Standards of Professional Conduct

Question 1

Standards of Professional Conduct

I - Professionalism 
A. Knowledge of the Law
B. Independence and Objectivity
C. Misrepresentation
D. Misconduct

Answer 1

I. PROFESSIONALISM

A. Knowledge of the Law

Members and Candidates must understand and comply with all applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct) of any government, regulatory organization, licensing agency, or professional association governing their professional activities. In the event of conflict, Members and Candidates must comply with the more strict law, rule, or regulation. Members and Candidates must not knowingly participate or assist in and must dissociate from any violation of such laws, rules, or regulations.

B. Independence and Objectivity

Members and Candidates must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities. Members and Candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another’s independence and objectivity.

C. Misrepresentation

Members and Candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities.

D. Misconduct

Members and Candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence.

Question 2

Standards of Professional Conduct

III. DUTIES TO CLIENTS
A. Loyalty, Prudence, and Care
B. Fair Dealing
C. Suitability
D. Performance Presentation
E. Preservation of Confidentiality

Answer 2

II. DUTIES TO CLIENTS

A. Loyalty, Prudence, and Care

Members and Candidates have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment. Members and Candidates must act for the benefit of their clients and place their clients’ interests before their employer’s or their own interests.

B. Fair Dealing

Members and Candidates must deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities.

C. Suitability

1. When Members and Candidates are in an advisory relationship with a client, they must:
   - Make a reasonable inquiry into a client’s or prospective client’s investment experience, risk and return objectives, and financial constraints prior to making any investment recommendation or taking investment action and must reassess and update this information regularly.
   - Determine that an investment is suitable to the client’s financial situation and consistent with the client’s written objectives, mandates, and constraints before making an investment recommendation or taking investment action.
   - Judge the suitability of investments in the context of the client’s total portfolio.
2. When Members and Candidates are responsible for managing a portfolio to a specific mandate, strategy, or style, they must make only investment recommendations or take only investment actions that are consistent with the stated objectives and constraints of the portfolio

D. Performance Presentation

When communicating investment performance information, Members and Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete.

E. Preservation of Confidentiality

Members and Candidates must keep information about current, former, and prospective clients confidential unless:

• The information concerns illegal activities on the part of the client or prospective client,
• Disclosure is required by law, or
• The client or prospective client permits disclosure of the information.

Question 3

Standards of Professional Conduct

IV. DUTIES TO EMPLOYERS
A. Loyalty
B. Additional Compensation Arrangements
C. Responsibilities of Supervisors

Answer 3

IV. DUTIES TO EMPLOYERS

A. Loyalty

In matters related to their employment, Members and Candidates must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer.

B. Additional Compensation Arrangements

Members and Candidates must not accept gifts, benefits, compensation, or consideration that competes with or might reasonably be expected to create a conflict of interest with their employer’s interest unless they obtain written consent from all parties involved.

C. Responsibilities of Supervisors

Members and Candidates must make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and the Code and Standards.

Question 4

Standards of Professional Conduct

II. INTEGRITY OF CAPITAL MARKETS
A. Material Nonpublic Information
B. Market Manipulation

Answer 4

II. INTEGRITY OF CAPITAL MARKETS

A. Material Nonpublic Information

Members and Candidates who possess material nonpublic information that could affect the value of an investment must not act or cause others to act on the information.

B. Market Manipulation

Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.

Question 5

Standards of Professional Conduct

V. INVESTMENT ANALYSIS, RECOMMENDATIONS, AND ACTIONS
A. Diligence and Reasonable Basis
B. Communication with Clients and Prospective Clients
C. Record Retention

Answer 5

V. INVESTMENT ANALYSIS, RECOMMENDATIONS, AND ACTIONS

A. Diligence and Reasonable Basis

Members and Candidates must:

• Exercise diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions.
• Have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action.

B. Communication with Clients and Prospective Clients

Members and Candidates must:

• Disclose to clients and prospective clients the basic format and general principles of the investment processes they use to analyze investments, select securities, and construct portfolios and must promptly disclose any changes that might materially affect those processes.
• Disclose to clients and prospective clients significant limitations and risks associated with the investment process.
• Use reasonable judgment in identifying which factors are important to their investment analyses, recommendations, or actions and include those factors in communications with clients and prospective clients.
• Distinguish between fact and opinion in the presentation of investment analysis and recommendations.

C. Record Retention

Members and Candidates must develop and maintain appropriate records to support their investment analyses, recommendations, actions, and other investment-related communications with clients and prospective clients.

Question 6

Standards of Professional Conduct

VI. CONFLICTS OF INTEREST
A. Disclosure of Conflicts
B. Priority of Transactions
C. Referral Fees

Answer 6

VI. CONFLICTS OF INTEREST

A. Disclosure of Conflicts

Members and Candidates must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and employer. Members and Candidates must ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively.

B. Priority of Transactions

Investment transactions for clients and employers must have priority over investment transactions in which a Member or Candidate is the beneficial owner.

C. Referral Fees

Members and Candidates must disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services.

Question 7

Standards of Professional Conduct

VII. RESPONSIBILITIES AS A CFA INSTITUTE MEMBER OR CFA CANDIDATE
A. Conduct as Participants in CFA Institute Programs
B. Reference to CFA Institute, the CFA Designation, and the CFA Program

Answer 7

VII. RESPONSIBILITIES AS A CFA INSTITUTE MEMBER OR CFA CANDIDATE

A. Conduct as Participants in CFA Institute Programs

Members and Candidates must not engage in any conduct that compromises the reputation or integrity of CFA Institute or the CFA designation or the integrity, validity, or security of CFA Institute programs.

B. Reference to CFA Institute, the CFA Designation, and the CFA Program

When referring to CFA Institute, CFA Institute membership, the CFA designation, or candidacy in the CFA Program, Members and Candidates must not misrepresent or exaggerate the meaning or implications of membership in CFA Institute, holding the CFA designation, or candidacy in the CFA Program.

Question 8

Code of Ethics

Answer 8

The Code of Ethics
Members of CFA Institute (including CFA charterholders) and candidates for the CFA designation (“Members and Candidates”) must:

• Act with integrity, competence, diligence, and respect and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets.
• Place the integrity of the investment profession and the interests of clients above their own personal interests.
• Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.
• Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.
• Promote the integrity and viability of the global capital markets for the ultimate benefit of society.
• Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.

Question 9

General principles of the asset manager code

Answer 9

Managers have the following responsibilities to their clients.
Managers must:
1. Act in a professional and ethical manner at all times.
2. Act for the benefit of clients.
3. Act with independence and objectivity.
4. Act with skill, competence, and diligence.
5. Communicate with clients in a timely and accurate manner.
6. Uphold the applicable rules governing capital markets.

Question 10

Asset Manager Code

A. Loyalty to Clients

Answer 10

A. LOYALTY TO CLIENTS
Managers must:
1. Place client interests before their own.
2. Preserve the confidentiality of information communicated by clients within the scope of the Manager–client relationship.
3. Refuse to participate in any business relationship or accept any gift that could reasonably be expected to affect their independence, objectivity, or loyalty to clients.

Question 11

Asset Manager Code

B. INVESTMENT PROCESS AND ACTIONS

Answer 11

B. INVESTMENT PROCESS AND ACTIONS
Managers must:
1. Use reasonable care and prudent judgment when managing client assets.
2. Not engage in practices designed to distort prices or
artificially inflate trading volume with the intent to mislead market participants.
3. Deal fairly and objectively with all clients when providing investment information, making investment recommendations, or taking investment action.
4. Have a reasonable and adequate basis for investment decisions.
5. When managing a portfolio or pooled fund according to a specific mandate, strategy, or style:
a. Take only investment actions that are consistent with the stated objectives and constraints of that portfolio or fund.
b. Provide adequate disclosures and information so investors can consider whether any proposed changes in the investment style or strategy meet their investment needs.
6. When managing separate accounts and before providing investment advice or taking investment action on behalf of the client:
a. Evaluate and understand the client’s investment objectives, tolerance for risk, time horizon, liquidity needs, financial constraints, any unique circumstances (including tax considerations, legal or regulatory constraints, etc.), and any other relevant information that would affect investment policy.
b. Determine that an investment is suitable to a client’s financial situation.

Question 12

Asset Manager Code

C. TRADING

Answer 12

C. TRADING
Managers must:
1. Not act or cause others to act on material nonpublic information that could affect the value of a publicly traded investment.
2. Give priority to investments made on behalf of the client over those that benefit the Managers’ own interests.
3. 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 management of the firm.
4. Maximize client portfolio value by seeking best execution for all client transactions.
5. Establish policies to ensure fair and equitable trade allocation among client accounts.

Question 13

Asset Manager Code

D. RISK MANAGEMENT, COMPLIANCE, AND SUPPORT

Answer 13

D. RISK MANAGEMENT, COMPLIANCE, AND SUPPORT
Managers must:
1. Develop and maintain policies and procedures to ensure that their activities comply with the provisions of this Code and all applicable legal and regulatory requirements.
2. Appoint a compliance officer responsible for administering the policies and procedures and for investigating complaints regarding the conduct of the Manager or its personnel.
3. Ensure that portfolio information provided to clients by the Manager is accurate and complete and arrange for independent third-party confirmation or review of such information.
4. Maintain records for an appropriate period of time in an easily accessible format.
5. Employ qualified staff and sufficient human and technological resources to thoroughly investigate, analyze, implement, and monitor investment decisions and actions.
6. Establish a business-continuity plan to address disaster recovery or periodic disruptions of the financial markets.
7. Establish a firm wide risk management process that identifies, measures, and manages the risk position of the Manager and its investments, including the sources, nature, and degree of risk exposure.

Question 14

Asset Manager Code

E. PERFORMANCE AND VALUATION

Answer 14

E. PERFORMANCE AND VALUATION
Managers must:
1. Present performance information that is fair, accurate, relevant, timely, and complete. Managers must not misrepresent the performance of individual portfolios or of their firm. Managers should report at least quarterly, and when possible, within 30 days of the end of the period.
2. Use fair-market prices to value client holdings and apply, in good faith, methods to determine the fair value of any securities for which no independent, third-party market quotation is readily available.

Question 15

Asset Manager Code

F. DISCLOSURES

Answer 15

F. DISCLOSURES
Managers must:
1. Communicate with clients on an ongoing and timely basis.
2. Ensure that disclosures are truthful, accurate, complete, and understandable and are presented in a format that communicates the information effectively.
3. Include any material facts when making disclosures or providing information to clients regarding themselves, their personnel, investments, or the investment process.
4. Disclose the following:
a. Conflicts of interests generated by any relationships with brokers or other entities, other client accounts, fee structures, or other matters.
b. Regulatory or disciplinary action taken against the Manager or its personnel related to professional conduct.
c. The investment process, including information regarding lock-up periods, strategies, risk factors, and use of derivatives and leverage.
d. Management fees and other investment costs charged to investors, including what costs are included in the fees and the methodologies for determining fees and costs.
e. The amount of any soft or bundled commissions, the goods and/or services received in return, and how those goods and/or services benefit the client.
f. The performance of clients’ investments on a regular and timely basis.
g. Valuation methods used to make investment decisions and value client holdings.
h. Shareholder voting policies.
i. Trade allocation policies.
j. Results of the review or audit of the fund or account.
k. Significant personnel or organizational changes that have occurred at the Manager.
l. Risk management processes.

Question 16

Asset Manager Code

NOTIFICATION OF COMPLIANCE

Answer 16

NOTIFICATION OF COMPLIANCE
Managers must notify CFA Institute of their claim of compliance through the Asset Manager Code claim of compliance form at www.cfainstitute.org/assetcode. This form is for communication and information-gathering purposes only and does not represent that CFA Institute engages in enforcement or quality control of an organization’s claim of compliance. CFA Institute does not verify either the Manager’s claim of compliance or actual compliance with the Code.

Question 17

Firm A is a multinational investment firm, with offices around the world including Japan, Australia, the United Kingdom, and the United States. Although all of its offices are part of the global parent, each office is registered with the appropriate national regulatory authority and each is held out to clients and potential clients as a distinct business entity. Firm A (US) claims compliance with the GIPS standards. What should the definition of the firm disclosure be?

Answer 17

Sample Disclosure: “Firm A is defined as an independent management firm with offices in Japan, Australia, the United Kingdom, and the United States. Firm A (US) is a subsidiary of Firm A serving US clients. Firm A also has subsidiaries in the United Kingdom, Australia, and Japan.”

Question 18

Company C manages money for both retail and institutional clients. There are two autonomous groups within Company C: “Company C Institutional Investment Management,” which manages institutional assets, and “Company C Retail Investors,” which manages retail assets. How should Company C define itself as a firm to comply with the GIPS standards?

Answer 18

The GIPS standards encourage firms to adopt the broadest, most meaningful definition of a firm. Company C should consider defining itself to include the assets managed by both the institutional entity and the retail entity for the purposes of claiming compliance with the GIPS standards. However, Company C could define the two autonomous entities as separate firms if each subsidiary is held out to clients and potential clients as a distinct business unit.

Question 19

Record keeping requirements in order for a firm to claim GIPS compliance

Answer 19

A firm must maintain data necessary to support a firm’s claim of compliance. i.e if a firm presents five years of performance history, it must maintain the records to support the firm’s five-year history and all other relevant data on the firm’s composite presentations. Because the Standards require firms to build a ten-year performance history, the firm must continue to maintain the records to support the firm’s eventual ten-year performance history.

Question 20

Qualities of GIPS compliant performance

Answer 20

GIPS standards require that at least five years of GIPS-compliant performance be reported (or for the period since firm’s inception or the composite inception date if the firm or the composite has been in existence less than five years). After presenting a minimum of five years of GIPS-compliant performance (or for the period since firm’s inception or the composite inception date if the firm or composite has been in existence less than five years), the firm must present an additional year of performance each year, building up to a minimum of 10 years of GIPS-compliant performance. Technically, a firm will be able drop the early years of its composite presentation once it has established a 10-year GIPS-compliant record, as long as it continues to show at least the most recent 10 years. For instance, it will be able to show just the 10 calendar years 2001-2010 after the composite returns for 2010 become available.

• -> it is recommended that if the firm is trying to emit old performance because it was bad that they allow full disclosure and present everything
• ->The availability of a list of composite descriptions is not disclosed as is required
• The availability of policies for valuing portfolios, calculating performance, and preparing compliant presentations is not disclosed
• Although Bristol does disclose the use of derivatives, it appears that the firm has not included all the required disclosure in this area. The firm must disclose the presence, use, and extent of leverage, derivatives and short positions, if material, including a description of the frequency of use and characteristics of the instruments sufficient to identify risks
• If the firm has included non-fee-paying portfolios in its composite, the percentage of the composite assets represented by non-fee-paying portfolios must be disclosed as of the end of each annual period
• The composite creation date must be disclosed.
• Because the composite represents a global investment strategy, the presentation must include information about the treatment of withholding taxes on dividends, interest income, and capital gains, if material
• Both a composite description and benchmark description must be disclosed
• A fee schedule appropriate to the compliant presentation must be disclosed
• The GIPS standards state that performance periods of less than one year must not be annualized, as Bristol does for the first quarter of 2011
• GIPS verification cannot be performed for a single composite as is stated in the presentation. Verification does not provide assurance about the performance of any specific composite. Firms must not state that a particular composite has been “verified” or make any claim to that effect
• For periods beginning on or after 1 January 2001, portfolios must be valued at least monthly. For periods beginning on or after 1 January 2010, portfolios must be valued on the date of all large cash flows. Bristol is valuing portfolios quarterly
• A firm must use the appropriate compliance statement as specified in the GIPS standards. There are no allowances for partial compliance. If a firm does not meet all the requirements of the GIPS standards, the firm must not represent or state that it is “in compliance with the Global Investment Performance Standards except for…” or make any other statements that may indicate partial compliance with the GIPS standards. Bristol’s use of the “except for” compliance statement violates the Standards and the appropriate compliance statement has not been used
• The firm must disclose which measure of internal dispersion is presented
• The GIPS standards state that accrual accounting must be used for fixed-income securities and all other investments that earn interest income. Bristol states that it uses cash-basis accounting for the recognition of interest income.
• -> The GIPS standards state that composites must include only actual assets under management within the defined firm, and they expressly prohibit linking the performance of simulated or model portfolios with actual performance
• -> If a composite includes non-fee-paying portfolios, the firm must present the percentage of composite assets represented by non-fee-paying portfolios as of each annual period end

Question 21

How should a firm handle trade errors?

Answer 21

those errors and any resulting gains/losses need to be disclosed to the compliance department and documented in a trade error log. The priority is to ensure errors are resolved in a way that prevents adverse impact for the client, not to ensure complete disclosure.

Question 22

required disclosure notes under GIPS standards

Answer 22

1. The proper GIPS compliance statement.
2. Definition of firm.
3. Composite description.
4. Benchmark description.
5. If gross-of-fees returns, any fees in addition to trading expenses.
6. If net-of-fees, any fees in addition to management fees and trading expenses that are deducted; if model or actual management fees are deducted; if net of any performance-based fees.
7. Currency used to express returns.
8. Internal dispersion and the measure used.
9. Fee schedule.
10. Composite creation date.
11. That a list of composite description is available.
12. That the policies for valuing portfolios, calculating performance, and preparing compliant statements are available.
13. If material, the presence, use, and extent of leverage, derivatives, and short positions, including frequency of use and instruments used.
14. Any significant event that would facilitate understanding the presentation.
15. Any presented periods prior to 2000 that are not GIPS-compliant.
16. If appropriate, the date, description of, and reason for redefining the firm.
17. If appropriate, the date, description of, and reason for redefining a composite.
18. Any changes to the composite’s name.
19. Minimum asset level for a portfolio to be included in the composite and any changes to the level.
20. Treatment of withholding taxes if material and whether benchmark returns are net of withholding taxes (if known).
21. Periods beginning on or after January 1, 2011, any known material differences in exchange rates used between the portfolios and the composite and the composite and the benchmark.
22. Any instances where the presentation conforms with local laws or regulations that conflict with the GIPS.
23. If relevant for results prior to January 1, 2010, how cash is allocated to carve-outs.
24. If appropriate the types of fees included in bundled fees.
25. For periods beginning on or after January 1, 2006, the use of sub-advisors and the periods used.
26. For periods prior to January 1, 2010, if any portfolios were not valued at month-end or last business day of the month.
27. If material for periods beginning on or after January 1, 2011, the use of unobservable subjective inputs for portfolio valuation.
28. For periods beginning on or after January 1, 2011, whether the valuation hierarchy used differs from the GIPS suggested hierarchy.
29. If no benchmark is presented, why.
30. If appropriate, the date and reason for changing benchmarks.
31. If a custom benchmark or a combination of benchmarks is used as benchmark, the components of and method for constructing the benchmark.
32. How significant cash flow is defined, if appropriate.
33. Whether a 3-year ex-post standard deviation is not presented because three years of monthly data are not available.
34. If determined that a 3-year ex-post standard deviation is not appropriate, describe why not appropriate, present an alternative ex-post risk measure, and explain why that risk measure is appropriate.
35. Whether past performance from a past firm or affiliate is linked to the presentation.
    recommended:
    - firm is encouraged but not required to provide a list of the firms contained within the parent company
    - whether the firm has affiliated companies