(risk, liquidity,etc.)
– Duty owned to participants and beneficiaries (not
to plan sponsor) 92
IV (B.1) - Purpose and Scope
(cont’d)
Pooled funds and separate accounts:
– owe fiduciary duty to the funds investors
Corporate governance:
– fiduciaries are obligated to vote proxies in an
informed and responsible manner for the benefit of
the beneficiaries
– this responsibility remains with trustee except
when delegated to an investment manager
93
IV (B.1) - Purpose and Scope
(cont’d)
Soft dollars:
– investment manager uses client brokerage to purchase
research services that benefit the investment manager
– if soft dollars benefit manager, must disclose to clients the
method followed in addressing the potential conflict of
interest
– if manager pays higher commissions than normally to
purchase services, he is violating IV(B.1)
– manager must follow laws of the country involved
– use client’s brokerage to purchase services for the client is
not a violation of IV(B.1)
94
IV (B.1) - Applications
Fiduciary responsibilities should take precedence
over any ties to corporate managers and self-interest
Voting proxies in favor of management rather than
beneficiaries violates IV(B.1)
Using client brokerage for non-research services
violates IV(B.1)
Using client brokerage for research services not
directly benefiting the account being traded is
permitted by law as long best price and execution are
received and the practice is disclosed
Using client brokerage for personal benefit violates
IV(B.1) 95
IV (B.1) - Procedures of
Compliance
Follow all applicable law and rules
Establish the investment objectives of the client
Diversify (unless not consistent with guidelines and
objectives)
Deal fairly with all clients with respect to investment
actions
Disclose all possible conflicts of interest
Disclose compensation arrangements
Determine who is authorized to vote proxies
Preserve confidentiality
Provide the best execution (cost)
Serve with loyalty 96
IV (B.2) - Portfolio Investment
Recommendations and Actions
Members shall:
– Make a reasonable inquiry into a client’s financial situation,
investment experience, and investment objectives prior to making
any investment recommendations and shall update this information
as necessary, but no less frequently than annually, to allow the
members to adjust their investment recommendations to reflect
changed circumstances.
– Consider the appropriateness and suitability of investment
recommendations or actions for each portfolio or client. In
determining appropriateness and suitability, members shall
consider applicable relevant factors, including the needs and
circumstances of the portfolio or client, the basic characteristics of
the investment involved , and the basic characteristics of the total
portfolio. Members shall not make a recommendation unless they
reasonably determine that the recommendation is suitable to the
client’s financial situation, investment experience, and investment
objectives 97
IV (B.2) - Portfolio Investment
Recommendations and Actions
(cont’d)
Members shall:
– Distinguish between facts and opinions in the presentation of
investment recommendations.
– Disclose to clients and prospects the basic format and
general principles of the investment processes by which
securities are selected and portfolios are constructed and
shall promptly disclose to clients and prospects any changes
that might significantly affect those processes.
98
IV (B.2) - Purpose and Scope
To consider carefully the needs,
circumstances, and objectives of the client
when determining the appropriateness and
suitability of a given investment
Ensure that the client are fully aware of the
investment policies, strategies and selection
procedures that apply to the investment of the
client’s assets
99
IV (B.2) - Purpose and Scope
(cont’d)
Members should gather client information
(objectives , risk, etc.) at the beginning of the
relationship
Repeated at least annually and prior to
material changes
Acquire information even when prompt action
is required
– exception:
• client relationship has just been established
• portfolio of securities already existing for that client
• proceeds of a maturing fixed-income issue becoming100
available
IV (B.2) - Purpose and Scope
(cont’d)
Perhaps the most important factor to be
considered in matching appropriateness and
suitability with a client’s needs and
circumstances is measuring that client’s
tolerance for risk
Member should amply and adequately
illustrate to clients the manner in which the
member conduct the investment decision-
making process
101
IV (B.2) - Applications
Should acquaint client with downside
risk along with upside potential
Should focus on characteristics of
client’s entire portfolio, not on an issue-
by-issue analysis
Existing clients must be made aware of
changes in portfolio (style, valuation,
deciding team, etc.)
102
IV (B.2) - Procedures of
Compliance
Formulate an investment policy with the
following:
– Client identification (nature)
– Investor objectives (return vs risk)
– Investor constraints:
• liquidity needs
• expected cash flows
• investable funds
• time horizon
• Tax considerations
• etc.
103
IV (B.3) - Fair Dealing
Members shall deal fairly and objectively with all
clients and prospects when disseminating investment
recommendations, disseminating material changes in
prior investment recommendations, and taking
investment action.
104
IV (B.3) - Purpose and Scope
Fairly implies no discrimination against
clients when disseminating
recommendations or taking action
But not “equally” because members
could not possibly reach all clients
simultaneously
Covers two groups of members:
– those who investment recommendations
– those who take investment action
105
IV (B.3) - Purpose and Scope
(cont’d)
Investment recommendations:
– any opinion expressed by a member in
regard to purchasing, selling, or holding an
investment
– can be disseminated through:
• initial detailed report
• brief update report
• addition or deletion from recommended list
• oral communication
– Should be disseminated fairly 106
IV (B.3) - Purpose and Scope
(cont’d)
– Material change is anything that would
cause an investor to change his mind
(definition is subjective)
– Material change should be communicated
to:
• clients known to have purchased the security or
hold it
• persons placing orders contrary to the current
firm recommendation
107
IV (B.3) - Purpose and Scope
(cont’d)
Investment actions:
– ensure that all clients are treated fairly in
light of their investment objectives and
circumstances (e.g. pro rata distribution)
– must disclose to clients the allocation
procedures
– member’s duty of fairness and loyalty can
never be overridden by client consent
108
IV (B.3) - Applications
Disseminating recommendations to best
clients first violates IV(B.3)
Disclosure do not change the fact that a
policy is unfair
Should allocate trade prior to the order
execution (using systematic approach, e.g.
pro rata basis)
Should design equitable system to prevent
selective disclosure
109
IV (B.3) - Procedures for
Compliance
Limit the number of people involved
Shorten the time frame between decision and
dissemination
Publish personnel guidelines for dissemination
Simultaneous dissemination
Establish control over trading activity
Establish procedures for determining material change
Maintain a list of clients and their holdings
Develop trade allocation procedures
Disclose trade allocation procedures
Establish systematic account review
Disclose levels of service 110
IV (B.4)- Priority of Transaction
Transactions for clients and employers should have priority over
transactions in securities or other investments of which a
member is the beneficial owner so that such personal
transactions do not operate adversely to their clients’ or
employers’ interests. If members make recommendation
regarding the purchase or sale of a security or other investment,
they shall give their clients and employer adequate opportunity
to act on the recommendation before acting on their own behalf.
For purposes of the Code and Standards, a member is a
“beneficial owner” if the member has:
– a direct or indirect pecuniary interest in the securities;
– the power to vote or direct the voting of the shares of the
securities or investments;
– the power to dispose or direct the disposition of the security
or investment. 111
IV (B.4) - Purpose and Scope
Give interests of clients and employer
priority over personal financial interests
Designed to prevent any potential or
appearance of conflict with respect to
personal transaction
Applies to member who have access to
information or have knowledge of
pending transactions that may be made
on behalf of their clients or employer
112
IV (B.4) - Purpose and Scope
(cont’d)
May undertake transactions in account for
which the member is a beneficial owner only
after the clients or employer had an adequate
opportunity to act on the recommendation
Personal transactions include those made for:
– member’s own account
– family accounts
– accounts in which member has direct or indirect
pecuniary interest
Family account that are client account should
be treat as client account 113
IV (B.4) - Applications
Not changing recommendations or not
disclosing information to act first
violates IV(B.4)
Placing family’s interests above
employer’s interests violates IV(B.4)
Family client account should be treated
like other account
Waiting to act after recommendations
are announced but before client have
114
time to react violates IV(B.4)
IV (B.4) - Procedures of
Compliance
Define personal transactions
Define investments
Limit the number of access persons
Define prohibited transactions
Establish reporting and prior-clearance
requirements
Consider special situations
Ensure that procedures will be enforced
Contain disciplinary procedures 115
IV (B.5) - Preservation of
Confidentiality
Members shall preserve the confidentiality of
information communicated by clients, prospects, or
employers concerning matters within the scope of the
client-member, prospect-member, or employer-
member relationship unless the member receives
information concerning illegal activities on the part of
the client, prospect, or employer.
116
IV (B.5) - Purpose and Scope
Applicable when:
– information received on the basis of special
ability to conduct a portion of the client’s
business
– information received arises from or is
relevant to that portion of client’s business
that is the subject of confidential
relationship
117
IV (B.5) - Purpose and Scope
(cont’d)
If information concerns illegal activities:
– may have an obligation to report the
activities to appropriate authorities
Not intended to prevent members from
cooperating with an investigation by
AIMR’s Professional Conduct
118
IV (B.5) - Applications
Disclosure of confidential information to
a potential contributor violates IV(B.5)
Use of confidential information from a
client to tell a charity to contact him
violates IV(B.5)
Cannot rely on an agreement to refuse
to disclose information in an AIMR
investigation
119
IV (B.5) - Procedures for
Compliance
The simplest, most conservative, and
most effective way to comply:
– avoid disclosing any information received
from client except to colleagues also
working for client
120
IV (B.6) - Prohibition against
Misrepresentation
Members shall not make any statements, orally or in
writing, that misrepresent
– the services that they or their firm are capable of performing;
– their qualifications or the qualifications of their firms;
– the member’s academic or professional credentials
Members shall not make or imply, orally or in
writing,any assurances or guarantees regarding any
investment except to communicate accurate
information regarding the terms of the investment
instrument and the issuer’s obligations under the
instrument
121
IV (B.6) - Purpose and Scope
Avoid misrepresentation of services or
qualifications and prohibits
inappropriate assurances about any
investment or its return
Misrepresentation:
– act of representing improperly or
imperfectly or giving a false impression
122
IV (B.6) - Purpose and Scope
(cont’d)
Misrepresentation should not occur in:
– oral presentations
– advertising
– electronic communications
– written materials (reports, letters, etc.)
Prohibits statements that an investment
is “guaranteed” or that superior returns
can be expected based on past success
– but some investment are in fact 123
guaranteed
IV (B.6) - Applications
Orally misrepresenting the range of
services offered violates IV(B.6)
Misrepresenting qualifications violates
IV(B.6)
Promising performance and
misrepresenting investment violates
IV(B.6)
124
IV (B.6) - Procedures for
Compliance
Designate which employees are
authorized to speak on behalf of the firm
Each member should prepare a resume
for presentation for client with:
– own qualifications
– list of services able to perform
125
IV (B.7) - Disclosure of Conflicts
to Clients and Prospects
Members shall disclose to their clients and prospects
all matters, including beneficial ownership of
securities or other investments, that reasonably could
be expected to impair the member’s ability to make
unbiased and objective recommendations.
126
IV (B.7) - Purpose and Scope
Disclose fully all actual and potential
conflicts to clients:
– material ownership of securities
– market making or underwriting activities
– corporate finance relationship
– directorships
Should disclose , with approval of their
employer, special compensation
arrangements with employer that might
conflict with client’s interests 127
IV (B.7) - Applications
Must disclose to clients service on a
company’s board, underwriting service,
special ownership relation (of the firm
and in stock)
If wife or husband own significant
amount of stock, analyst considered a
beneficial owner
Failure to disclose change in
compensation arrangements violates
128
IV(B.7)
IV (B.7) - Procedures for
Compliance
Should report to clients and employers
any material beneficial interest in:
securities
– corporate directorships
– other special relationships with companies
recommended
Should make disclosure before
recommendation or action
129
IV (B.8) - Disclosure of Referral
Fees
Members shall disclose to clients and prospects any
consideration or benefit received by the member or
delivered to others for the recommendation of any
services to the client and prospect.
130
IV (B.8) - Purpose and Scope
Inform clients of any benefit received
from referrals of clients
To help clients:
– evaluate partiality
– evaluate full cost of the service
Consideration includes all fees, whether
paid in cash, in soft dollars or in kind
131
IV (B.8) - Applications
Failure to inform prospective client of
referral fee arrangements violates
IV(B.8)
Disclosure should include the nature of
the benefit and the value of the benefit
and should be made in writing
132
IV (B.8) - Procedures for
Compliance
Disclose all agreements (in writing)
Describe in the disclosure the nature of
the consideration and the estimated
dollar value of the consideration
Consult a supervisor and legal counsel
concerning any prospective
arrangement regarding referral fees
133
Standard of Professional Conduct
Standard V - Relationships with
and Responsibilities to the
Investing Public
134
V(A) - Prohibition against Use of
Material Nonpublic Information
Members who possess material nonpublic
information related to the value of a security shall not
trade or cause others to trade in that security if such
trading would breach a duty or if the information was
misappropriated or relates to a tender offer. If
members receive material nonpublic information in
confidence, they shall not breach that confidence by
trading or causing others to trade in securities to
which such information relates. Members shall make
reasonable efforts to achieve public dissemination of
material nonpublic information disclosed in breach of
a duty. 135
V(A) - Purpose and Scope
Prohibits members from taking
investment action on the basis of
information that the member knows or
should know:
– was disclosed by the person conveying
the information in violation of a confidence
or in a breach of duty
– has been misappropriated or illegally
obtained
– relates to a tender offer 136
V(A) - Purpose and Scope
(cont’d)
Information is “material” if disclosure would
have an impact on price
Information is “nonpublic” until it has been
disseminated to marketplace in general (as
opposed to a select group)
Factors to determine if information fits the
definition of material and nonpublic:
– specificity of the information
– extent of its difference from public information
– nature of the information
137
– reliability of the information
V(A) - Purpose and Scope
(cont’d)
The test for determining if a tipper is
breaching a fiduciary duty is whether the
tipper personally benefits from the disclosure
(directly or indirectly)
Three types of personal benefits:
– pecuniary or reputational benefit
– quid pro quo relationship
– a “gift” of confidential information
138
V(A) - Purpose and Scope
(cont’d)
Mosaic Theory:
– use of material public information and/or
nonmaterial nonpublic information to arrive
at conclusions that become material only
after the pieces are assembled together
139
V (A) - Applications
Trading on loose information that are
obtained without a breach of duty or no
misappropriation does not violate V(A) (e.g.
elevator conversation, “chain” information)
Trading on loose information concerning a
tender offer violates V(A)
Lack of adequate procedures to protect
material nonpublic information possessed on
the basis of a confidential relationship
violates V(A) 140
V (A) - Procedures for
Compliance
Members and firms should establish,
maintain, and enforce written
compliance policies and procedures
designed to prevent the misuse of
material nonpublic information
Use “Fire Wall” to prevent
communication between department
141
V (A) - Procedures for
Compliance (cont’d)
Minimum elements of Fire Wall:
– substantial control or relevant
interdepartmental communications
– review employee trading against “watch”,
“restricted”, and “rumors” lists
– restriction of proprietary trading while the
firm is in possession of material nonpublic
information
142
V (A) - Procedures for
Compliance (cont’d)
Other typical compliance guidelines:
– require communication
– establish training and compliance
procedures
– review accounts
– keep all research
143
V (B) - Performance Presentation
Members shall not make any statement, orally or in
writing, that misrepresent the investment
performance that they or their firm have
accomplished or can reasonably be expected to
achieve
If members communicate individual or firm
performance information directly or indirectly to
clients or prospective clients, or in a manner intended
to be received by clients or prospective clients,
members shall make every reasonable effort to
assure that such performance information is a fair,
accurate, and complete presentation of such
performance 144
V (B) - Purpose and Scope
Encourages full disclosure of
investment performance data to clients
Addresses any practice that would lead
to misrepresentation of a member’s
performance record (presentation or
measurement)
145
V (B) - Purpose and Scope
(cont’d)
Several practices hindered
comparability and accuracy of
performance:
– representative accounts (not overall
performance)
– survivorship biases
– portability of investment results
– varying time periods
146
V (B) - Purpose and Scope
(cont’d)
AIMR designed the AIMR Performance
Presentation Standards (AIMR-PPS)
and Global Investment Performance
Standards (GIPS) to:
– achieve greater uniformity and
comparability
– improve the services offered to clients
– enhance the professionalism of the
industry
– bolster the notion of self-regulation 147
V (B) - Purpose and Scope
(cont’d)
Direct comparisons among investment
managers are possible with those
standards
Members are not required to be in
compliance with AIMR-PPS and GIPS
to be in compliance with V(B)
AIMR-PPS and GIPS are voluntary
standards
148
V (B) - Purpose and Scope
(cont’d)
AIMR-PPS four sections:
– Construction and maintenance of
composites
– Calculation of returns
– Presentation of investment results
– Disclosures
AIMR-PPS are divided between
requirements and recommendations
– to claim compliance must follow all
149
required elements (no partial compliance)
V (B) - Applications
Failure to clearly identify simulated
performance results violates V(B)
Except if full disclosure, use of past
performance achieved with another firm
violates V(B)
Composites must be clearly defined and
contain all similar portfolios under
management
150
V (B) - Procedures for
Compliance
Best method to avoid violations of V(B)
is to comply with AIMR-PPS and GIPS
Maintain data about the firm’s
investment performance in written form
151
