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2021 Curriculum CFA Program Level III Ethical and Professional Standards

Introduction

Asset managers hold a unique place of trust in the lives of millions of investors. Investment professionals and firms that undertake and perform their responsibilities with honesty and integrity are critical to maintaining investors’ trust and confidence and to upholding the client covenant of trust, loyalty, prudence, and care. CFA Institute and its members are committed to reinforcing those principles. The CFA Institute mission is to lead the investment profession globally by setting the highest standards of ethics, education, and professional excellence. To foster this culture of ethics and professionalism, CFA Institute offers this voluntary code of conduct. It is designed to be broadly adopted within the industry as a template and guidepost for investors seeking managers who adhere to sound ethical practice.

The Asset Manager Code of Professional Conduct outlines the ethical and professional responsibilities of firms that manage assets on behalf of clients. Whereas the CFA Institute Code of Ethics and Standards of Professional Conduct 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 organizations); we refer to such firms as “Managers.” In part, this document responds to requests from Managers to extend the scope of the Code and Standards to the firm level. Although many institutional asset managers, particularly those in well-regulated jurisdictions, already have such a code in place, they should use this Code to evaluate their own code and ensure that all of this Code’s principles have been included. This Code also has been developed for use by asset managers, including hedge fund managers, who may not already have such a code in place. This second edition of the Code includes provisions relating to risk management as well as guidance for Managers seeking to claim compliance.

Ethical leadership begins at the highest level of an organization; therefore, the Code should be adopted by the Manager’s senior management, board of directors, and similar oversight bodies. Such adoption sends a strong message regarding the importance of ethical behavior at the firm. Rather than creating rules that apply only to certain people or groups, this Code is intended to cover all employees of the firm. Although not every employee is actively involved in conduct covered in the Code, a code that is broadly applied reinforces the need for all employees to understand the ethical issues involved in the asset management business. By adopting and enforcing a code of conduct for their organizations, Managers demonstrate their commitment to ethical behavior and the protection of investors’ interests. In doing so, the Managers also protect and enhance the reputation of their organizations.

The Code sets forth minimum ethical standards for providing asset management services for clients. It is meant to be general in nature and allows flexibility for asset managers of various sizes and structures to develop the particular policies and procedures necessary to implement the Code. The goal of this Code is to set forth a useful framework for all asset managers to provide services in a fair and professional manner and to fully disclose key elements of those services to clients, regardless of whether individual Managers are required to register or comply with applicable securities laws or regulations. Unregistered hedge fund managers, in particular, are encouraged to adopt the Code and implement its provisions to ensure fair dealing and integrity and to promote self-regulation in this dynamic sector.

We recognize that in the highly regulated and complex business of investment management, the adoption of a code of ethics by itself is not sufficient to ensure ethical conduct. To be implemented effectively, the principles and standards embodied in the Code must be supported by appropriate compliance procedures. The specific procedures that translate principle into practice will depend on a variety of factors, including the business of the Manager, the type of clients, the size of the Manager (based on assets under management and on number of employees), the regulatory régime with which the Manager must comply, and other factors.

Managers must adhere to all applicable laws and regulations governing their activities. Thus, the provisions of this Code may need to be supplemented with additional provisions to meet the requirements of applicable security regulation in markets around the world. Inevitably, in some markets, the Code will closely reflect or be aligned with existing regulation or accepted best practice and in other markets, the Code will expand on the existing work of regulatory authorities or may even break new ground. Furthermore, Managers operate in different types of market structures, which may affect the manner in which the Code can be applied. Despite these differences, the Code provides a universal set of principles and standards relevant to all asset managers.

Clients have a responsibility to be aware of, understand, and monitor how their assets are invested. Yet, to fulfill this responsibility, clients must be able to count on full and fair disclosure from their Managers. Providing clients with a code of ethics that sets a framework for how the Manager conducts business is an important step toward developing the trust and confidence necessary for a successful investment management relationship.

Adopting the Code and Claiming Compliance

Adoption of or compliance with the Asset Manager Code of Professional Conduct requires firms to adhere to all the principles of conduct and provisions set forth in the Code. Many asset management firms already have codes of ethics and other policies and procedures that address or go beyond the principles and provisions of the Code. Adoption of or compliance with the Code does not require a firm to amend its existing code of ethics or other policies and procedures as long as they are at least consistent with the principles and provisions set forth in the Code. Managers are strongly encouraged to review and consider the material in the Appendix when developing and reviewing their codes and other policies and procedures, although because of the many variables in size and complexity among asset management firms, compliance with the Code does not require strict adherence to this guidance.

If the Manager has not complied with each of the principles of conduct and provisions of the Code, the Manager cannot represent that it is in compliance with the Code. Statements referring to partial or incomplete compliance (e.g., “the firm complies with the Asset Manager Code except for . . .” or “the firm complies with parts A, B, and C of the Asset Manager Code”) are prohibited.

Once a Manager has met each of the required elements of the Code, the firm must make the following statement whenever the firm claims compliance with the Code:

“[Insert name of Firm] claims compliance with the CFA Institute Asset Manager Code of Professional Conduct. This claim has not been verified by CFA Institute.”

Acknowledgement of Claim of Compliance to CFA Institute

Asset managers must notify CFA Institute of their claim of compliance with the Asset Manager Code of Professional Conduct through the CFA Institute online notification process at www.cfainstitute.org/assetcode. Asset managers must submit this notification when they initially claim compliance and on an annual basis thereafter. This acknowledgement 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 asset manager’s claim of compliance or actual compliance with the Code. 

Learning Outcomes

The member should be able to:

  • explain the purpose of the Asset Manager Code and the benefits that may accrue to a firm that adopts the Code;
  • explain the ethical and professional responsibilities required by the six General Principles of Conduct of the Asset Manager Code;

  • determine whether an asset manager’s practices and procedures are consistent with the Asset Manager Code;

  • recommend practices and procedures designed to prevent violations of the Asset Manager Code. 

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