B.Investment Process and Actions Managers must:
1.Not engage in practices designed to distort prices or artificially inflate trading volume with the intent to mislead market participants.
I.Market manipulation includes practices that distort security prices or values or artificially inflate trading volumes with the intent to deceive persons or entities that rely on information in the market.
II.Such practices may involve, for example, transactions that deceive market participants by distorting the price-setting mechanism of financial instruments and the dissemination of false or misleading information.
III.Transaction-based manipulation includes, but is not limited to, transactions that artificially distort prices or volume to give the impression of activity or price movement in a financial instrument (e.g., trading in illiquid stocks at the end of a measurement period to drive up the price and improve Manager performance) and securing a large position with the intent to exploit and manipulate the price of an asset and/or a related derivative.
IV.Information-based manipulation includes, but is not limited to, spreading knowingly false rumors to induce trading by others and pressuring sell-side analysts to rate or recommend a security in such a way that benefits the Manager or the Manager’s clients.
2.Deal fairly and objectively with all clients when providing investment information, making investment recommendations, or taking investment action.
I.To maintain the trust that clients place in them, Managers must deal with all clients in a fair and objective manner. Managers must not give preferential treatment to favored clients to the detriment of other clients.
II.In some cases, clients may pay for a higher level of service or certain services and certain products may only be made available to certain qualifying clients (e.g., certain funds may be open only to clients with assets above a certain level). These practices are permitted as long as they are disclosed and made available to all clients.
III.This provision is not intended to prevent Managers from engaging in secondary investment opportunities—referred to in some jurisdictions as “side-letter,” “sidecar,” or “tag-along” arrangements—with certain clients as long as such opportunities are fairly allocated among similarly situated clients for whom the opportunity is suitable.
3.Have a reasonable and adequate basis for investment decisions.
I.Managers can rely on external third-party research as long as Managers have made reasonable and diligent efforts to determine that such research has a reasonable basis. When evaluating investment research, Managers should consider the assumptions used, the thoroughness of the analysis performed, the timeliness of the information, and the objectivity and independence of the source.
II.Managers should have a thorough understanding of the securities in which they invest and the strategies they use on behalf of clients. Managers should understand the structure and function of the securities, how they are traded, their liquidity, and any other risks (including counterparty risk).
III.Managers who implement complex and sophisticated investment strategies should understand the structure and potential vulnerabilities of such strategies and communicate these in an understandable manner to their clients.
IV.For example, when implementing complex derivative strategies, Managers should understand the various risks and conduct statistical analysis (i.e., stress testing) to determine how the strategy will perform under different conditions. By undertaking adequate due diligence, Managers can better judge the suitability of investments for their clients.
4.When managing a portfolio or pooled fund according to a specific mandate, strategy, or style:
a)Take only investment actions that are consistent with the stated objectives and constraints of that portfolio or fund.
I.When Managers are given a specific mandate by clients or offer a product, such as a pooled fund for which the Managers do not know the specific financial situation of each client, the Managers must manage the funds or portfolios within the stated mandates or strategies.
II.Clients need to be able to evaluate the suitability of the investment funds or strategies for themselves. Subsequently, they must be able to trust that Managers will not diverge from the stated or agreed-on mandates or strategies.
III.When market events or opportunities change to such a degree that Managers wish to have flexibility to take advantage of those occurrences, such flexibility is not improper but should be expressly understood and agreed to by Managers and clients.
IV.Best practice is for Managers to disclose such events to clients when they occur or, at the very least, in the course of normal client reporting.
b)Provide adequate disclosures and information so investors can consider whether any proposed changes in the investment style or strategy meet their investment needs.
I.To give clients an opportunity to evaluate the suitability of investments, Managers need to provide adequate information to them about any proposed material changes to their investment strategies or styles.
II.They must provide this information well in advance of such changes. Clients should be given enough time to consider the proposed changes and take any actions that may be necessary. If the Manager decides to make a material change in the investment strategy or style, clients should be permitted to redeem their investment, if desired, without incurring any undue penalties.
5.When managing separate accounts and before providing investment advice or taking investment action on behalf of the client:
a)Evaluate and understand the client’s investment objectives, tolerance for risk, time horizon, liquidity needs, financial constraints, any unique circumstances (including tax considerations, legal or regulatory constraints, etc.) and any other relevant information that would affect investment policy.
I.The information contained in an IPS allows Managers to assess whether a particular strategy or security is suitable for a client (in the context of the rest of the client’s portfolio), and the IPS serves as the basis for establishing the client’s strategic asset allocation. (Note: In some cases, the client will determine the strategic asset allocation; in other cases, that duty will be delegated to the Manager).
II.The IPS should also specify the Manager’s role and responsibilities in managing the client’s assets and establish schedules for review and evaluation.
III.The Manager should reach agreement with the client as to an appropriate benchmark or benchmarks by which the Manager’s performance will be measured and any other details of the performance evaluation process (e.g., when performance measurement should begin).