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Communications from the Institute do not constitute, and should not be considered a substitute for, legal advice.
[18860]
May 18, 2005
TO: CLOSED-END INVESTMENT COMPANY MEMBERS No. 29-05
COMPLIANCE MEMBERS No. 1-05
EQUITY MARKETS ADVISORY COMMITTEE No. 22-05
INTERNATIONAL MEMBERS No. 15-05
INVESTMENT ADVISER ASSOCIATE MEMBERS No. 8-05
INVESTMENT ADVISER MEMBERS No. 10-05
SEC RULES MEMBERS No. 64-05
SMALL FUNDS MEMBERS No. 44-05
RE: CFA INSTITUTE ASSET MANAGER CODE OF PROFESSIONAL CONDUCT
The CFA Institute’s CFA Centre for Financial Market Integrity (“CFA Centre”) has
issued a final Asset Manager Code of Professional Conduct (“Code”).1 The Code “is meant to
apply, on a global basis, to firms . . . who manage client assets as separate accounts or pooled
funds (including collective investment schemes, mutual funds, and fund of funds).”
The final document begins with an introduction that discusses the genesis and purpose
of the Code. Following the introduction are six “General Principles of Conduct” that describe
responsibilities of asset management firms to their clients (e.g., act in a professional and ethical
manner at all times). The main body of the Code covers six areas: (1) loyalty to clients; (2)
investment process and actions; (3) trading; (4) compliance and support; (5) performance and
valuation; and (6) disclosures. For each of these areas, the Code includes a series of directives
regarding specific conduct in which firms “must” (or must not) engage. Attached to the Code is
Appendix A – Recommendations and Guidance. The appendix “provides guidance explaining
the Code and includes further recommendations and illustrative examples to assist Managers
seeking to implement the Code.”
The final Code reflects many of the Institute’s comments on an exposure draft that the
CFA Centre published for comment late last year.2 For example, the Institute expressed concern
about the mandatory nature of the Code and related guidance. The introduction to the final
1 The Code is available at http://www.cfainstitute.org/cfacentre/positions/pdf/asset_manager_code.pdf.
2 See Institute Memorandum to Chief Compliance Officer Committee No. 15-05, Compliance Advisory Committee
No. 14-05, Equity Markets Advisory Committee No. 13-05, Closed-End Investment Company Members No. 14-05,
Investment Adviser Members No. 4-05, Investment Adviser Associate Members No. 4-05, SEC Rules Members No.
29-05, Small Funds Members No. 16-05, and International Members No. 6-05 [18490], dated February 17, 2005.
2
Code clarifies that the Code is voluntary. In addition, unlike in the exposure draft, the guidance
is set forth in a separate appendix, making clear that it is not part of the Code. An introduction
to the appendix explains that the examples therein are not meant to be exhaustive, and
acknowledges that 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. It further indicates that the appendix highlights issues for managers to
consider as they develop their own internal policies and procedures.
In addition, several substantive provisions of the Code and guidance have been revised
in response to concerns raised by the Institute and other commenters. For example, Section C.3
of the Code originally stated that managers must use commissions generated from client trades
only to pay for investment-related products or services that directly benefit the client. Similarly,
the accompanying guidance provided that “any benefits offered in return for commissions must
directly benefit the client whose assets produced them.” The Institute’s comment letter pointed
out that U.S. law recognizes that such products and services can benefit a group of client
accounts and the investment process overall. We further commented that in most cases, it is
virtually impossible to tie benefits directly to individual client accounts.
The final version of Section C.3 responds to these concerns. It states that managers must
use commissions generated from client trades only to pay for investment-related products or
services that “directly assist the manager in its investment decision-making process and not in
the management of the firm.” In addition, the guidance has been revised to state that “any
benefits offered in return for commissions must benefit the Manager’s clients.”
Frances M. Stadler
Deputy Senior Counsel