Estimated study time: 45 minutes
Content:
The Asset Manager Code (AMC) of Professional Conduct is a framework developed by CFA Institute specifically for investment management firms — it complements the Code and Standards (which apply to individual members) by establishing firm-level ethical obligations. Whereas the Code and Standards govern individual behavior, the AMC sets expectations for how asset management organizations should be structured, governed, and operated. A firm claiming compliance with the AMC must comply with all six components.
The six components of the AMC are: (1) Loyalty to Clients, (2) Investment Process and Actions, (3) Trading, (4) Risk Management, Compliance, and Support, (5) Performance and Valuation, and (6) Disclosures. Each component has required practices. For example, under Loyalty to Clients, the firm must act in clients' best interests, maintain independence and objectivity, avoid conflicts of interest, and establish a written code of ethics enforced through training and discipline.
The Trading component requires that all firms establish policies for trade allocation and execution. Trades must be allocated across clients fairly — no "cherry picking" favorable fills for preferred accounts. Soft-dollar arrangements must be disclosed and must benefit clients. The firm must prohibit personal trading that conflicts with client interests and require pre-clearance of personal trades in securities the firm is actively recommending.
Risk Management and Compliance requires that firms appoint a chief compliance officer who is not also the head of investments (separation of duties). Firms must conduct periodic internal audits, maintain records for regulatory purposes, and develop business continuity plans. The compliance function must have sufficient independence and authority to enforce policies.
Performance and Valuation under the AMC aligns closely with GIPS, but goes further in some respects. Firms must present performance fairly, calculate returns consistently using industry-standard methodologies, and value assets using objective, verifiable methods. Performance-based fees must be structured so as not to encourage excessive risk-taking — for example, high-water marks are considered a best practice for performance fee structures.
Disclosures under the AMC require that firms provide clients with clear, accurate, and timely information about investment strategies, risks, fees, and any conflicts of interest. The firm must disclose all compensation arrangements — including revenue sharing with affiliated companies — and disclose any regulatory investigations or significant legal proceedings. Clients must receive accurate performance reports at least quarterly.
Key Terms:
Quiz Questions:
Q1. Under the Asset Manager Code, which of the following is required with respect to the compliance function?
A) The compliance officer must hold the CFA designation B) The compliance officer must report directly to the board of directors C) The compliance function must be independent from the investment function D) Compliance audits must be conducted by an external third party
Answer: C — The AMC requires that the compliance function maintain independence from investment decision-making. This prevents portfolio managers from influencing compliance decisions. There is no requirement that the CCO hold the CFA designation or that audits be external.
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Q2. An asset management firm manages both institutional pension funds and a proprietary hedge fund. When attractive IPO allocations are received, the firm's policy is to allocate them to the hedge fund first, as it generates higher fees. Under the AMC, this practice is:
A) Permissible, because the hedge fund clients accepted this policy at onboarding B) Permissible if the pension funds receive some allocation as well C) A violation of the Trading component — all clients must be treated fairly in allocations D) Permissible as long as the practice is disclosed in the firm's Form ADV
Answer: C — The AMC's Trading component requires fair allocation across all client accounts. Systematically favoring higher-fee clients in allocations violates this requirement regardless of disclosure or partial allocation.
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Q3. A firm claims compliance with the Asset Manager Code. One of its components is that the firm "presents performance fairly." Which of the following practices is most consistent with this requirement?
A) Presenting composite returns that exclude underperforming accounts for the current period B) Calculating returns using a time-weighted methodology and presenting both gross and net of fees C) Presenting only net-of-fees returns to give clients a more conservative picture D) Omitting the benchmark from performance presentations to focus on absolute returns
Answer: B — Fair performance presentation under the AMC requires consistent methodology (TWR), meaningful disclosure (both gross and net fees when possible), and benchmark comparison. Excluding underperformers or omitting benchmarks is misleading.
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Q4. A wealth management firm earns referral fees from a third-party custodian for directing client assets to that custodian's platform. The firm does not disclose this arrangement to clients. Which AMC component does this violate?
A) Loyalty to Clients only B) Risk Management and Compliance only C) Disclosures only D) Both Loyalty to Clients and Disclosures
Answer: D — Undisclosed referral fees violate both the Loyalty to Clients component (the firm is serving its own financial interest over clients') and the Disclosures component (which requires revealing all compensation arrangements that could impair objectivity).
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Q5. Under the AMC's Performance and Valuation component, a firm that charges performance fees should best structure those fees to:
A) Use a fixed percentage of all gains above 0%, charged monthly B) Use a high-water mark and a hurdle rate to align incentives and protect clients from paying fees on recovered losses C) Base fees entirely on AUM rather than performance to remove incentive distortions D) Charge performance fees only in years where the market rises, to reward relative outperformance
Answer: B — The AMC recommends that performance fee structures use high-water marks (so fees are only charged on new net gains) and hurdle rates (so fees only apply above a minimum return). This aligns manager and client incentives and prevents clients from paying fees on recoveries from prior losses.
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