Asia-Pacific Asset Managers: No Compliance with CFA Institute Asset Manager Code Is Red Flag

Last week was a very busy time for Asia’s financial industry, thanks not only to the 2013 CFA Institute Annual Conference but also a visit from the chief investment officer of one of the largest pension funds in the United States. The message from Michael Trotsky, CFA, chief investment officer of Massachusetts Pension Reserves Investment Management (Mass PRIM) fund, to potential Asia-Pacific business partners was clear: No matter how good an investment manager’s performance, failure to comply with the basic principles in the CFA Institute Asset Manager Code of Professional Conduct raises a red flag.

Trotsky was joined in Singapore for a pre-conference workshop by two Asset Manager Code-compliant asset managers, Singapore Labor Foundation Chief Investment Officer Lim Liying, CFA, and Al Meezan Investment Management Ltd. CEO Mohammad Shoaib, CFA, as panelists. Judging by the large number of questions, the interest was extremely high. Mr. Trotsky summarized his reasons for putting so much emphasis on Asset Manager Code compliance and the many benefits it provides for asset owners such as Mass PRIM. In particular he pointed out that the Asset Manager Code provides a useful tool to quickly identify firms that commit to a common standard of ethical principles and sound professional practices. Besides, he appreciates the fact that it assists in the initial and ongoing due diligence reviews of external managers and helps ask difficult questions of, and set expectations for, asset managers. The audience appeared particularly interested to learn about the uniform global standard it sets for comparing the practices of managers from different markets or regions without having to appreciate the specific regional laws governing their operations. Indeed, fund managers trying to obtain an investment mandate from an asset owner in another country would do well to comply with the Asset Manager Code because it helps prospective clients to make a judgment about the asset management firm’s internal code of conduct, which may span hundreds of pages and be too cumbersome to study for an initial screening.

Ms. Lim and Mr. Shoaib emphasized the value of the Asset Manager Code as a communication and promotional tool to demonstrate the importance they place on protecting client interests. One of the goals of the close to 900 compliant firms in 32 countries is building an ethical reputation that will ultimately help retain and attract clients. In addition, asset management firms that have chosen to adopt the Asset Manager Code appreciate that it helps send a message to investors, regulators, and partners that they are voluntarily operating under a higher set of ethical and professional standards.

Separate from the CFA Institute Annual Conference, local members from Singapore had approached CFA Institute about holding another roundtable session on the Asset Manager Code. This second industry discussion helped to confirm further interest in Singapore and address questions about the Code. For example, one investment professional questioned the voluntary nature of code compliance, citing the current lack of a third-party verification function similar to that which has evolved to verify GIPS standards compliance. A discussion ensued about the common practice of regulators to examine representations such as claims of compliance and the usual penalties associated with misrepresentations.

For his part, Mr. Trotsky mentioned an example when he fired a manager who failed to adhere to the spirit of the Asset Manager Code and ultimately placed more weight on his own interests — a major loss for that asset manager given the size of Mass PRIM and its more than $54 billion in assets under management.

Last on Mr. Trotsky’s schedule was a very busy day in Tokyo, starting with meetings and discussions with top Japanese pension fund managers and industry associations as well as Japan’s Financial Services Agency. In the wake of scandals that impacted both institutional and retail investors, Japanese investors were especially attuned to ways to demonstrate tangible commitments to ethical conduct. Interestingly, the FSA takes a similar view as CFA Institute. As explained in the introduction to the CFA Institute Standards of Practice Handbook, which CFA charterholders must adhere to, rules and regulations are not enough to ensure that ethical lapses are minimized — a positive ethical attitude on a firmwide basis also is required. In this regard the FSA, which like all regulators acknowledges its limits in setting rules even when combined with meaningful enforcement mechanisms, emphasized the important role of self-regulatory organizations in establishing a financial market in which trust — an indispensable component in financial markets — prevails.

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