Monday, September 10, 2012

Ethics - Standard V - Investment Analysis, Recommendations, and Actions

Start 3:15 pm

Moving on.  3 subsections in this one, pretty quick.

Standard V - Investment Analysis, Recommendations, and Actions

V(A) Diligence and Reasonable Basis
MCs must 1) exercise diligence, independence, thoroughness in analyzing investments, making recos, and taking actions and 2) have a reasonable and adequate basis, supported by appropriate research and investigation, for any analysis, reco, or action
  • MC must make reasonable efforts to cover all pertinent issues when arriving at a reco
  • Diligence/reasonable basis defined:
    • formed through balance of all resources to try to minimize unexpected downside events
  • Must make sure third party research is sound
    • Secondary - research from a co-worker
    • Third party - research from entity outside the firm
    • May rely on others in your firm to determine soundness of either
  • Quantitative/automated research
    • MCs not required to be experts but must convey to clients importance of research and how results were used
    • Test assumptions, timeframe, and perhaps volatility outside of what model says is testable
  • External advisers - establish procedures for selecting - review code of ethics etc.
  • Group research - represents consensus of the group, but not necessarily the views of the MC.  But if it is at a reasonable basis in view of MC, MC need not decline being named on report.  
Notes from examples
  • When work is a group effort, as long as you think there is reasonable basis for changes, you can publish something you don't necessarily agree with - 'confident in the process'
  • You must understand how all third party components will work in the amalgamated strategy - how do the components interact
  • To properly diligence a fund investment, examine strategy, track record, principals, fees and risk profile.
V(B) Communication with Clients and Prospective Clients
MCs must 1) disclose basic format/general principles of investment process and any changes that might affect those processes, 2) use reasonable judgment in identifying which factors are important to include in analyses and include those factors in communications and 3) distinguish between fact and opinion in presentation of analyses/recos.
  • Informing clients - important to put impact of investments in context of whole portfolio
    • Should inform them of why you use outside advisers and what they do
  • Communication means ANY means of communication
  • Identify limitations of analysis - highlight changes in methodology, include all elements important to the analysis and conclusions
    • OK to focus on one small aspect so long as you note the limitation of the report
  • Distinguish between fact and opinion, especially in forecasts (clearly note they are forecasts)
  • Determining reasonable judgment is a case by case - very complex
Notes from examples:
  • When making recos, must outline basic investment selection strategy, otherwise clients cannot assess risks/limitations
  • Always cite projections/calculations as such
  • If you change your fund strategy, tell existing as well as potential clients
V(C) Record Retention
MCs must develop and maintain appropriate records to support their investment analyses, recos, and actions, and other investment-related communications with clients and prospective clients.
  • Which records is a function of the role of the MC
  • Can be in hard copy OR electronic
  • Records are property of the firm
    • Must have express written consent of employer to take them along
    • Must recreate analysis using public records or info from company
      • Cannot use memory or sources obtained at previous employer
  • Local requirements
    • Often local regulators impose requirements
    • These might satisfy V(C) but it is up to MC to determine
    • In absence of requirement, CFAI recommends maintaining records at least 7 years
Notes from examples:
  • Carefully document all interviews, notes from visits, etc.
End of Standard V.
4:05 PM
Approximate time - 1 hour

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