Download Prudent Practices for Investment Managers

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Best Practices for
Investment Managers
 STEWARDS
 COMMITTEE
MEMBERS
 TRUSTEES
 BOARDS
 MONITORING
 CHOOSING
 MANAGERS
 SELECTING
 BUYING
 SELLING
 MANAGING
EVOLUTION OF THE
CONCEPT OF PRUDENCE
 Harvard v. Amory (1830)
 Prudent Man Rule
• Common Law
 ERISA (1974)
 Prudent Expert Rule
• Federal Law
 Uniform Prudent Investor Act (1994)
 Private Trusts
• State Law
 Uniform Management of Institutional Funds Act
(2002)
 Charitable Trusts
• State Law
Definition of Prudence
 The fundamental principle for professional
money management, stated by Judge
Samuel Putnum in 1830
 "Those with responsibility to invest money for
others should act with prudence, discretion,
intelligence, and regard for the safety of
capital as well as income."
INDUSTRY BEST PRACTICE
 www.cfainstitute.org
 Trade Management Guidelines
 Soft Dollar Standards
 Research Objectivity Standards
 Global Investment Performance Standards
 Asset Manager Code of Conduct
 www.nccusl.org
 UPIA (1994)
 UMIFA (2002)
INDUSTRY BEST PRACTICES
 www.sia.com
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Compensation Practices
Firm Management
Internal Firm Policies
Relationships with Regulators
Role of Compliance Professionals
Investor Confirmations
Registered Rep Supervision
Investor Complaints
Soft Dollars
Sales Supervision
Best Practices for
Investment Managers
 Key decision-makers demonstrate
expertise in their field, and there is a
clear succession plan in place.
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Qualitative Evaluation of Expertise
Formal Succession Plan
Compensation Practices
Firm Management
Best Practices for
Investment Managers
 There are clear lines of authority and
accountability, and the mission,
operations, and resources operate in a
coherent manner.
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Strategic Plan
Tactical Plan
IT Plan
Firm Management
Best Practices for
Investment Managers
 There are effective and appropriate
external management controls.
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Audits
Examinations
Compliance Program
Board & Committee Oversight
Best Practices for
Investment Managers
 Mutual Funds, Hedge Funds & Annuities
associated with the organization have
suitable board governance.
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Performance
Suitability
Expenses
Standards for Selection & Retention
Conflict & Self-Dealing Addressed
Best Practices for
Investment Managers
 Remuneration of the Investment
Manager/s and compensation of key
decision-makers are aligned with client
interests.
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Performance Based
Long-term Focus
Fully-disclosed
Compensation Practices
Best Practices for
Investment Managers
 The working atmosphere is conducive to
attract, retain, and motivate key employees.
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Turnover
Decision-making Process
Creativity
Opportunity
Compensation Practices
Formal Evaluation Process
Internal Firm Policies
Best Practices for
Investment Managers
 There is a formal structure which
supports effective compliance.
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Corporate Culture/Attitude
Compliance Program
Compliance Officer
Control Self-assessments
Role of Compliance Professionals
Best Practices for
Investment Managers
 The organization provides financial
transparency that demonstrates there is
capital and profitability to sustain operations
and adequate disclosures are made.
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Financials
Form ADV
Fee Schedules
Agreements
Disclosure Documents
• Proxy Voting, Soft-dollar, Pricing & Best Execution
Best Practices for
Investment Managers
 The organization is committed to firm-
wide innovation and has established a
competitive position of strength.
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Creativity
Decision-making
Best Practices
Systems
Personnel Development
Best Practices for
Investment Managers
 There is an effective process for
allocating and managing both internal
and external resources and vendors.
 Soft-dollar
 Trade Allocations
 Research Objectivity
Best Practices for
Investment Managers
 The organization has a diverse client base,
and the capacity to service the same.
 Concentrations by:
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Fees
Asset Class
Security
Client
Product
Best Practices for
Investment Managers
 The organization is properly managing
the growth/decline of assets under
management.
 Growth/Decline Rates:
• Fees
• Assets
• Accounts
Best Practices for
Investment Managers
 The investment system is clearly
defined and consistently adds value.
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Investment Story
Process
Policies, Procedures & Controls
Exception Identification, Tracking &
Resolution
Best Practices for
Investment Managers
 The investment research process is
defined, focused, and documented.
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Soft-dollar Budget
Benefit Derived
Off-list Securities
Research Objectivity
Best Practices for
Investment Managers
 The portfolio management process for
each distinct strategy is clearly defined,
focused, and documented.
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Benchmarks
Asset Allocation
Deviations from Policy
Periodic Reviews
Risk & Return Differentiation
Best Practices for
Investment Managers
 The trade and execution process is
defined, focused, and documented.
 Soft-dollars
 Best Execution
 Trade Allocation
Best Practices for
Investment Managers
 The organization has responsible and ethical
marketing and sales practices.
 AIMR/CFA Compliant (Best Practices)
• Performance Reporting (GIPS)
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Return
Risk
Benchmarks
Time-frame
Classification
• Trade Management
• Research Objectivity
• Proxy Voting
Best Practices for
Investment Managers
 There is a defined process for the attribution
and reporting of costs, performance, and risk.
 Performance Measurement
• Risk
• Return
• Benchmark
 Performance Attribution
• Classifications
• Cause & Effect
 Fees & Expenses Disclosed
Best Practices for
Investment Managers
 The investment system and portfolio
management processes are monitored
and are consistent with assigned
mandates.
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Performance Dispersion
Off-list Securities
Concentrations
Exceptions to Min/Max Allocations
Best Practices for
Investment Managers
 There is an effective risk-management
process to evaluate both the
organization’s business and investment
risk.
 Control Self-assessments
 Risk Management Plan
 Role of Compliance Professionals
Best Practices for
Investment Managers
 Control procedures are in place to
periodically review policies for
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Best Execution,
Soft Dollars,
Pricing, and
Proxy Voting.
Best Practices for
Investment Managers
 There is an effective process for identifying,
managing, and disclosing conflicts of interest.
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Broker/Dealer
Investment Managers
Mutual Funds
Insider Trading
Front-running
Pricing
Asset Manager Code of Conduct
Best Practices for
Investment Managers
 There is a process to periodically review
the organization’s effectiveness in
meeting its fiduciary responsibilities.
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Annual Reviews
Investment Policy Statements
Investment Objectives
Risk & Return Levels
Vendor Selection & Usage
BEST PRACTICES FOR
INVESTMENT MANAGERS
27 Practices
ANALYZE
 Practice No. 1.1 Investments are managed in
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accordance with applicable laws, trust documents, and
written investment policy statements
Practice No. 1.2 Fiduciaries are aware of their duties
and responsibilities
Practice No. 1.3 Fiduciaries and parties in interest
are not involved in self-dealing
Practice No. 1.4 Service agreements and contracts
are in writing, and do not contain provisions that
conflict with fiduciary standards of care
Practice No. 1.5 There is documentation to show
timing and distribution of cash flows, and the payment
of liabilities
Practice No. 1.6 Assets are within the jurisdiction of
U.S. courts, and are protected from theft and
embezzlement
DIVERSIFY
 Practice No. 2.1 A risk level has been identified
 Practice No. 2.2 An expected, modeled return to meet
investment objectives has been identified
 Practice No. 2.3 An investment time horizon has been
identified
 Practice No. 2.4 Selected asset classes are consistent with the
identified risk, return, and time horizon
 Practice No. 2.5 The number of asset classes is consistent
with portfolio size
FORMALIZE
 Practice No. 3.1 There is detail to implement a
specific investment strategy
 Practice No. 3.2 The investment policy statement
defines the duties and responsibilities of all parties
involved
 Practice No. 3.3 The investment policy statement
defines diversification and rebalancing guidelines
 Practice No. 3.4 The investment policy statement
defines due diligence criteria for selecting investment
options
FORMALIZE
(continued)
 Practice No. 3.5 The investment policy statement
defines monitoring criteria for investment options and
service vendors
 Practice No. 3.6 Investment policy statement
defines procedures for controlling and accounting for
investment expenses
 Practice No. 3.7 Investment policy statement
defines appropriately structured, socially responsible
investment strategies
IMPLEMENT
 Practice No. 4.1 The investment strategy is implemented in
compliance with the required level of prudence
 Practice No. 4.2 Fiduciary is following applicable “Safe
Harbor” provisions (when elected)
 Practice No. 4.3 Investment vehicles are appropriate for the
portfolio size
 Practice No. 4.4 A due diligence process is followed in
selecting service providers, including the custodian
MONITOR
 Practice No. 5.1 Periodic performance reports
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compare the performance of money managers
against appropriate index, peer group, and IPS
objectives
Practice No. 5.2 Periodic reviews are made of
qualitative and/or organizational changes to money
managers
Practice No. 5.3 Control procedures are in place to
periodically review a money manager’s policies for
best execution, soft dollars, and proxy voting
Practice No. 5.4 Fees for investment management
are consistent with agreements and with the law
Practice No. 5.5 “Finders fees,” 12b-1 fees, or other
forms of compensation that have been paid for asset
placement are appropriately applied, utilized, and
documented