We wrapped up the Code and Standards earlier in the week and finish today with additional material in study session one across the three exams. This material may be worth a couple of points on the exam but is definitely secondary to the standards. Do not neglect the material but a quicker read is probably a good idea.
The way I always approached the “additional” material was to understand the basic reasoning and components but not spend too much time on the details. This helps you make an educated guess on any questions that might come up but does not detract from the ‘core’ material of the Code and Standards.
Global Investment Performance Standards
GIPS used to be in the Level III curriculum but was moved up to the first exam.
- GIPS applies to firms, not individuals. An analyst cannot be “GIPS compliant”
- The goal is fair representation and disclosure across investment opportunities for the public
- It fosters the notion of “self regulation” within the industry
- Each section includes “requirements” and “recommendations” for compliance. I would focus on the requirements if time is limited.
- All actual, fee-paying, discretionary portfolios must be included in at least one composite
- No non-discretionary portfolios, but non-fee paying portfolios may be included
- Must calculate time-weighted total portfolio returns with external cash flows using daily weighting
- Only actual assets, no model portfolios or simulations
The seven LOS seem fairly basic so you’ll probably want to use that as guidance for your studying.
CFA Institute Soft Dollar Standards
“Soft dollars” are money paid to brokers for services other than the actual brokerage of shares, this usually means research. Soft dollars are allowable only if it directly helps the investment manager make a decision on client funds, so for the benefit of the client. The standards are voluntary and require a set of practices and disclosures to claim compliance. As with all standards, the “most strict” rule prevails.
A lot of the material revolves around determining if research qualifies as “permissible research” under the three-level test.
- Defining the product or service. Keep in mind that a product/service should be narrowly defined so that all components qualify for soft dollars, i.e. a computer workstation may be allowed but the electricity, desk, chairs and other miscellaneous furniture around it may not.
- Determine the usage. The primary usage of the product must be directly for client benefit. It the previously mentioned computer workstation is used to for accounting purposes instead of research then it would not qualify.
- Mixed-use analysis is for products/services that may partly qualify based on usage. In this case, then the firm must make an estimate of the time that qualifies for soft dollars and any other usage must be paid out of “hard dollars”.
Additionally, an investment manager must fulfill their fiduciary duty through three general practices.
- Seeking to obtain best execution, this is the best value for costs not necessarily the cheapest overall
- Minimizing transaction costs
- Using brokerage (soft dollars) for the benefit of the client
Pay attention to practice problems where a manager will use soft dollars from one client pool for the benefit of another client pool, which is not permissible. This seems to be a big point the Institute wants to get across. Client brokerage is the client’s money and must be used for their benefit not for the benefit of another client.
CFA Institute Research Objectivity Standards
The (ROS) always seemed even more redundant to me given the emphasis on objectivity and independence given in the Institute’s Code and Standards. Knowing the material in the Standards should give you a pretty good idea on any ROS questions.
- Clients interests ahead of self or employer when preparing research and making recommendations
- Disclose actual or potential conflicts in a fair, accurate, complete, and timely fashion
- Create and maintain policies that minimize and manage conflicts
- Support self-regulation within the industry
- Promote a work environment that encourages and rewards ethical behavior
Again, there are requirements and recommendations for compliance. Focus on the requirements for the exam (but come back to the recommendations in your daily practice).
Asset Manager Code of Professional Conduct
As with the ROS, the AMC seems a little repetitive but you could see a question on the exam so focus on the basics. Be able to pick out the six components from a list and understand the idea behind the recommendations.
*My strategy on much of this additional material was to understand the idea and reasoning behind recommendations and practices. This way, you do not need to memorize the actual recommendations but have a good chance of being able to pick out the correct answer from three choices. This will also help you remember The Code and Standards because the idea and reasoning behind the recommendations is the same throughout.
Six components of the AMC
- Act ethically and professionally
- Best interest of client
- Objective and independent
- Skill, competence, and diligence
- Communicate accurately and on a regular basis
- Comply with legal and regulatory requirements
Some important recommendations
- The AMC applies to firms and recommends keeping records for six years (7 years applies to individuals)
- Off-site backup and a business-continuity plan
- Salary arrangements that align interests of clients and firm
- Create procedure for how confidential information is collected, used and stored
- Procedures for how shares are allocated and returns both gross and net of fees are provided upon request
- As with GIPS, a lot of the material seems to revolve around the disclosures so you might want to skim over these so you can pick them out of a list if provided
This wraps up study session one across the three exams. Note that study session two in the level II and level III curriculum also covers the ethics material. We will go over the cases and revisit the Standards when we cover study session two next week.
Let me know if you have any questions or comments. Thanks.
‘til next week, happy studyin’
Joseph Hogue, CFA