Asset Manager Code of Professional Conduct
Adopting Release
April 2005
Adoption of the Asset Manager Code of Professional Conduct provides firms with an opportunity to take a proactive step in affirming their commitment to ethical practices and placing client interests first.
CFA Institute has a long history of setting ethical standards for the investment industry. The CFA Institute Code of Ethics and Standards of Professional Conduct (Code and Standards) have existed for more than 40 years and are the benchmark for ethical behavior in the industry. It is with that history that the newly formed CFA Centre for Financial Market Integrity issued the draft Asset Manager Code of Professional Conduct (the “Code”) in November 2004 for public comment. The draft of the voluntary Code was developed with the input and review of more than 50 investment practitioners from more than 20 countries. The Code is designed to be broadly adopted within the industry as a template and to be used as a guidepost for investors seeking managers that adhere to sound ethical practice. The CFA Centre developed the Code to establish a higher standard of professional conduct for investment management firms and help reinforce investor confidence.
The Code outlines the ethical and professional responsibilities of firms that manage assets on behalf of both institutional and retail clients. While the CFA Institute Code and Standards address individual conduct, this Code is meant to apply, on a global basis, to firms that manage client assets as separate accounts or pooled funds (including collective investment schemes, mutual funds, and fund of funds). In part, the Code was developed in response to requests from firms inquiring about adopting the Code and Standards as their firm’s code of ethics. While many firms have adopted the Code and Standards, because it focuses on the conduct of individuals, the Code and Standards does not adequately address ethical responsibilities of firms. The Asset Manager Code was developed specifically for firms.
The CFA Centre developed the Code primarily for those asset managers who may not have a code of ethics in place, including those asset managers who are not required to register with a regulator. More specifically, the Code was drafted for use by hedge funds, which remain largely unregulated. Many other institutional asset managers, particularly those in well-regulated jurisdictions, already have a code of ethics in place, either on their own initiative or as required by regulation. These firms can use this Code to evaluate their own policies and procedures to ensure that they have included all of the ethical principles necessary to managing assets with a high degree integrity.
During the course of the comment period, the CFA Centre received more than 35 comments from 11 different countries. The revised Code reflects changes made as a result of those comments. As with any comment process, we received various levels of critique on the specific provisions of the Code and its overall focus. The goal of the Code is to provide a comprehensive and consistent framework for asset managers around the world and across the spectrum of services and investment strategies. Comments in favor of the Code and those critical of it provided valuable insight and perspective. The main objections to the Code and the CFA Centre responses are detailed below.
1. There is little need for such an asset manager code of ethics since many of the elements are already mandated by local law or regulation.
The Code was developed specifically for those firms who may not fall under existing laws or regulations. Hedge funds in particular will benefit from adopting the Code and demonstrate their commitment to managing assets and interacting with clients in a responsible and ethical manner. Other firms, however, will also benefit from adopting the Code. As previously stated, many managers may already have a code of ethics in place, either on their own initiative or as required by local law or regulation. These managers will benefit by using the Code to evaluate their own code and determining if all the principles have been met. Many of the principles in the Code are common practice for some firms, particularly in more regulated markets. However, managers adopting the Code in its entirety as a firm-wide code of ethics make a strong statement as to their commitment to ethical behavior. The fact that that certain provisions may duplicate legal or regulatory requirements should in no way inhibit adoption of the Code – in fact, it should make adoption and compliance with the Code straightforward. While adoption of the Code for those firms would still be an affirmative step to ensuring investor interests’ are protected, they are not the primary audience for the Code. Managers in less-regulated jurisdictions or who are otherwise exempt from formal regulatory registration, including hedge funds, will benefit the greatest from the adoption of the Code.
2. The requirements of the draft Code may conflict with local laws or regulations.
The Code itself contains the basic principles necessary for managing investments in an ethical manner. In some cases the Code does require firms to go beyond what is required by law or regulation, but in no instance does the Code require a manager to violate law or regulation. Managers have a fundamental responsibility to understand and comply with all applicable laws, rules, and regulations. Local law and regulation should be seen as the lowest common denominator of behavior – that to which everyone must comply. An ethical code is that to which everyone should comply – and those who see the need for and value in such a code will comply.
3. The requirements in the draft Code relating to the use of “soft” or “bundled” commissions were too restrictive.
The final version of the Code now requires that managers use commissions generated from client trades only to pay for investment-related products or services that directly assist the investment manager in its investment decision making process and not in the management of the firm. The Code no longer requires managers to tie the use of the commissions directly to each client. The changes that were made as a result of the comments received should make the principle easier to implement in practice, but still requires a more judicious and transparent approach to soft commissions than may be required by local laws or regulations.
4. The Code lacks flexibility in its adoption and implementation. The guidance that accompanies the Code is too specific and implies that it is mandatory and all inclusive.
Firms providing asset management services are diverse in size, client type, investment strategy, and geographic location. The ethical principles that guide their activities, however, are universal. The Code sets out those ethical principles. As with any set of compliance and ethical standards, Managers must adopt detailed policies and procedures in order to effectively implement the Code. Appendix A includes recommendations and guidance as to issues managers should consider when developing their internal policies and procedures needed to implement the Code. The guidance is not intended to cover all issues or aspects of a manager’s operations that would have to be included in such policies and procedures in order to fully implement and support the Code. This guidance provides fuller depth and explanation as to what is intended by the principles in the Code.
The guidance explaining the Code includes recommendations and illustrative examples to assist managers seeking to implement the Code. The recommendations, guidance, and examples are not meant to be exhaustive and the policies and procedures needed to support the Code will be dependent on the particular circumstances of each firm and the legal and regulatory environment in which the firm operates. For example, a compliance officer has many duties and responsibilities beyond what is mentioned in the guidance. The specific items mentioned in the guidance are meant to identify and emphasize issues that are often overlooked or are of particular importance. Accordingly, Managers have significant flexibility in adopting the policies and procedures that are appropriate to their firm.
5. The Code should have a longer comment period to allow for greater input from the industry.
The Code has significant review and input from industry practitioners, legal and compliance experts, and regulators for more than four months. The Code is intended to be a living document that evolves over time. On-going dialogue with the various constituents affected by the Code will lead to future editions.