The Importance of Ethics
Definitions of Important Terms
The AIMR Code of Ethics
Ethical Responsibilities Required by the Code
Main Prescriptions of the Code
1. Act with integrity
2. Be a credit to the profession
3. Use independent professional judgment
Saturday, November 15, 2008
The AIMR code of Professional Conduct - A. Standard I.: Fundamental responsibilities
1. 1(A) Know and comply with laws, regulations, ethical codes and professional standardsa.
Required conduct
Members must comply with the laws and regulations of their home country when residing and working in foreign countries or in trading foreign securities, as well as with the local laws and regulations ad the AIMR Code of ethics and Standards of Professional conduct. When these laws, regulations, codes and standards are different, the member must comply with the most strict laws, regulations, codes and standards to which he or she is subject.
2. I(B): Do not knowingly Participate or assist others in any violations of applicable regulations or ethical codes
Required conduct
Members are responsible for legal and ethical violations in which they knowingly participate or assist. Although members are presumed to know all applicable laws and regulations, AIMR recognizes that a member may not realize there is a violation because he or she might not be aware of all the facts giving rise to the violation.
Required conduct
Members must comply with the laws and regulations of their home country when residing and working in foreign countries or in trading foreign securities, as well as with the local laws and regulations ad the AIMR Code of ethics and Standards of Professional conduct. When these laws, regulations, codes and standards are different, the member must comply with the most strict laws, regulations, codes and standards to which he or she is subject.
2. I(B): Do not knowingly Participate or assist others in any violations of applicable regulations or ethical codes
Required conduct
Members are responsible for legal and ethical violations in which they knowingly participate or assist. Although members are presumed to know all applicable laws and regulations, AIMR recognizes that a member may not realize there is a violation because he or she might not be aware of all the facts giving rise to the violation.
B. Standard II: Relationships with and Responsibilities to the Profession
1. II(A) Use of Professional designation
Required conduct
a. Members of AIMR may reference their membership only in a dignified and judicious manner. An accurate explanation of requirements that have been met to obtain membership may be included.
b. CFA charterholder members may use “Chartered financial Analyst,” or the CFA mark in a dignified and judicious manner. An accurate explanation of requirements tht have been met to obtain the designation may be included.
c. Candidates may reference their participation in the CFA program, as long as it is made clear that they are only a candidate. Only those awarded the CFA charter may use the initials “CFA” after their name. There is no special entitlement or partial designation to someone who has passed one or more CFA examinations, but who has not been awarded a charter.
2. II(B) Do not engage in any act that adversely reflects upon you honesty, trustworthiness, or professional competence
This standard goes beyond acts committed in a professional capacity (which are addressed in Standard I (A)). Standard II (B) concerns personal integrity and behavior that reflect on the entire profession. Violations include:
a. Convictions for a felony or any crime punishable by more than one year in prison, even if not related to professional activities.
b. Conviction or a misdemeanor involving moral turpitude, such as lying, cheating, stealing, and other dishonest conduct.
c. Repeated convictions of misdemeanors, no matter how inconsequential, because a large number of such convictions might suggest a disrespect for the law.
d. An action that reflects negatively on the level of ethical conduct of a CFA.
Required conduct
3. II© Do not plagiarise
Violations of this standard include the following:
a. Using parts of reports or articles prepared by other, either verbatim, or with only a slight change in wording without acknowledgement of the source.
b. Attributing specific quotations to “leading analysts”
or “investment experts,” without specifically referring to them by name.
c. Presenting statistical estimates or forecasts made by others with the source identified, but without any of the caveats that appeared in the source.
d. Using a chart or graph prepared by others without stating the source.
Required conduct
a. Members of AIMR may reference their membership only in a dignified and judicious manner. An accurate explanation of requirements that have been met to obtain membership may be included.
b. CFA charterholder members may use “Chartered financial Analyst,” or the CFA mark in a dignified and judicious manner. An accurate explanation of requirements tht have been met to obtain the designation may be included.
c. Candidates may reference their participation in the CFA program, as long as it is made clear that they are only a candidate. Only those awarded the CFA charter may use the initials “CFA” after their name. There is no special entitlement or partial designation to someone who has passed one or more CFA examinations, but who has not been awarded a charter.
2. II(B) Do not engage in any act that adversely reflects upon you honesty, trustworthiness, or professional competence
This standard goes beyond acts committed in a professional capacity (which are addressed in Standard I (A)). Standard II (B) concerns personal integrity and behavior that reflect on the entire profession. Violations include:
a. Convictions for a felony or any crime punishable by more than one year in prison, even if not related to professional activities.
b. Conviction or a misdemeanor involving moral turpitude, such as lying, cheating, stealing, and other dishonest conduct.
c. Repeated convictions of misdemeanors, no matter how inconsequential, because a large number of such convictions might suggest a disrespect for the law.
d. An action that reflects negatively on the level of ethical conduct of a CFA.
Required conduct
3. II© Do not plagiarise
Violations of this standard include the following:
a. Using parts of reports or articles prepared by other, either verbatim, or with only a slight change in wording without acknowledgement of the source.
b. Attributing specific quotations to “leading analysts”
or “investment experts,” without specifically referring to them by name.
c. Presenting statistical estimates or forecasts made by others with the source identified, but without any of the caveats that appeared in the source.
d. Using a chart or graph prepared by others without stating the source.
B. Standard II: Relationships with and Responsibilities to the Profession
1. II(A) Use of Professional designation
Required conduct
a. Members of AIMR may reference their membership only in a dignified and judicious manner. An accurate explanation of requirements that have been met to obtain membership may be included.
b. CFA charterholder members may use “Chartered financial Analyst,” or the CFA mark in a dignified and judicious manner. An accurate explanation of requirements tht have been met to obtain the designation may be included.
c. Candidates may reference their participation in the CFA program, as long as it is made clear that they are only a candidate. Only those awarded the CFA charter may use the initials “CFA” after their name. There is no special entitlement or partial designation to someone who has passed one or more CFA examinations, but who has not been awarded a charter.
2. II(B) Do not engage in any act that adversely reflects upon you honesty, trustworthiness, or professional competence
This standard goes beyond acts committed in a professional capacity (which are addressed in Standard I (A)). Standard II (B) concerns personal integrity and behavior that reflect on the entire profession. Violations include:
a. Convictions for a felony or any crime punishable by more than one year in prison, even if not related to professional activities.
b. Conviction or a misdemeanor involving moral turpitude, such as lying, cheating, stealing, and other dishonest conduct.
c. Repeated convictions of misdemeanors, no matter how inconsequential, because a large number of such convictions might suggest a disrespect for the law.
d. An action that reflects negatively on the level of ethical conduct of a CFA.
Required conduct
3. II© Do not plagiarise
Violations of this standard include the following:
a. Using parts of reports or articles prepared by other, either verbatim, or with only a slight change in wording without acknowledgement of the source.
b. Attributing specific quotations to “leading analysts”
or “investment experts,” without specifically referring to them by name.
c. Presenting statistical estimates or forecasts made by others with the source identified, but without any of the caveats that appeared in the source.
d. Using a chart or graph prepared by others without stating the source.
Required conduct
a. Members of AIMR may reference their membership only in a dignified and judicious manner. An accurate explanation of requirements that have been met to obtain membership may be included.
b. CFA charterholder members may use “Chartered financial Analyst,” or the CFA mark in a dignified and judicious manner. An accurate explanation of requirements tht have been met to obtain the designation may be included.
c. Candidates may reference their participation in the CFA program, as long as it is made clear that they are only a candidate. Only those awarded the CFA charter may use the initials “CFA” after their name. There is no special entitlement or partial designation to someone who has passed one or more CFA examinations, but who has not been awarded a charter.
2. II(B) Do not engage in any act that adversely reflects upon you honesty, trustworthiness, or professional competence
This standard goes beyond acts committed in a professional capacity (which are addressed in Standard I (A)). Standard II (B) concerns personal integrity and behavior that reflect on the entire profession. Violations include:
a. Convictions for a felony or any crime punishable by more than one year in prison, even if not related to professional activities.
b. Conviction or a misdemeanor involving moral turpitude, such as lying, cheating, stealing, and other dishonest conduct.
c. Repeated convictions of misdemeanors, no matter how inconsequential, because a large number of such convictions might suggest a disrespect for the law.
d. An action that reflects negatively on the level of ethical conduct of a CFA.
Required conduct
3. II© Do not plagiarise
Violations of this standard include the following:
a. Using parts of reports or articles prepared by other, either verbatim, or with only a slight change in wording without acknowledgement of the source.
b. Attributing specific quotations to “leading analysts”
or “investment experts,” without specifically referring to them by name.
c. Presenting statistical estimates or forecasts made by others with the source identified, but without any of the caveats that appeared in the source.
d. Using a chart or graph prepared by others without stating the source.
C. Standard III: Relationships with and responsibilities to the Employer
1. III(A) Inform Employers of the code of ethics and standards of professional conduct
Required conduct
Members must inform their immediate supervisor, in writing, that they are required to conform to the Code of Ethics and Standards of Professional Conduct. They are obligated to deliver a copy of the Code and Standards to their supervisor. This procedure is not necessary only if the employer has stated in writing, that the firm’s policies already include AIMR’s Code and Standards.
Compliance Procedures
2. III(B) Duties owed to employers
Required conduct
Do not undertake independent practice in competition with your employer that might result in some compensation or other benefit, unless you have written consent from both your employer and the outside entity (client) to do so.
If a member contemplates performing services for an entity other than his or her employer that could result in compensation, by rendering a service currently available by the employer, a written statement to the employer must be made describing:
a. The types of services offered.
b. The expected duration of the service.
c. The compensation.
No service should be rendered without the current employer’s written approval.
Compliance Procedures
3. III© Disclose conflicts of interest to employer
Required conduct
Members must disclose to employers any material fact that could reasonably be expected to interfere with their duty to the employer, or their ability to act in an unbiased and objective manner. A conflict of interest exists with any situation that would interfere with the member rendering unbiased investment advice, or cause the member not to act in the employer’s best interest. Material ownership of stock, participation in outside boards, and financial or other pressures that may influence a decision should be promptly reported to the employer, so their impact can be assessed and a decision made on how to resolve the conflict.
4. III(D) Disclose additional compensation arrangements
Required conduct
Inform employers in writing of compensation (monetary or other) for services that are in addition to the compensation received from the employer. The employer is entitled to have full knowledge of a member’s compensation arrangements in order to assess the true cost of services, and their likely effects on the employee’s loyalities and objectivity.
Members must make a written disclosure to their employers specifying any compensation they propose to receive, in addition to the compensation received from primary employer.
5. III(E) Responsibility of Supervisors
Required conduct
Members with supervisory responsibility are expected to understand what constitutes an adequate compliance system for their firm and to make reasonable efforts to see that appropriate procedures are established, documented, communicated to subordinates, monitored and enforced. They are expected to have in-depth knowledge of the Code and Standards, and must exercise their responsibility with respect to both persons who hold and do not hold the CFA designation.
Required conduct
Members must inform their immediate supervisor, in writing, that they are required to conform to the Code of Ethics and Standards of Professional Conduct. They are obligated to deliver a copy of the Code and Standards to their supervisor. This procedure is not necessary only if the employer has stated in writing, that the firm’s policies already include AIMR’s Code and Standards.
Compliance Procedures
2. III(B) Duties owed to employers
Required conduct
Do not undertake independent practice in competition with your employer that might result in some compensation or other benefit, unless you have written consent from both your employer and the outside entity (client) to do so.
If a member contemplates performing services for an entity other than his or her employer that could result in compensation, by rendering a service currently available by the employer, a written statement to the employer must be made describing:
a. The types of services offered.
b. The expected duration of the service.
c. The compensation.
No service should be rendered without the current employer’s written approval.
Compliance Procedures
3. III© Disclose conflicts of interest to employer
Required conduct
Members must disclose to employers any material fact that could reasonably be expected to interfere with their duty to the employer, or their ability to act in an unbiased and objective manner. A conflict of interest exists with any situation that would interfere with the member rendering unbiased investment advice, or cause the member not to act in the employer’s best interest. Material ownership of stock, participation in outside boards, and financial or other pressures that may influence a decision should be promptly reported to the employer, so their impact can be assessed and a decision made on how to resolve the conflict.
4. III(D) Disclose additional compensation arrangements
Required conduct
Inform employers in writing of compensation (monetary or other) for services that are in addition to the compensation received from the employer. The employer is entitled to have full knowledge of a member’s compensation arrangements in order to assess the true cost of services, and their likely effects on the employee’s loyalities and objectivity.
Members must make a written disclosure to their employers specifying any compensation they propose to receive, in addition to the compensation received from primary employer.
5. III(E) Responsibility of Supervisors
Required conduct
Members with supervisory responsibility are expected to understand what constitutes an adequate compliance system for their firm and to make reasonable efforts to see that appropriate procedures are established, documented, communicated to subordinates, monitored and enforced. They are expected to have in-depth knowledge of the Code and Standards, and must exercise their responsibility with respect to both persons who hold and do not hold the CFA designation.
D. Standard IV: Relationships with and Responsibilities to Clients and Prospects - Part I
1. IV(A.1) Recommendations and representations should have a reasonable basis
Required conduct
(1) Be diligent and thorough in investigations, when making recommendations, or when undertaking investment actions for others.
(2) Have a reasonable and adequate basis, supported by appropriate research, for recommendations and investments.
(3) Avoid material misrepresentation in any research report or investment recommendations.
(4) Maintain files and records to support the reasonableness of recommendations and investment decisions.
Members must make reasonable and diligent efforts to ensure any research report is accurate. Members should not use any information from a source he or she has reason to suspect is not accurate.
2. IV(A.2) research Reports
Required conduct
(1) Include all relevant factors in research reports.
(2) Distinguish between facts and opinions in research reports.
(3) Indicate the basic characteristics of the investment for any research reports containing an investment recommendation.
Research report encompasses all means of communicating an investment recommendation. These includes:
(1) Traditional research reports on the market, a class of investments, asset allocation, or a specific secuirity in paper form.
(2) IN-person or telephone recommendations.
(3) Media broadcasts
(4) Computer transmissions (e.g., the Internet)
Capsule recommendations (such as a “buy” or “sell” lists) must be supported by background reports or data that are available to interested members.
(5) A supervisory analyst should check research reports to assure compliance with these standards.
3. IV(A.3) Maintaining Independence 0and Objectivity
Required conduct
Every member should avoid situations that might cause, or be perceived to cause, a loss of independence and objectivity in recommending investments or taking investment action.
Analysts and portfolio managers violate this standard if they:
(1) Take an allocation of shares in oversubscribed IPOs for their personal account.
(2) Accept expensive gifts or entertainment from corporations (corporations that are not clients)
(3) Allow their firm’s business relationships with a company to affect a research review or investment decision.
(4) Allow compensation schedules to affect judgment.
4. IV(B.1) fiduciary Duties
The member has the responsibility to understand and comply with his or her fiduciary duties. This standard relates primarily to those who have discretionary authority in managing clients’ assets, or have other relationships of special trust. It is especially important in cases of managing trust and pension funds.
To satisfy this standard, members have an affirmative obligation to determine what their fiduciary duties are:
a. Required Conduct of Fiduciaries in General
(1) The duties of fiduciaries are to be found in :
(2) The general duties of fiduciaries are:
(a) Loyalty
(b) Care
(c) Prudence
(d) Impartiality
(e) Discretion
(3) Members with control over client assets should
b. Required Conduct of Trustees
(1) the Prudent Man Rule requires that every investment undertaken for a trust, standing alone, must be made prudently, i.e., with the prime directive of preserving the value of the corpus of the trust and secondarily, providing a safe return on the capital invested.
More recently, states have moved towards a Prudent Investor rule.
(a) Under the Prudent Man Rule, certain asset classes might be interpreted to be inherently imprudent (e.g., options), whereas no asset class is considered inherently imprudent under the Prudent Investor Rule. The riskiness of assets must be considered within a portfolio context in P.I.R.
(b) Under the P.M.R., the standard of prudence is applied to each asset held in trust, standing alone. Under the P.I.R. the standard of prudence is applied to the overall portfolio. The prime directive is to achieve a return/risk objective that is reasonable, without exceeding a level of overall portfolio risk that an investment professional would deem suitable to the trust under the prevailing circumstances. Employing overly conservative strategies may be subjected to less criticism under the traditional P.M.R. Under the P.I.R., overly conservative investment strategies may not be justified if they result in generating significantly inferior returns.
(c) The P.I.R. requires that trust investments be reasonably diversified.
(d) Under Traditional P.M.R. trustees were usually not permitted to delegate the authority to make investments. Under P.I.R. trustees may delegate the authority to make investment decisions to qualified investment managers, as long as those managers are selected prudently.
(e) Paying above average commissions for research or other services provided by a broker is permitted if the fiduciary comes to a bona fide conclusion that the services rendered are worth the extra cost.
(f) The modern P.I.R. standards generally impose a professional standard of care and prudence (Prudent Expert Standard).
(g) Other fiduciary duties that must be followed under U.S. law are:
(1) All of the beneficiaries of a trust should be treated equally.
(2) Best efforts must be applied to maximizing after-tax returns.
(3) Legal requirements, such as the filing of periodic financial statements and tax returns required by law, must be known and satisfied.
c. Required conduct for Managing Private Retirement Plans Governed by ERISA
Under ERISA, fiduciaries of retirement plans have the following affirmative duties:
(1) Loyalty: Loyalty, under ERISA, require them to act solely in the interest of the plan participants and beneficiaries with the exclusive purpose of: (a) Providing plan benefits. (b) Defraying reasonable plan expenses.
(2) Care: Care requires them to use all of the skills of a professional in carrying out their responsibilities. Thus ERISA applies a Prudent Expert standard.
(3) Prudence: Prudence requires them to take no risks that are likely to endanger the ability of the plan to provide promised benefits and earn a reasonable return commensurate with the risk taken.
(4) Know and Carry out their Responsibilities as Defined by the Plan’s Trust Documents
(5) ERISA prohibits fiduciaries from
(a) Self-Dealing
(b) Permitting conflicts of interest
(c) Receiving “Kickbacks”
(d) Dealing with Parties in Interest.
d. Legal Rights and Beneficiaries and participants under ERISA
Under ERISA, plan participants and beneficiaries who believe that their retirement trust is not being operated solely for their best interests may bring civil action again the plan fiduciaries. If victorious, they have the right to recover both the losses the court decides they have suffered as a result of breaches of duty by the plan fiduciaries and their attorney(s) fees.
e. Required Conduct for Fiduciaries Associated with Public Pension Plans
f. Required Conduct for Fiduciaries of Charitable Organizations and Endowments
(1) In the U.S. fiduciary duties of fiduciaries of charitable organizations and endowments are primarily contained in the Uniform Management of Institutional Funds Act (UMIFA), which embodies most of the same standards as those found in the Prudent Man and Prudent Investor Standards.
UMIFA does impose some unique affirmative duties on institutional fiduciaries. These are:
(a) Fiduciaries must formulate policies for the investment program of the organization’s assets. Such policies should be based on:
(1) the amount of funds needed on a long- and short term basis, to carry out the work of the institution.
(2) The current and probable future resources of the organization.
(3) The expected return on its assets.
(4) Probable future economic trends.
(b) to follow spending and investment policies adopted by the institution.
g. Required Conduct for Money Managers
(1) Money managers can look to the Investment Advisors Act of 1940 for some behavioral guidance. This act prohibits investment advisors from
(2) Some general principles that should guide a money manager are
(a) be honest and loyal to the client, acting always in the clients best interest.
(b) Use care and independent professional judgment in investment matters.
(c) Have a reasonable basis for investment decisions.
(d) Avoid conflicts of interest or make full disclosure of facts and circumstances that could be construed as a conflict of interest.
(e) Make sure investment actions and advice are suitable for the client.
(f) Obtain the best executions’ on trades for clients. Make sure that commissions and other expenses are reasonable for the service rendered.
(g) Avoid misrepresentations of all kinds, particularly with respect to performance presentations.
h. Required Conduct for Brokers and Dealers
In particular, brokers and dealers:
(1) Should not churn customer accounts.
(2) Should not accept funds when their firms are insolvent
(3) Should not engage in fraudulent, deceptive or manipulative practices.
(4) Should not exploit their customers’ trust or ignorance
(5) Should deal fairly with their clients.
i. Required Conduct for Security Analysts
Research analyst must:
(1) Do the best job they can for their employers and their employers’ clients.
(2) Se independent judgment.
(3) Have an adequate basis for their recommendations
(4) Deal fairly with clients and fellow professionals.
j. Other Issues Regarding the Required Conduct of Fiduciaries
(1) Social Investing: Social investing is permitted under most fiduciary laws and guidelines only if:
(a) The portfolio’s return and risk are not compromised.
(b) Diversification is still adequate
(c) Excessive costs are not incurred.
(2) Relationship Investing
(3) Proxy voting
The U.S. Dept of Labor has set forth specific regulations for proxy voting of shares held by qualified retirement plans governed by ERISA.
(a) The investment manager has the fiduciary responsibility of voting proxies arising form the retirement plans under his or her control, unless the plan documents designate some other person)s) as the responsible Party(s)
(4) Soft Dollars
When an investment manager pays for goods or services that benefit the manager by channeling security transactions through specific brokers who are paid commissions for those transactions, the funds paid are called “soft dollars.” When managers use their own funds to pay for goods and services, such payments are called “hard dollars.”
(a) The primary rule is that brokerage belongs to the client. Fiduciaries must not use client funds for their own benefit. However transactions involving soft dollars are permitted under the following circumstances:
(1) the goods or services purchased help the manager make a better investment decision.
(b) ERISA imposes a sole benefit test of loyalty for the management of pension plans.
5. IV(B.2) Portfolio Investment Recommendations and Actions
a. required conduct
Members shall:
(1) Inquire as to client’s financial situation, investment experience, and investment objectives before any investment recommendations or action are made. Update this information at least once a year.
(2) Before making a recommendation or taking investment action, determine the appropriateness and suitability of the action by considering:
(a) The client’s needs and circumstances
(b) The basic characteristics of the investment
(c) The client’s investment experience and objectives.
(3) Distiniguish between facts and opinions in presenting investment recommendations.
(4) Disclose to clients and prospects the basic format and general principles by which securities are selected and portfolios are constructed. Promptly disclose to clients and prospects any changes that might significantly affect this process.
(5) Obtain written authorization from the client to make changes.
Required conduct
(1) Be diligent and thorough in investigations, when making recommendations, or when undertaking investment actions for others.
(2) Have a reasonable and adequate basis, supported by appropriate research, for recommendations and investments.
(3) Avoid material misrepresentation in any research report or investment recommendations.
(4) Maintain files and records to support the reasonableness of recommendations and investment decisions.
Members must make reasonable and diligent efforts to ensure any research report is accurate. Members should not use any information from a source he or she has reason to suspect is not accurate.
2. IV(A.2) research Reports
Required conduct
(1) Include all relevant factors in research reports.
(2) Distinguish between facts and opinions in research reports.
(3) Indicate the basic characteristics of the investment for any research reports containing an investment recommendation.
Research report encompasses all means of communicating an investment recommendation. These includes:
(1) Traditional research reports on the market, a class of investments, asset allocation, or a specific secuirity in paper form.
(2) IN-person or telephone recommendations.
(3) Media broadcasts
(4) Computer transmissions (e.g., the Internet)
Capsule recommendations (such as a “buy” or “sell” lists) must be supported by background reports or data that are available to interested members.
(5) A supervisory analyst should check research reports to assure compliance with these standards.
3. IV(A.3) Maintaining Independence 0and Objectivity
Required conduct
Every member should avoid situations that might cause, or be perceived to cause, a loss of independence and objectivity in recommending investments or taking investment action.
Analysts and portfolio managers violate this standard if they:
(1) Take an allocation of shares in oversubscribed IPOs for their personal account.
(2) Accept expensive gifts or entertainment from corporations (corporations that are not clients)
(3) Allow their firm’s business relationships with a company to affect a research review or investment decision.
(4) Allow compensation schedules to affect judgment.
4. IV(B.1) fiduciary Duties
The member has the responsibility to understand and comply with his or her fiduciary duties. This standard relates primarily to those who have discretionary authority in managing clients’ assets, or have other relationships of special trust. It is especially important in cases of managing trust and pension funds.
To satisfy this standard, members have an affirmative obligation to determine what their fiduciary duties are:
a. Required Conduct of Fiduciaries in General
(1) The duties of fiduciaries are to be found in :
(2) The general duties of fiduciaries are:
(a) Loyalty
(b) Care
(c) Prudence
(d) Impartiality
(e) Discretion
(3) Members with control over client assets should
b. Required Conduct of Trustees
(1) the Prudent Man Rule requires that every investment undertaken for a trust, standing alone, must be made prudently, i.e., with the prime directive of preserving the value of the corpus of the trust and secondarily, providing a safe return on the capital invested.
More recently, states have moved towards a Prudent Investor rule.
(a) Under the Prudent Man Rule, certain asset classes might be interpreted to be inherently imprudent (e.g., options), whereas no asset class is considered inherently imprudent under the Prudent Investor Rule. The riskiness of assets must be considered within a portfolio context in P.I.R.
(b) Under the P.M.R., the standard of prudence is applied to each asset held in trust, standing alone. Under the P.I.R. the standard of prudence is applied to the overall portfolio. The prime directive is to achieve a return/risk objective that is reasonable, without exceeding a level of overall portfolio risk that an investment professional would deem suitable to the trust under the prevailing circumstances. Employing overly conservative strategies may be subjected to less criticism under the traditional P.M.R. Under the P.I.R., overly conservative investment strategies may not be justified if they result in generating significantly inferior returns.
(c) The P.I.R. requires that trust investments be reasonably diversified.
(d) Under Traditional P.M.R. trustees were usually not permitted to delegate the authority to make investments. Under P.I.R. trustees may delegate the authority to make investment decisions to qualified investment managers, as long as those managers are selected prudently.
(e) Paying above average commissions for research or other services provided by a broker is permitted if the fiduciary comes to a bona fide conclusion that the services rendered are worth the extra cost.
(f) The modern P.I.R. standards generally impose a professional standard of care and prudence (Prudent Expert Standard).
(g) Other fiduciary duties that must be followed under U.S. law are:
(1) All of the beneficiaries of a trust should be treated equally.
(2) Best efforts must be applied to maximizing after-tax returns.
(3) Legal requirements, such as the filing of periodic financial statements and tax returns required by law, must be known and satisfied.
c. Required conduct for Managing Private Retirement Plans Governed by ERISA
Under ERISA, fiduciaries of retirement plans have the following affirmative duties:
(1) Loyalty: Loyalty, under ERISA, require them to act solely in the interest of the plan participants and beneficiaries with the exclusive purpose of: (a) Providing plan benefits. (b) Defraying reasonable plan expenses.
(2) Care: Care requires them to use all of the skills of a professional in carrying out their responsibilities. Thus ERISA applies a Prudent Expert standard.
(3) Prudence: Prudence requires them to take no risks that are likely to endanger the ability of the plan to provide promised benefits and earn a reasonable return commensurate with the risk taken.
(4) Know and Carry out their Responsibilities as Defined by the Plan’s Trust Documents
(5) ERISA prohibits fiduciaries from
(a) Self-Dealing
(b) Permitting conflicts of interest
(c) Receiving “Kickbacks”
(d) Dealing with Parties in Interest.
d. Legal Rights and Beneficiaries and participants under ERISA
Under ERISA, plan participants and beneficiaries who believe that their retirement trust is not being operated solely for their best interests may bring civil action again the plan fiduciaries. If victorious, they have the right to recover both the losses the court decides they have suffered as a result of breaches of duty by the plan fiduciaries and their attorney(s) fees.
e. Required Conduct for Fiduciaries Associated with Public Pension Plans
f. Required Conduct for Fiduciaries of Charitable Organizations and Endowments
(1) In the U.S. fiduciary duties of fiduciaries of charitable organizations and endowments are primarily contained in the Uniform Management of Institutional Funds Act (UMIFA), which embodies most of the same standards as those found in the Prudent Man and Prudent Investor Standards.
UMIFA does impose some unique affirmative duties on institutional fiduciaries. These are:
(a) Fiduciaries must formulate policies for the investment program of the organization’s assets. Such policies should be based on:
(1) the amount of funds needed on a long- and short term basis, to carry out the work of the institution.
(2) The current and probable future resources of the organization.
(3) The expected return on its assets.
(4) Probable future economic trends.
(b) to follow spending and investment policies adopted by the institution.
g. Required Conduct for Money Managers
(1) Money managers can look to the Investment Advisors Act of 1940 for some behavioral guidance. This act prohibits investment advisors from
(2) Some general principles that should guide a money manager are
(a) be honest and loyal to the client, acting always in the clients best interest.
(b) Use care and independent professional judgment in investment matters.
(c) Have a reasonable basis for investment decisions.
(d) Avoid conflicts of interest or make full disclosure of facts and circumstances that could be construed as a conflict of interest.
(e) Make sure investment actions and advice are suitable for the client.
(f) Obtain the best executions’ on trades for clients. Make sure that commissions and other expenses are reasonable for the service rendered.
(g) Avoid misrepresentations of all kinds, particularly with respect to performance presentations.
h. Required Conduct for Brokers and Dealers
In particular, brokers and dealers:
(1) Should not churn customer accounts.
(2) Should not accept funds when their firms are insolvent
(3) Should not engage in fraudulent, deceptive or manipulative practices.
(4) Should not exploit their customers’ trust or ignorance
(5) Should deal fairly with their clients.
i. Required Conduct for Security Analysts
Research analyst must:
(1) Do the best job they can for their employers and their employers’ clients.
(2) Se independent judgment.
(3) Have an adequate basis for their recommendations
(4) Deal fairly with clients and fellow professionals.
j. Other Issues Regarding the Required Conduct of Fiduciaries
(1) Social Investing: Social investing is permitted under most fiduciary laws and guidelines only if:
(a) The portfolio’s return and risk are not compromised.
(b) Diversification is still adequate
(c) Excessive costs are not incurred.
(2) Relationship Investing
(3) Proxy voting
The U.S. Dept of Labor has set forth specific regulations for proxy voting of shares held by qualified retirement plans governed by ERISA.
(a) The investment manager has the fiduciary responsibility of voting proxies arising form the retirement plans under his or her control, unless the plan documents designate some other person)s) as the responsible Party(s)
(4) Soft Dollars
When an investment manager pays for goods or services that benefit the manager by channeling security transactions through specific brokers who are paid commissions for those transactions, the funds paid are called “soft dollars.” When managers use their own funds to pay for goods and services, such payments are called “hard dollars.”
(a) The primary rule is that brokerage belongs to the client. Fiduciaries must not use client funds for their own benefit. However transactions involving soft dollars are permitted under the following circumstances:
(1) the goods or services purchased help the manager make a better investment decision.
(b) ERISA imposes a sole benefit test of loyalty for the management of pension plans.
5. IV(B.2) Portfolio Investment Recommendations and Actions
a. required conduct
Members shall:
(1) Inquire as to client’s financial situation, investment experience, and investment objectives before any investment recommendations or action are made. Update this information at least once a year.
(2) Before making a recommendation or taking investment action, determine the appropriateness and suitability of the action by considering:
(a) The client’s needs and circumstances
(b) The basic characteristics of the investment
(c) The client’s investment experience and objectives.
(3) Distiniguish between facts and opinions in presenting investment recommendations.
(4) Disclose to clients and prospects the basic format and general principles by which securities are selected and portfolios are constructed. Promptly disclose to clients and prospects any changes that might significantly affect this process.
(5) Obtain written authorization from the client to make changes.
D. Standard IV: Relationships with and Responsibilities to Clients and Prospects - Part II
6. IV(B.3) Fair Treatment of clients
Required conduct
Deal fairly with clients regarding:
(1) Dissemination of recommendations
(2) Dissemination of changes of prior opinions
(3) Taking investment action.
Every effort should me made to communicate investment ideas to clients, for which the ideas are suitable and who have a known interest in them, as simultaneously as possible within reasonable limits defined by communications technology.
7. IV(b.4)Priority of Transactions
Required conduct
This standard applies to all members and access persons (defined as persons who have advanced knowledge pertaining to upcoming research recommendations, changes in opinions about securities, and/or pending investment actions to be taken either by the firm itself, or on behalf of clients).
There is nothing unethical about access persons investing for their own benefit. The personal investments of access persons and investment professionals must be undertaken within the confines of the following restrictions.
(1) Interests of clients, the employer, and the integrity of the professional must be put ahead of the access person’s or member’s own personal interests.
(2) Care must be taken that personal investments do not create conflicts of interest or impair the investment professional’s ability to be objective and render independent professional judgments about securities.
(3) All applicable laws, regulations, and compliance procedures must be followed.
(4) The investment professional should not receive a personal benefit from investment actions taken on behalf of a client (except for the usual and customary compensation for the service rendered).
Compliance Procedures
8. IV(B.5) Confidentiality
Required conduct
Preserve the confidentiality of client and employer information, unless it concerns illegal activities. The best approach is never to disclose information received from a client or employer, except to authorized persons on a “need to know” basis.
9. IV(B.6) Prohibition against misrepresentations
Required conduct
A member may not misrepresent:
(1) The performance of his or her (or the employer’s) services or investment performance.
(2) Their qualifications or the qualifications of their firm.
(3) Their academic and professional standards.
Members should ensure that misrepresentation does not occur in oral presentations, advertising, electronic communication, or written materials.
No guarantees should be given regarding the outcome or the probable return on an investment.
10. IV (B.7) Disclose conflicts of interest to clients and prospects
Required conduct
Members must disclose to clients and prospects any potential conflict of interest. Disclosure of any matter that could reasonably be expected to impair objectivity allows clients to judge motives and possible biases for themselves.
11. IV(B.8) Disclose referral fees
Required conduct
The existence of referral fees, their nature, and their amount should be disclosed in writing to any prospective client, as soon as the client is referred to a member.
Compliance Procedures
Required conduct
Deal fairly with clients regarding:
(1) Dissemination of recommendations
(2) Dissemination of changes of prior opinions
(3) Taking investment action.
Every effort should me made to communicate investment ideas to clients, for which the ideas are suitable and who have a known interest in them, as simultaneously as possible within reasonable limits defined by communications technology.
7. IV(b.4)Priority of Transactions
Required conduct
This standard applies to all members and access persons (defined as persons who have advanced knowledge pertaining to upcoming research recommendations, changes in opinions about securities, and/or pending investment actions to be taken either by the firm itself, or on behalf of clients).
There is nothing unethical about access persons investing for their own benefit. The personal investments of access persons and investment professionals must be undertaken within the confines of the following restrictions.
(1) Interests of clients, the employer, and the integrity of the professional must be put ahead of the access person’s or member’s own personal interests.
(2) Care must be taken that personal investments do not create conflicts of interest or impair the investment professional’s ability to be objective and render independent professional judgments about securities.
(3) All applicable laws, regulations, and compliance procedures must be followed.
(4) The investment professional should not receive a personal benefit from investment actions taken on behalf of a client (except for the usual and customary compensation for the service rendered).
Compliance Procedures
8. IV(B.5) Confidentiality
Required conduct
Preserve the confidentiality of client and employer information, unless it concerns illegal activities. The best approach is never to disclose information received from a client or employer, except to authorized persons on a “need to know” basis.
9. IV(B.6) Prohibition against misrepresentations
Required conduct
A member may not misrepresent:
(1) The performance of his or her (or the employer’s) services or investment performance.
(2) Their qualifications or the qualifications of their firm.
(3) Their academic and professional standards.
Members should ensure that misrepresentation does not occur in oral presentations, advertising, electronic communication, or written materials.
No guarantees should be given regarding the outcome or the probable return on an investment.
10. IV (B.7) Disclose conflicts of interest to clients and prospects
Required conduct
Members must disclose to clients and prospects any potential conflict of interest. Disclosure of any matter that could reasonably be expected to impair objectivity allows clients to judge motives and possible biases for themselves.
11. IV(B.8) Disclose referral fees
Required conduct
The existence of referral fees, their nature, and their amount should be disclosed in writing to any prospective client, as soon as the client is referred to a member.
Compliance Procedures
Friday, November 14, 2008
Relationships with and Responsibilities to the Investing Public
Ethical and Professional Standards
Standard V: Relationships with and Responsibilities to the Investing Public
1. V(A) Do not use material nonpublic information
Members shall not make any investment action (trade the security, or make a recommendation regarding the security), or communicate the information, when in the possession of material nonpublic information related to the value of a security if such action would breach a duty, the information was misappropriated, or if it relates to a tender offer. If such material nonpublic information is received, an effort should be made to get the company about whom the information relates to make a public disclosure of the information, except if the information was received because of a special or confidential relationship with the company (as in the case of “constructive” insider), and the information is to be kept in confidence.
a. Definitions of Material Nonpublic Information
(1) Traditional theory
(a) Information must be material. Information is material if:
(1) It pertains to a tender offer.
(2) It would significantly change the total mix of information about a company, its affairs, or its securities; i.e., a reasonable investor would want to know it before making an investment decision, or, if known it would probably have an impact on the price of a security.
(3) It is a specific fact, rather than an opinion.
(b) The information must be Nonpublic. Information becomes public as soon as the company discloses it in a way calculated to make it available to the general investing public. Corporate disclosure made to a “room full of analysts” does not constitute disclosure under the law.
(c) The source Must be an insider: Someone who knows the information because he or she is in a position to receive confidential information about a company’s affairs and who has a fiduciary duty not to disclose it.
Tippees, such as analysts who receive material nonpublic information, may legally use it, unless they are brought into the fold of confidentiality or then know that the information was mis-appropriated or obtained illegally. They are brought into the fold of confidentiality when they are given the information for a legitimate business purpose.
Note that a fiduciary duty exists as a matter of law; it cannot be imposed simply by telling someone to “keep this information confidential.”
(2) Misappropriation Theory
Under the misappropriation theory, individuals commit securities fraud if they obtain material nonpublic information from another to whom they owe a duty of trust and confidence, and then communicate that information or use it as the basis of a trade or recommendation, even if they owe no fiduciary duty to the issuer of the involved issuer. They also commit fraud if they obtain material nonpublic information illegally.
The concept is that material nonpublic information is “property.” If anyone who has access to this information uses it for their own personal benefit, or give it to others, they misappropriate company property. This is a form of theft, which is punishable by criminal and civil actions.
b. The Mosaic theory
Taking several immaterial and/or publicly available stand-alone facts from various sources and putting them together to form a complete and significant picture of a corporate situation is called the mosaic theory. This is the analyst’s job and is completely legal.
c. Required conduct
(1) Members shall not take any investment action or communicate information about a security or company, when in the possession of material nonpublic information related to the value of the security if such action would breach a duty owed to the company, the information was misappropriated, or if it relates to a tender offer.
(2) When acting as a consultant or any other role in which the member becomes a “temporary insider” keep information received confidential and do not use it for investment purposes or communicate it to others.
d. Legal Ramifications of Using or Communicating Inside or Misappropriated Information
Penalties include:
(1) Fines up to $1,000,000 for individuals ($2,500,000 for firms)
(2) Disgorgement of up to three times any illicit profits (or losses avoided) from trading (or recommending) securities based on inside or misappropriated information.
(3) Jail terms of up to 10 years.
(4) Civil suit for damages suffered by the counterparties to any illegal trades.
(5) Sanction by regulating bodies, primarily the SEC.
e. Compliance Procedures
(1) Do not seek out material nonpublic information.
2. V(B) Performance Presentation
Members may not misrepresent their investment performance record, either in terms of the presentation or the measurement of those results. When communicating data about the performance history of accounts or composites (group of accounts), either of the individual investment manager or of a firm, the member must give a fair and complete presentation. It is unethical to misrepresent past investment performance or the investment performance that a client can reasonably expect to obtain in the future.
a. Reasons Why Performance Presentation Standards are Necessary
Historically, investors have faced many difficulties in obtaining fair performance results that were comparable among various investment management firms.
Therefore, AIMR developed the AIMR Performance presentation Standards and Global Investment Performance Standards in the hope that a set of globally accepted common standards will enable performance results among various investment firms to become truly comparable.
b. Required conduct
(1) Members may not misrepresent
(2) When communicating data about the performance history of individual accounts, composites (groups of accounts), an individual investment manager, or an entire firm, the member must give a fair and complete presentation.
c. Compliance Procedures
(1) Compliance with the AIMR Performance Presentation Standards and/or the Global Investment Performance Standards is the best way to comply with this standard.
Standard V: Relationships with and Responsibilities to the Investing Public
1. V(A) Do not use material nonpublic information
Members shall not make any investment action (trade the security, or make a recommendation regarding the security), or communicate the information, when in the possession of material nonpublic information related to the value of a security if such action would breach a duty, the information was misappropriated, or if it relates to a tender offer. If such material nonpublic information is received, an effort should be made to get the company about whom the information relates to make a public disclosure of the information, except if the information was received because of a special or confidential relationship with the company (as in the case of “constructive” insider), and the information is to be kept in confidence.
a. Definitions of Material Nonpublic Information
(1) Traditional theory
(a) Information must be material. Information is material if:
(1) It pertains to a tender offer.
(2) It would significantly change the total mix of information about a company, its affairs, or its securities; i.e., a reasonable investor would want to know it before making an investment decision, or, if known it would probably have an impact on the price of a security.
(3) It is a specific fact, rather than an opinion.
(b) The information must be Nonpublic. Information becomes public as soon as the company discloses it in a way calculated to make it available to the general investing public. Corporate disclosure made to a “room full of analysts” does not constitute disclosure under the law.
(c) The source Must be an insider: Someone who knows the information because he or she is in a position to receive confidential information about a company’s affairs and who has a fiduciary duty not to disclose it.
Tippees, such as analysts who receive material nonpublic information, may legally use it, unless they are brought into the fold of confidentiality or then know that the information was mis-appropriated or obtained illegally. They are brought into the fold of confidentiality when they are given the information for a legitimate business purpose.
Note that a fiduciary duty exists as a matter of law; it cannot be imposed simply by telling someone to “keep this information confidential.”
(2) Misappropriation Theory
Under the misappropriation theory, individuals commit securities fraud if they obtain material nonpublic information from another to whom they owe a duty of trust and confidence, and then communicate that information or use it as the basis of a trade or recommendation, even if they owe no fiduciary duty to the issuer of the involved issuer. They also commit fraud if they obtain material nonpublic information illegally.
The concept is that material nonpublic information is “property.” If anyone who has access to this information uses it for their own personal benefit, or give it to others, they misappropriate company property. This is a form of theft, which is punishable by criminal and civil actions.
b. The Mosaic theory
Taking several immaterial and/or publicly available stand-alone facts from various sources and putting them together to form a complete and significant picture of a corporate situation is called the mosaic theory. This is the analyst’s job and is completely legal.
c. Required conduct
(1) Members shall not take any investment action or communicate information about a security or company, when in the possession of material nonpublic information related to the value of the security if such action would breach a duty owed to the company, the information was misappropriated, or if it relates to a tender offer.
(2) When acting as a consultant or any other role in which the member becomes a “temporary insider” keep information received confidential and do not use it for investment purposes or communicate it to others.
d. Legal Ramifications of Using or Communicating Inside or Misappropriated Information
Penalties include:
(1) Fines up to $1,000,000 for individuals ($2,500,000 for firms)
(2) Disgorgement of up to three times any illicit profits (or losses avoided) from trading (or recommending) securities based on inside or misappropriated information.
(3) Jail terms of up to 10 years.
(4) Civil suit for damages suffered by the counterparties to any illegal trades.
(5) Sanction by regulating bodies, primarily the SEC.
e. Compliance Procedures
(1) Do not seek out material nonpublic information.
2. V(B) Performance Presentation
Members may not misrepresent their investment performance record, either in terms of the presentation or the measurement of those results. When communicating data about the performance history of accounts or composites (group of accounts), either of the individual investment manager or of a firm, the member must give a fair and complete presentation. It is unethical to misrepresent past investment performance or the investment performance that a client can reasonably expect to obtain in the future.
a. Reasons Why Performance Presentation Standards are Necessary
Historically, investors have faced many difficulties in obtaining fair performance results that were comparable among various investment management firms.
Therefore, AIMR developed the AIMR Performance presentation Standards and Global Investment Performance Standards in the hope that a set of globally accepted common standards will enable performance results among various investment firms to become truly comparable.
b. Required conduct
(1) Members may not misrepresent
(2) When communicating data about the performance history of individual accounts, composites (groups of accounts), an individual investment manager, or an entire firm, the member must give a fair and complete presentation.
c. Compliance Procedures
(1) Compliance with the AIMR Performance Presentation Standards and/or the Global Investment Performance Standards is the best way to comply with this standard.
Ethical and Professional Standards - Corporate Governance
VI. Corporate Governance
A. Introduction
B. Fiduciaries Responsible for Voting Proxies
C. Proxy Voting Standards for Fiduciaries
D. Recommended elements in a proper Proxy Voting Policy
1. Designate a competent individual or policy making body as being responsible for implementing and monitoring a proxy voting policy. This person or body should:
2. Set up administrative procedures that:
E. Laws and Regulations Regarding the Voting of Proxies by Fiduciaries
A. Introduction
B. Fiduciaries Responsible for Voting Proxies
C. Proxy Voting Standards for Fiduciaries
D. Recommended elements in a proper Proxy Voting Policy
1. Designate a competent individual or policy making body as being responsible for implementing and monitoring a proxy voting policy. This person or body should:
2. Set up administrative procedures that:
E. Laws and Regulations Regarding the Voting of Proxies by Fiduciaries
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