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CFA Institute Centre Proposes New Risk Management Requirements for Asset Managers
New York, November 11, 2008 − The CFA Institute Centre for Financial Market Integrity, the policy authority on ethics in the global capital markets, today announced that it is seeking public comment on a proposed risk management requirement to its Asset Manager Code of Professional Conduct (AMC). The comment period ends January 15, 2009.
The proposal establishes a more detailed risk management process that identifies, monitors, and analyzes the risk position and exposure of a manager. This new provision provides asset managers with guidance that addresses many of the risk management concerns that have risen from the current market crisis. “The types of risks faced by Managers include, but are not limited to, market risk, credit risk, liquidity risk, counterparty risk, operational risk and style drift,” says the provision. “Risk management that is objective and independent of the portfolio management process is imperative to understanding and controlling these types of risk.”
"We can think of no more important addition to the Asset Manager Code than to expand its focus on more thorough risk analysis procedures,” said Kurt Schacht, CFA, managing director of the CFA Institute Centre. “It is easy with hindsight to say that managers should have been much more aware of counterparty and liquidity risk in our sub-prime era. At this point, investors believe that it is more important to help refocus and fix the process than to point fingers.”
The proposed seventh principle is: “Establish a risk management process that identifies, monitors, and analyzes the risk position of Manager portfolios, including the sources, nature and degree of risk exposure for both individual securities and the total portfolio.” It was developed in cooperation with the global 13-member CFA Institute Standards of Practice Council, which is responsible for the CFA Institute Code of Ethics and Standards of Professional Conduct and all associated codes.
The AMC, which in 2004 was developed in consultation with investment professionals from the U.S., Europe, and Asia, supports global investor protection by encouraging investment firms to voluntarily adhere to a strict set of ethical standards. It provides a “checklist” of ethical conduct that investors should expect from their asset managers, creating a higher level of confidence in asset managers that adopt and enforce the Code.
The AMC outlines general principles of conduct and provides asset managers with specific and practical guidelines in six main areas, designed to apply to all facets of the manager-client relationship:
- Loyalty to clients. The code states that asset managers must maintain their independence and objectivity and put client interests first. It specifies, for instance, that asset managers should 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.
- The investment process. For example, asset managers should create an “investment policy statement” for each client and then always invest in a way that is consistent with the statement.
- Trading. The code provides guidelines for prioritizing trades made on behalf of clients and establishing fair and equitable trade allocation among clients.
- Compliance. This includes submitting accounts to an annual, independent audit to ensure accurate, complete information for clients, according to the Code.
- Performance evaluation. Asset managers should, for example, use standardized performance measurement and use fair market price to value client holdings.
- Disclosure. This includes disclosing conflicts of interest, disciplinary actions, risk factors, and fees.
Managers adopting the AMC in its entirety as a firm-wide code of ethics make a strong statement as to their commitment to ethical behavior. There are no formal procedures for adopting the AMC, but managers that claim compliance should fully understand and comply with all of the code’s requirements.
“The AMC is comprehensive set of professional conduct standards designed for use by any asset manager, including the hedge fund industry,” said Schacht. “We think hedge funds globally can benefit greatly from this Code and its rigorous focus on ethical and professional conduct. While there are several best practice templates available to the industry, the AMC is the only one that is focused on client loyalty and requires full adoption to claim compliance. We encourage hedge fund investors everywhere to require their managers to adopt the AMC."
Access the invitation to comment and the Asset Manager Code here.
About the CFA Institute Centre for Financial Market Integrity
The CFA Institute Centre develops timely, practical solutions to global capital market issues. Established in 2004, the CFA Institute Centre builds upon the CFA Institute mission to lead the investment profession globally by setting the highest standards of ethics, education, and professional excellence. It carries forward the organization’s 60-year history of standards and advocacy work, especially its Code of Ethics and Standards of Professional Conduct for the investment profession. More information may be found at www.cfainstitute.org/centre.