Views on improving the integrity of global capital markets
19 August 2013

Asset Manager Code of Professional Conduct: Benefits for Investment Professionals

In the wake of the global financial crisis — and calls for greater transparency and protecting client interests — CFA Institute has enjoyed increased growth in adoptions of the CFA Institute Asset Manager Code of Professional Conduct.

Over 900 asset management firms in 32 countries and regions now claim compliance with the Asset Manager Code, which outlines the ethical and professional responsibilities of firms that manage assets on behalf of clients while allowing flexibility in implementation for asset managers of various sizes and structure. I recently caught up with Michael Trotsky, CFA, executive director and chief investment officer of Massachusetts Pension Reserves Investment Management (MassPRIM) , and representatives from two Asset Manager Code-compliant firms, Li Ying Lim, CFA, CEO and chief investment officer of SLF Strategic Advisers Private Limited in Singapore, and Mohammad Shoaib, CFA, CEO of Al Meezan Investment Management in Pakistan.

As a plan sponsor, why do you include a question about compliance with the CFA Institute Asset Manager Code as part of your RFPs for investment managers?

Mr. Trotsky: As a pension fund with over $52 billion in assets under management, we are very interested in two things. One is the performance of our funds, and the second is bringing this performance home for our beneficiaries. Recent scandals such as Madoff’s Ponzi scheme and the AIJ Investment Advisors fraud in Japan have shown that one does not necessarily guarantee the other, and naturally we want to minimize the risk resulting from a lack of ethical behavior on the side of our asset managers. Therefore, when we do our due diligence, asking potential asset managers whether they comply with the voluntary Asset Manager Code is part of the processhelps is this.

This has made due diligence a lot easier when we invest with non-U.S. managers. For example, if an Asian manager who is looking for a mandate with us has formally claimed compliance with it, we instantly know what to expect. I think in this sense, code compliance is also in their interest.

From an asset manager standpoint, what are the compelling reasons to comply with the Asset Manager Code and become part of this distinct and growing group?

Ms. Lim: We want our finance industry to function with the highest degree of integrity. Complying with the Asset Manager Code, we believe, sends a signal to our investors and other industry players about the importance we put on voluntarily operating under higher ethical and professional standards.

Shoaib: We claimed compliance for similar reasons. As a private enterprise we know about the growing number of asset owners that look at ethics risk, and we think that voluntarily adopting the Asset Manager Code helps us to create a strong reputation for our firm’s ethical values. We believe that this can help retain and attract clients.

What argument would you make for other asset managers to comply with the Code?

Ms. Lim: I strongly believe that a high-level ethical culture at the firm level benefits everyone in our industry. With “everyone,” I really do mean everyone, from retail investors to CEOs of asset management firms and employees. Every single manager would contribute to a healthy ethical industry culture as a result of voluntarily adopting the Asset Manager Code and, subsequently, to the sustainability of our industry.

Mr. Shoaib: At this moment we are the only asset management firm in Pakistan that has formally adopted the Asset Manager Code, and we feel that we have a competitive advantage thanks to it. What we are also interested in, however, is to consciously contribute to the overall integrity of financial markets because, without it, markets and our business would not be sustainable. For this reason we would welcome other asset managers to become compliant, and I think it is in their interest too.

Mr. Trotsky: In our case, if an asset manager cannot confirm to us that it respects the most basic principles outlined in the Asset Manager Code, such as putting our interests before their own, then we give it a red flag. In fact, we use it as a template to create questions on our due diligence process for potential managers. For example, we first ask whether they put clients’ interests first, and then we follow up with questions to confirm how they do it.

Having experienced the impact of massive ethical lapses such as the Madoff and AIJ cases, we are sensitive to the risks associated with unethical conduct. I think that in the future there will be no way around the Asset Manager Code. Luckily, we are by far not the only pension fund which takes ethics seriously, and also many of my colleagues in the Asia-Pacific region and in other parts of the world are putting emphasis on the ethical dimension of their managers.

Did you face challenges when you introduced the Asset Manager Code of Professional Conduct in your organization?

Mr. Trotsky: When I encourage an asset manager to become compliant, I receive different reactions depending on who I talk to. CEOs, CIOs, and marketing professionals in particular seem to appreciate the benefits it provides as a promotional tool.

Mr. Shoaib: Talking to my industry colleagues I sometimes hear that compliance managers are at times a little reluctant to make more commitments. I think, though, that most companies are already compliant with the basic principles of the Asset Manager Code anyway, and where this is not the case, the business benefits almost always outweigh such concerns.

Ms. Lim: There were no particular challenges within my organization. As I discuss Asset Manager Code adoption with my industry colleagues, however, in some instances they say that it is not yet an immediate priority. They say this even though they are supportive of the Asset Manager Code principles. Given the fact that ethics is a priority for more and more asset owners which are adding relevant questions on ethics and codes to manager questionnaires, it should be clear that this will be increasingly important.

Mr. Shoaib: I second that. Considering the increasing requests in RFPs, and especially the increasing number of competitors claiming compliance, I am actually surprised to learn that there are conflicting opinions about the priority of the decision to formally adopt the Asset Manager Code.

About the Author(s)
Alexander Flatscher, CFA

Alexander Flatscher, CFA, is a former director of professional standards at CFA Institute. He was responsible for promoting the ethical standards, policies, and positions of CFA Institute in the Asia-Pacific region.

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