50 Rules on Ethics

A journey of a thousand miles must begin with a single step.

Confucius

At this year's CFA Institute Annual Conference, John Rogers, CFA, President and CEO, called for all investment professionals to restore trust in the investment industry. He presented the CFA Institute's "Integrity List," a collection of 50 steps investment professionals can take to restore trust in our industry. And these steps are:

1. Make ethics training a high priority for yourself, your colleagues, and your firm.

2. Recommend to clients the simple products with transparent payoffs, costs, and risks.

3. Name and shame unethical behavior.

4. Operate with a 100% conflict-free business model.

5. Take credit for successes – and be transparent about failures.

6. Advocate for stronger regulations that protect investors.

7. Never overlook unethical behavior because you’re better served by ignorance.

8. Act with integrity 24/7 – not just at the office.

9. Commit to a gold standard code of ethics and professional conduct.

10. Vocally demand that your firm does what is right for clients.

11. Encourage young professionals to have the courage to disagree.

12. Keep client fees low.

13. Act with fairness and prudence with every decision.

14. Present analysis based on facts and client needs.

15. Always be honest with clients.

16. Never engage in misleading sales promotions.

17. Always under-promise and over-deliver.

18. Align incentives and disincentives in favor of clients.

19. Disclose how you improve your level of competence.

20. Outline exactly how you are managing a client’s funds.

21. Disseminate transparent, accurate, and timely information.

22. Be clear about situational influences in your environment.

23. Place the client’s interests before your own.

24. Base investment recommendations on strong analysis.

25. Actively disclose all compensation arrangements to clients.

26. Adhere to high standards even if they are not required in your country.

27. Disclose information in ways your parents would understand.

28. Adopt Global Investment Performance Standards.

29. Maintain regular contact with clients.

30. Always share bad news with all who are affected.

31. Listen to clients’ concerns and fears.

32. Help clients focus on risk as much as they do on performance.

33. Create an ethical work culture that allows constructive criticism.

34. Bring an ethical dimension to discussions of business strategy.

35. Adopt the CFA Institute Asset Manager Code of Conduct.

36. Remind junior associates that reputations are hard earned and easily lost.

37. Lead by example.

38. Take responsibility for the actions of your team.

39. Mentor future investment industry professionals.

40. Use social media to comment about the values you uphold.

41. Write articles and speak publicly about ethics.

42. Act as an expert resource for journalists.

43. Refuse to associate with any brokers who take advantage of clients.

44. Bring to justice those who take part in irresponsible and illegal activities.

45. Recommend companies with fair practices and good corporate governance.

46. Never get involved with risky investments.

47. Advocate for technology that makes the industry more transparent.

48. Serve on committees that advocate for regulatory reform.

49. Engage and build relationships with local regulators and policy makers.

50. Become a member of CFA Institute and sign the required annual ethics statement.

Impressive! I am glad I wasn't asked to come up with 50 steps. While they may not all apply to you or your organization, many, no doubt, do. And so, consider which you can begin to work on.

Code of Conduct for GIPS Service Providers

At the recent GIPS(R) (Global Investment Performance Standards) Executive Committee meeting in Brussels, Belgium, the EC discussed the possibility of creating a "Code of Conduct" for GIPS service providers. I think this is an excellent idea, though at this point have zero knowledge of what is actually being considered.

In Tuesday's post, I mentioned how The Spaulding Group will not take on a verification client who we believe has come by their historical performance records through some improper means, and recommended that other verifiers adopt this policy, too. I would think that this is an example of the code of conduct one would expect from service providers.

When the Performance Measurement Forum set off to develop a certification program for performance measurement professionals several years ago (which contributed to the creation of the CIPM program), ethics wasn't a section we considered. The CIPM program wisely has included it, and more and more we can see how ethics is an important topic for our industry. It seems that almost daily we learn of infractions. Granted, the political world may be outpacing our industry in this regard, but it seems as if some would like to overtake them.

Performance measurement professionals can serve as a key gatekeeper to the delivery of fraudulent information. And while we haven't yet heard of any PMPs who have allowed the presentation of information they knew was wrong, these individuals can still find themselves being pressured to do something they know would be wrong.

Verifiers can serve as yet another group to try to halt the spread of fictitious information, by holding firm when we learn of something unethical and to simply refuse to be a part of it. My feeling is that if a firm is willing to act improperly to obtain historical records, won't they do the same when it comes to other situations that arise? It's better to avoid even going down the path with someone who may not behave as we think they should.

Learning from USMA

I served in the U.S. Army (Field Artillery branch) for nearly five years, and spent 39 months with the 25th Infantry Division in Hawaii (tough duty, but someone had to do it). During that time I worked with several West Point graduates (I obtained my commission through ROTC), and recall learning the "cadet honor code":

A cadet will not lie, cheat, steal,

or tolerate those who do

There's a great lesson here, is there not, and a great example for us all to follow?

An article in yesterday's WSJ ("Weitz Firm Got Rival's Database, Suit Says," by Dionne Dearcey) spoke of a lawsuit filed by a former employer for Weitz & Luxemberg, Joseph C. Maher, who claimed Weitz had "a cache of files from a competitor [Waters & Kraus] that allegedly could be used to earn millions of dollars." These records were supposedly brought to the firm by a former W&L employee of the competitor, who had joined Weitz. We have no way to know at this time where the truth lies, but if Maher's allegations are found to be true, why would a law firm hire someone who stole records from their prior firm? (Please, no lawyer jokes)

We had a conversation recently with someone about the GIPS® (Global Investment Performance Standards) portability rules, which require:

1. Substantially all of the investment decision makers to be employed by the new or acquiring firm (e.g., research department staff, portfolio managers, and other relevant staff);
2. The decision-making process to remain substantially intact and independent within the new or acquiring firm; and
3. The new or acquiring firm to have records that document and support the past performance.

 (See ¶ I.5.A.8, Global Investment Performance Standards. 2010)

In most cases, managing to meet the first two requirements is a lot easier than meeting the third. And so, what is a person to do to get the records, especially if they are leaving in less than an ideal way?

Well, if they are a CFA charterholder, stealing the records would be considered an ethics violation; but what if they aren't a charterholder, can they steal them? Of course they can; who's to stop them (unless they get caught or sued, of course)? But would that not still constitute an ethics problem?

Last year The Spaulding Group adopted a Standards of Practice, based on the CFA Institutes's, and appointed both a Chief Ethics Officer (John Simpson, CIPM) and Assistant (Jed Schneider, CIPM, FRM). And we made the decision that we will not accept a verification client if we suspect they obtained their historical records through some improper means. Yes, it is tempting to copy records in order to achieve compliance; but such action says something about the character of the individual(s), and we would prefer not to include them among our clients. We encourage all GIPS verifiers to adopt a similar rule. As USMA (United States Military Academy) proclaims, "...or tolerate those who do." And we won't.

Performance & ethics

Calculating rates of return really isn't that difficult. And while we may debate whether returns should be calculated using money-weighting or time-weighting, such issues pale in comparison with the broader aspect of ethics.

I must confess that I initially thought that the Certificate in Investment Performance Measurement (CIPM) Program's emphasis on ethics seemed a bit excessive. And perhaps the exam questions could be geared more to the issues and situations that performance analysts and performance heads are more likely to encounter. But the issue of ethics shouldn't be ignored. We seem to be reminded of this on a fairly regular basis.

Yesterday's Wall Street Journal has an article on Raj Rajaratnam and his Galleon hedge fund. Recall that Mr. Rajaratnam has been accused of trading on inside information. His prowess at building relationships, which allegedly resulted in him gaining access to confidential information, allowed him to build a successful business and amass a fortune of more than a billion dollars.

Galleon's returns were apparently quite impressive. And one might not find any fault with the accuracy of the valuations or the return methodology employed. But what is the value of the returns if, as has been suggested, they reflect the results of illegal activity?

What is the responsibility of the performance analyst or manager, should they have reason to believe that the returns reflect illicit activity? Perhaps questions like these should be added to the CIPM program. What would YOU do, if you had reason to believe that the firm's results were arrived at through illegal means? Something to ponder, yes? 

p.s.,We are investigating another fraud case which might involve a firm that claimed compliance with the Global Investment Performance Standards (GIPS(R)). We will provide details once we've done further vetting of the information we've seen so far.