Part 1 - Ethics Regulations An ESG Flashcards
Six Components of the AMC
- Loyalty to clients
- Investment Process and Actions
- Trading
- Risk Management, Compliance and Support
- Performance and valuation
- Disclosures
Six General Principles of 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
Professional Code A: Loyalty to Clients
- Client Interests ahead of firm’s interests
- Maintain client confidentiality
- Refuse relationships / gifts that compromise independence, objectivity and loyalty
Professional Code B: Investment Process and actions
- Reasonable care and judgement
- No market manipulation
- Deal fairly and objectively with info, advice and actions
- Reasonable and adequate basis for recommendations
- Appropriate disclosures for client evaluations
- Notify in advance of material changes
- Understand objectives constraints and other info
- Only suitable investments for each client
Professional Code C: Trading
- Do not act or cause others to act on MNPI
- Give clients priority over the firm
- Use client commissions only to pay for benefits to the client
- Seek best execution
- have policies for fair and equitable trade allocation
Professional Code D: Risk Management, Compliance and Support
- Policies and procedures to comply with AMC
- CCO
- Independent third party to verify info
- Maintain records on investment actions
- Employ sufficient and qualified staff
- BCP
- Firmwide risk management plan
Professional code E: Performance and valuation
- Present performance data that is fair, accurate, relevant timely and complete
- Use fair market prices when available and commonly used valuation techniques
Professional Code F: Disclosures
- ongoing timely comms with clients
- truthful, accurate, complete and understandable
- Include all material facts regarding firm, personnel, investments and processes
- Disclose conflicts, regulatory actions, fees, soft dollars etc
Recommendations and Guidance
Professional Code A: Loyalty to Clients
- Align manager compensation
- Create privacy policy
- Refuse gifts and entertainment of more than a nominal value
AMC Recommendations and Guidance
Professional Code B: Investment Process and Actions
- Disclose deviations from intent
- Allow redemptions without penalties for style changes
- Establish a written IPS for each client
- Each decision made in context of the client’s total situation
AMC: Recommendations and Guidance
Professional Code C: Trading
- Use firewalls and have procedures to evaluate MNPI
- Develop procedures to limit and monitor personal trading
- Discourage soft dollars
- Client directed trading requires written confirmation
- Group suitable accounts and do block trading
AMC: Recommendations and Guidance
Professional Code D: Risk Management, Compliance and Support
- CCO should be independent of investment
- Retain compliance records and documentation of violations and actions
- Consider outsourcing of a firmwide risk management plan
AMC: Recommendations and Guidance
Professional Code E: Performance and Valuation
- Adopt GIPS
- Use independent third parties for valuations
AMC: Recommendations and Guidance
Code F: Disclosures
- Minimum quarterly investment performance reporting within 30 days of quarter end
- Regular disclosure of client specific risk information
Main US Regulators
SEC - safeguard investor interests, promotes capital investment and ensures smooth market functioning
FINRA - Oversees broker dealers
CFTC - Oversees commodity derivatives market
NFA - Oversees Futures
US Regulatory Acts
Securities Act 1933 - registrations and anti fraud
Securities Exchange Act 1934 - Secondary Market
Investment Advisers Act 1940
Investment Company Act 1940
Dodd Frank 2010 - Shield customers and disallow bailouts
Accredited Investors
Net worth of $1 million or income of $200,000 ($300,000) with spouse
Two tests for private investment fund exemption
- 100 or fewer beneficial owners
- No public offerings, only qualified purchasers ($5 million individual, $25 million institution)
Motivations for ESG Adoption
- Increase Risk Adjusted Returns
- Reduce Reputational Risk
- Address Stakeholder Concerns
- Doing the right thing or improving the planet
Challenges faced by institutional investors regarding ESG
- ESG Adoption
- Lack of standards
- Cost
ESG Considerations when allocating to commodity derivatives
Presence of speculative investors can lead to increased price volatility. Problematic for food related products
Key rationales behind ESG adoption amongst HF managers
- Regulation
- Risk Management
- Client Demand
- New Potential Sources of Alpha
Rationale behind the Open Protocol HF Reporting and framework
- Bridge investors needs for risk and portfolio metrics
- Standardises data, inputs, calculations, methods etc
How does ESG in PE differ from other alts?
- Can make certain commitments that comply with shared ESG objectives
- Can institute longer horizon ESG goals and objectives
