CAIA L2 - 2.1 - Asset Manager Code of Professional Conduct Flashcards
List
6 components
of the AMC
(Asset Manager Code
of Professional Conduct)
2.1 - Asset Manager Code of Professional Conduct
LITRo PD
A) Loyalty to Clients
B) Investment Process and Actions
C) Trading
D) Risk Management, Compliance, and Support
E) Performance and Valuation
F) Disclosures
2.1 - Asset Manager Code of Professional Conduct
List
6 general principles
of conduct
2.1 - Asset Manager Code of Professional Conduct
- Always act ethically and professionally.
- Act in the best interests of the client.
- Act in an objective and independent manner.
- Perform actions using skill, competence, and diligence.
- Communicate accurately with clients on a regular basis.
- Comply with legal and regulatory requirements regarding capital markets.
2.1 - Asset Manager Code of Professional Conduct
List
Professional Code A:
Loyalty to Clients
2.1 - Asset Manager Code of Professional Conduct
A1. Clients First
A2. Clients confidentiality
A3. Gifts
‘–
A.1 Place the client’s interests ahead of the firm’s in all aspects of the relationship (e.g., selecting investments, transacting).
A.2 Maintain client confidentiality. However, there may be exceptions regarding potentially illegal activities occurring in client accounts, which may need to be reported.
A.3 Refuse business relationships and gifts that would compromise independence, objectivity, and loyalty to clients (even in appearance). Only items of nominal value may be accepted. The firm may maintain other (significant) business relationships with the same client, assuming potential conflicts are mitigated and disclosed. Lavish gifts from service providers are prohibited, but not from clients. Gifts from clients are a disclosure issue
2.1 - Asset Manager Code of Professional Conduct
List
Professional Code B:
Investment Process and Actions
2.1 - Asset Manager Code of Professional Conduct
B1. Reasonable care
B2. No market manipulation
B3. Fair dealing
B4. Reasonable basis for valuation
B5. a) Style for funds (clients comply with); b) communicate style changes
B6. a) Clients objectives and constraints b) suitable investments
‘–
B.1 Use reasonable care and judgment when managing client assets. Managers should perform at the same standard as other skilled professionals to balance risk and return for the client and not cause harm to client.
B.2 Do not manipulate securities prices and volumes to try to mislead market participants, as it damages the integrity of markets to the detriment of all investors. Actions such as establishing large positions to distort prices or spreading false rumors are examples of violations.
B.3 Deal fairly and objectively with all clients when providing information, giving advice, and taking actions. Managers may offer higher levels of service to some clients for higher compensation if the service levels are disclosed and available to all clients willing to pay for them. Managers may engage in secondary investment opportunities (that are offered because of other business activities) if the opportunities are fairly allocated to all suitable clients.
B.4 Have a reasonable and adequate basis for recommendations. The due diligence required will vary based on the complexity and risks of the strategy. Third-party research can be used if there is a reasonable basis to support it. Managers must be knowledgeable of the securities they recommend. That is particularly true for complex strategies, and such strategies must be explained in understandable ways to the client.
B.5.a For portfolios managed to a specific style or strategy, managers do not have to evaluate the suitability to a given client. Managers must provide suitable disclosure so clients can determine if the portfolio is suitable for their needs. The portfolio must then be managed in the manner intended. Flexibility and deviations from that intent must be expressly agreed to by clients.
B.5.b Material changes to strategies and styles must be provided to clients as far in advance as possible to provide clients the time to react, if needed.
B.6.a When managing portfolios of a specific client, understand the client’s objectives, constraints, and any other pertinent information to be able to take suitable investment actions for that client.
B.6.b Client portfolios should contain only investments that are suitable for those clients.
2.1 - Asset Manager Code of Professional Conduct
List
Professional Code C:
Trading
2.1 - Asset Manager Code of Professional Conduct
C1. MNPI - Material Nonpublic information (do not trade with)
C2. Clients over firm
C3 - Clients comissions in favor of clients
C4 - Best execution
C5 - Fair allocation
‘–
C.1 Do not act or cause others to act on material nonpublic information that could affect the value of public securities. Such actions are frequently illegal and damage the integrity of markets. Managers must adopt compliance procedures to segregate information between those with reasons to have such information and the rest of the firm. However, use of the mosaic theory (material public information and nonmaterial nonpublic information) is acceptable.
C.2 Give clients priority over the firm. Managers cannot execute ahead of clients or to the detriment of clients’ interests. Managers may invest their own capital along with clients if clients do not suffer.
C.3 Use client commissions (which belong to the client) only to pay for investment decision-making products and services that directly benefit the client, not for the management of the firm.
C.4 Seek best execution (e.g., maximize value) for all client trades. Directed brokerage by the client may restrict the ability to do so.
C.5 Establish policies for fair and equitable trade allocation. All clients for whom the trade is suitable should be given the opportunity to participate.
2.1 - Asset Manager Code of Professional Conduct
List
Professional Code D:
Risk Management, Compliance, Support
2.1 - Asset Manager Code of Professional Conduct
D1. “PP” Policy + Procedures comply with AMC, legal and regulation
D2. Compliance Officer (competent)
D3. 3rd party to verify info to clients
D4. “DOC” document investment actions
D5. Sufficient and qualified staff
D6. Business continuity Plan
D7. Risk Management Plan
‘–
D.1 Develop detailed policies and procedures to comply with the AMC and all legal and regulatory requirements.
D.2 Appoint a competent, knowledgeable, credible compliance officer with authority to implement the P&Ps.
D.3 Use an independent third party to verify that information provided to clients is accurate and complete; the normal reconciliation process by the custodial bank qualifies. Verification may be based on audits or reviews of pooled funds and account statements and transaction reports from the custodian bank for individual accounts (e.g., not just on internal records of the firm).
D.4 Maintain records to document investment actions. Either hard copy or electronic format is acceptable.
D.5 Employ sufficient and qualified staff to meet all AMC requirements. Firms must have (pay for) the resources to deliver the services promised and ensure compliance with the P&Ps. A robust internal control system is required to mitigate against potential fraud. Outsourcing of some tasks is acceptable, but the firm remains ultimately responsible for all outsourced tasks.
D.6 Establish a business continuity plan to deal with disasters or market disruptions. A basic plan should include the following:
* Backup (preferably off site) of account information
* Plans to monitor, analyze, and trade investments
* (Communication with suppliers, employees,clients)
* Communication plans with key vendors and suppliers
* Employee communication and coverage of key business functions when normal communications are out
* Client communication plans
D.7 Establish a firmwide risk management plan to measure and manage the risks taken. It must be objective and independent of the influence of the portfolio managers.
2.1 - Asset Manager Code of Professional Conduct
List
Professional Code E:
Performance and Valuation
2.1 - Asset Manager Code of Professional Conduct
E1. Data “Fartc”: fair, accurate, relevant, timely, complete)
E2. 2nd: Valuation with common practices + 1st: use market prices
‘–
E.1 Present performance data that is fair, accurate, relevant, timely, and complete. Do not misrepresent performance of accounts or the firm (e.g., selective presentation, hypothetical performance).
E.2 Use fair market prices when available and commonly used valuation methods in other cases.
2.1 - Asset Manager Code of Professional Conduct
List
Professional Code F:
Disclosures
2.1 - Asset Manager Code of Professional Conduct
Communication TA TACU
F1. Timely Appropriate Communication
F2. Truthful Accurate Complete Understandable Communication
Material Facts “FIPIP”
F3. Material facts “FIPIP” Firm, investments, personnel,investment process
F4. Disclose:
a) Conflicts of interest
b) Disciplinary actions
c) Management fees
d) Soft dollar
e) Client performance
f) Valuation methods
g) Shareholder voting
h) Allocation policies
i) Audit client’s results
j) Personnel changes
k) Risk management process
‘–
F.1 Have ongoing, timely communication with clients using appropriate methods at the firm’s discretion.
F.2 Ensure truthful, accurate, complete, and understandable communication. Use plain language. Determine what to disclose and how.
F.3 Include any (all) material facts regarding the firm, personnel, investments, and the investment process.
F.4 Disclose the following:
1. Any conflicts of interest, such as those arising from relationships with brokers and other clients, fees, soft dollars, bundled fees, directed brokerage, manager or employee holdings in the same securities as clients, and any other material issues
1. Regulatory and disciplinary actions related to professional conduct by the firm or employees (upon request)
1. Investment process information, including strategy, risk factors, lock-up period, derivatives, and leverage
1. Management fees and client costs, including the method of their determination. Disclose any unusual expenses. Use plain language to explain how all fees are calculated. (itemized upon requested)
1. All soft dollar and bundled fees, what is received in return, and how they benefit the client. It is not necessary to provide details of soft dollar amounts for each separate client; total amounts or the percentage of total commissions are sufficient.
1. Regular and timely client investment performance reporting
1. Valuation methods used to make investment decisions and value client assets. Typical disclosure is by asset class. Proprietary information need not be disclosed.
1. The P&Ps used for shareholder voting. These must address how controversial and unusual issues are handled, provide guidance for further actions when voting against corporate management recommendations, and disclose any delegation of voting. Provide clients with details on votes cast for their holdings if requested.
1. Trade allocation policies
1. Review and audit results of the client’s funds and accounts
1. Significant personnel and organizational changes, including mergers and acquisitions involving the firm
1. The firm’s risk management process and changes to the process. Disclose what risk metrics the client will receive.
2.1 - Asset Manager Code of Professional Conduct
