Ethics, Regulations, ESG Flashcards
Asset Manager Code (6 professional codes)
A. Loyalty to Clients B. Investment Process & Actions C. Trading D. Risk Mgt., Compliance & Support E. Performance & Valuation F. Disclosures
LOIN TRIPED
A. Loyalty to Clients
- Place client interest before their own.
- Preserve confidentiality
- Refuse to participate in any business relationship/accept gift that could be reasonably expected to affect independence, objectivity, or loyalty to clients
B. Investment Process & Actions
- Use reasonable care and prudent judgement when managing client assets.
- Not engage in market manipulation
- Fair dealing with all clients
- Have a reasonable & adequate basis for investment decisions.
- When managing pooled assets or portfolio:
a. Take only investments that are consistent with the stated objectives and constraints of that fund
b. Provide adequate disclosures and information so investors can consider whether changes meet their investment needs. - When managing separate accounts:
a. Evaluate and understand the client’s investment objective, tolerance of risk, time horizon, liquidity needs, financial constraints etc.
b. Determine that an investment is suitable to a clients financial situation
C. Trading
- Not act or cause others to act on material nonpublic information
- Give priority to investments made on behalf of clients over those that benefit the Managers’ own interest.
- Use commissions generated from client trades to pay for only investment-related products or services that directly assist the manager in its investment decision making process, and not in the mgt. of the firm.
- Maximize client portfolio value by seeking best execution for all client transactions.
- Establish policies to ensure fair and equitable trade allocations among client accounts.
D. Risk Management, Compliance & Support
- Develop and maintain policies and procedures to ensure their activities comply with the provisions of this Code and all applicable legal and regulatory requirements.
- Appoint a compliance officer responsible for administering policies & procedures for investigating complaints regarding the conduct of the Manager or its personnel
- Ensure portfolio information provided to clients is accurate, complete and arrange for independent third-party confirmation of such information.
- Maintain records for an appropriate period of time in an easily accessible format.
- Employ qualified staff and sufficient human & technological resources.
- Establish a business continuity plan to address disaster recovery or periodic disruptions.
- Establish firm-wide risk mgt. processes that identifies, , measures, and manages risk position of the manager and its investments
E. Performance and Valuation
- Present information that is fair, accurate, relevant, timely, and complete.
- Use fair-market price to value client holdings and apply, in good faith, methods to determine fair value of securities for which no independent, third-party market quotation is readily available.
F. Disclosures
- Communicate with clients in an ongoing and timely basis.
- Ensure disclosures are truthful, accurate, complete, and understandable
- Include any material facts when making disclosures
- Disclose the following:
a. Conflicts of interests
b. Regulatory /disciplinary actions taken against Mgr.
c. Investment Process (Incl. lock-up, strategies, risks)
d. Mgt Fees, and other investment costs
e. Amount of any soft or bundled commissions
f. Performance of clients on a regular basis
g. Valuation methods
h. Shareholder voting policies
i. Trade allocation policies
j. Results of the review of an audit of the fund
k. Significant personel/organizational change
l. Risk mgt. processes
Six responsibilities according to the code
Managers must:
- Act in a professional and ethical manner at all times
- Act for the benefit of the clients
- Act with independence & objectivity
- Act with skill, competence, and diligence
- Communicate with clients in a timely and accurate manner.
- Uphold the applicable rules governing capital markets
6 Pet BISCUits
public interest theory of regulation vs. private interest theory of regulation
public: people act through government
private: regulations emanate from self-interested motivations
Financial markets regulations principles
- Trust
- Market Integrity / Fundamental fairness
- Government protection (rule of law)
SECs responsibilities
- Protect investors
- Maintaining fair, orderly financial markets
- Facilitating capital information
FINRA
Overseen by the sec and is a non-governmental, self-regulatory organization that supervises the broker-dealer industry to ensure it operates fairly and honestly.
CFTC
Oversees the derivatives market and its participants.
NFA
Oversees the futures market
Blue Sky Laws
State’s own set of securities law designed to protect state interests and prevent fraudulent activities within its borders.
Securities Act 1933 (Securities Act)
Requires registration with the SEC, unless an exemption is available
Securities Exchange Act 1934 (Exchange Act)
Provides governance of securities transactions on the secondary market
Investment Adviser Act 1940 (40’s act)
Regulates the organization of companies, including mutual funds that primarily engage in investing
Dodd-Frank Act
Enacted to promote financial stability of the US by:
- improving accountability and transparency
- to end “too big to fail”
- Protect American tax-payers by ending bail-outs
- Protect consumers from abusive financial practices
Registration requirements SEC/State
- sub $25m no registration is required
- $25-100m registration is required with State
- > $100m registration is required with SEC
Two exemptions to registration under Advisers Act often used by fund managers
- Venture capital fund adviser exemption
- Private fund adviser exemption
Twelve matters regulated under the Investment Advisers Act 1940
- Advisory agreement terms
- Performance fees
- Client solicitation
- Political contributions
- Trading practices
- Advertising
- Record-keeping
- Personal securities reporting
- Custody
- Proxy voting
- Compliance program
- Gifts & Entertainment
ICO
Initial Coin Offering (ICO): tracking asset ownership through a coin or token
Accredited Investor
> $200k in income ($300k incl. spouse) in prior two years (incl. this year)
Or
> $1m in assets (ex house)
Two tests for private investment fund exemption as to not to be qualified as an investment company and be subject to 1940 Advisers Act provisions.
(1) <100 beneficial owners
(2) Must not make any public offering
Qualified purchaser
Natural person with at least $5m in investments or an institutional investor with $25m in investments
Three types of SEC exams
- regular periodic inspections
- cause inspections (tips, complaints)
- sweep inspections (theme inspections across firms)
European Supervisory Agencies
- European Securities & Market Authority (ESMA)
- European Banking Authority (EBA)
- European Insurance & Occupational Pensions Authority (EIOPA)
- European Systemic Risk Board (ESRB)
Legislative process in EU for the Finance Industry
L1. Legislative act
L2. Implementing Measures
L3. Supervisory Convergence
L4. Supervision & Enforcement
UCITS (undertaking for collective investments in transferrable securities) requirements
EU framework covering collective investment schemes:
- Open-ended
- Liquid
- Invest in public companies
AIFMD (alternative investment fund management directive) key features
Regulates alternative managers:
- AIFMs must be authorized
- Restrictions are placed on remuneration
- AIFMs are required to set a leverage limit
- Required to monitor & manage liquidity risk (conduct stress tests)
Four key reporting obligations for AIFMs
- Annual report
- Main instruments traded
- Most important concentrations
- stress test results
Exemption from Securities & Futures Commission (SFC) in Hong Kong
- Made offers to less than 50 persons
- Minimum subscription amount is 500k HKD
- Maximum offering of shares is 5m HKD and
- an offer is made to a professional investor
Exemption from Securities & Futures Act in Singapore
- <30 qualified investors (max 15 entities)
- Value of assets does not exceed a specified amount.
- It is registered with the MAS as an RFMC
Two primary legislative acts that govern regulations of assets in Japan
The Financial Instruments and Exchange Act (FIEA) and the Act on Investment Trust and Investment Corporation (ITIC).
key role of the European Securities and Markets Authority, and two functions it has the power to perform.
The ESMA is a European regulatory body that focuses on securities legislation.
The ESMA has the power to write regulatory technical standards, and to establish a framework of mutual recognition between member states.
main objective of the European Banking Authority?
Safeguard the banking sector’s integrity, efficiency, and orderly functioning
European Systemic Risk Board (ESRB)
Responsible for macro-prudential oversight
ESG Challenges
ESG Adoption
Lack of Standards
Cost
Natural Resources and Environmental Issues
- Conserve Water
- Reduce soil erosion
- Encourage biodiversity
- Minimize greenhouse gas emissions
- Protect endangered species
Environmental Issues give me CREMP
Natural Resources and Social Issues
- Compliance with health & safety standards
- Respect worker’s rights
- Respect indigenous people
- Meet all labor laws and regulations
- Engage respectfully with the community
- Provide safety training/certifications
Social issues are the main Crime Providers
Natural Resources and Governance
- Cooperate with regulators and NGOs
- Achieve industry best practices/certifications
- Maintain appropriate anti-corruption procedures
- Maintain transparency on asset holdings and ESG Criteria
The Government sends a CAMera Man
ESG Considerations for Commodities
- Never take delivery of the physical commodity
- Only trade the most liquid contracts
- Demand that hedge funds disclose their strategies and holdings.
- Avoid funds whose trading adds to price volatility
- Limit investment in agricultural contracts.
What ESG factors come into play when making direct investments in physical commodities?
Sourcing (expose investor to ESG issues regarding how the commodity is produced and delivered) Hoarding (investing in a limited supply market for financial gain) Money Laundering (Diamonds/precious metals e.g.)
ESG emphasis in Real Estate
Environmental factors
Water usage recommendations
- Use low-flow plumbing when permitted
- employ metering and sub-metering to track usage and for early leak detection
- explore alternative onsite water sources
- utilize native plants and low-irrigation landscape plans.
- educate all building users and tenants on water conservations best practices
Key drivers hedge fund shift towards ESG
- Regulation
- Client demand
- Search for new sources of alpha
Hedge fund governance spans two main themes
(i) The backgrounds, role, and independence of directors and (ii) the funds leadership team, holdings, restrictions and risks.
Hedge Fund preferred model baseline with regards to BoD
- Qualified and experienced
- Majority of independent directors
- Representative of a potentially diverse set of investors
- Independent directors
Efforts to close the bridge between investors’ need for risk and hedge funds needs to maintain privacy
Open Hedge Fund Reporting which provide a consistent frame work around (1) data and inputs, (2) calculations & methods, (3) timely and regular reporting, (4) protocols and standards
Three categories of Hedge Fund categories as it relates to ESG
- Underlying Investments (consistent with ESG objectives?)
- Activism (voting rights, pressure, marketing)
- Avoidance (processes/investments that are inconsistent with ESG objectives)
Two notable characteristics of Private Equity related to ESG
- GP-LP relationship
2. Private Equity Investment Process
Three elements to include for PE firms interested in engaging in ESG activities
- establishing formal commitment to ESG integration
- setting ESG related objectives & metrics
- engaging and communicating with all stakeholders
Investment process three areas to evaluate relative to ESG
(1) Due Diligence
(2) Investment decision and agreement
(3) ownership
What should investors do during the monitoring process
- ensure ESG issues and risk remain on BOD agenda
- provide tools for measuring ESG practices
- ensure that ESG performance is part of quarterly/annual review
Issue with ESG ratings
Low correlation of ESG scores across rating agencies
SASB Materiality Map
analyzes ESG issues along two major dimensions (ESG, and Industry). Companies materiality (>50%,<50%, not at all)
Three phases of ESG
- pre-financial
- transitional (esg becomes visible)
- financial (full impacts of ESG events are felt)
