Responding to Fallout from the Financial Crisis
The financial crisis and collapsing asset values have led to a substantial loss of trust by investors in both their investment managers and massive regulatory reform efforts. Whether the magnitude of these responses is warranted has been the subject of great debate, but both stand to impact the investment profession in negative ways. Today, in an interactive session at the 64th Annual CFA Institute Annual Conference in Edinburgh, Jon Stokes, head of Standards of Practice at CFA Institute, explained some of the ways in which CFA Institute is responding to these challenges and arming members and other investment professionals with the tools to make a difference themselves.
Stokes used a series of case studies to engage conference attendees in discussion about some of the ethical issues and situations faced by investment managers. Each case discussion was followed by a brief presentation covering specific research projects and solutions developed by CFA Institute.
Strong self-regulation has been central to CFA Institute values and its policy positions. Stokes explained the CFA Institute view that effective self-regulation can lead to improved financial market integrity and help to stave off the heavy hand of regulators. The fundamental values of ethics and integrity have always been embraced by individual CFA charterholders, as codified in the CFA Institute Code of Ethics and Standards of Professional Conduct. Several new firm-friendly codes of conduct have been developed based on those same principles.
Stokes explained that the Asset Manager Code of Professional Conduct (AMC) was developed to enable firms to adopt the same firm-wide standards that individual CFA charterholders adhere to: “Demand for the AMC developed several years ago as CFA Institute members were looking for ways to raise the commitment at their own firms towards ethical practice.” With the creation of a new practitioner-led AMC Advisory committee in 2011, Stokes expects greater numbers of firm adoptions of the AMC and increased levels of focus on client loyalty, transparency, and the other elements in the code. More than 500 firms already have claimed compliance.
Two related institution-focused products covered in the presentation were the Pension Trustee Code of Conduct and Endowments Code of Conduct. Stokes discussed the significance of each and their applicability for use by trustees who govern pension funds and endowment funds. Each code was developed in an effort to resolve the lack of professionalism and client (beneficiary) focus which historically has been present for these institutions. Teams of practitioners drawn from the ranks of pension and endowment fund sponsors worked to create these codes, and adoptions for both are rising. “No code of conduct can prevent fraud, but they do provide a framework for ethical professional practices,” Stokes explained.
Stokes also discussed the growing demand for financial services regulations and the work that CFA Institute has done to offer a practitioner perspective to policy makers. In Europe, CFA Institute has conducted two recent research projects focused on the impact of the Markets in Financial Instruments Directive (MiFID) on the European financial markets. A CFA Institute research report published in 2009, Market Microstructure: The Impact of Fragmentation under the Markets in Financial Instruments Directive, documented that the equity markets in Europe have been fragmented as a result of the implementation of MiFID, an unintended consequence of the regulations. The report offers policy considerations on the basis of the findings, which among other things, focus on measures to improve transparency and access to market prices.
A companion study published in 2010, The Structure, Regulation, and Transparency of European Equity Markets under MiFID, suggests a decreasing level of transparency and declining market quality. The study indicates that policy measures under MiFID should support transparent trading structures and provide greater consistency in the application of transparency rules within the regulatory framework. On the basis of these two studies, CFA Institute has been able to gain credibility for policy positions on proposed revisions to MiFID and other regulation coming out of the European Commission (EC).
Agnes Le Thiec, CFA, director of capital markets policy Europe, Middle East, and Africa (EMEA), joined the conversation to explain, “The result of CFA Institute’s research and advocacy outreach has been a more impactful voice for investors at the EC and better information for regulators on which to base reforms.” Le Thiec provided a glimpse forward at pending legislation coming out of Brussels which will impact CFA Institute members across the EU, and which will be the subject of CFA institute consultations including regulation of structured retail products, key disclosure requirements to investors, and taxation of financial services activities and firms.
Stokes concluded the update on CFA Institute advocacy efforts with a reference to the ongoing challenges facing our profession and the financial services industry in the aftermath of the financial crisis. Loss of trust by investors and the resulting rule making by policy makers have to be addressed by all of us who work in the industry. We must govern ourselves better and offer greater transparency and loyalty to our clients. If we do, the result may be net gains in assets under management and net declines in the costs of regulatory compliance. If we fail to act, the consequences will almost certainly be less attractive.