InvestmentManagement “Hot” TopicsWhat would I expect to find in

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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

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. 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. Strategic Plan Tactical Plan IT Plan Firm Management

Best Practices for Investment Managers There are effective and

appropriate external management controls. 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. 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. 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. 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. 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. 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. 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: 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. Investment Story Process Policies, Procedures & Controls Exception Identification, Tracking &

Resolution

Best Practices for Investment Managers The investment research process is

defined, focused, and documented. 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. 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)o Returno Risko Benchmarkso Time-frameo 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. 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 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. 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. 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

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 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