Docstoc

Code of Ethics and Standards of Professional Conduct

Document Sample
Code of Ethics and Standards of Professional Conduct Powered By Docstoc
					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

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:9
posted:10/22/2011
language:English
pages:151