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Policies, Procedures, Ethics, and Competency
Timothy F. Peterson, CFA, CAIA, CIPMPartner, Ashland Partners & CompanyNCREIF Performance Committee12 July 2012
Disclaimer
The views expressed herein are those of Mr. Peterson and do not necessarily reflect the views of Ashland Partners & Company LLP, its Partners, or other employees of the Company.
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Opening Thoughts
Policies and Procedures: A way of documenting Ethics and Competency
Ethics and competency are two sides of the same coin:
Ethical intent requires competent execution,
and vice-versa.
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Sources
“The Speed of Trust,” Stephen M.R. Covey (Free Press)
“Investment Policy – How to win the Loser’s Game,” Charles D. Ellis (Irwin)
“Standards or Practice Handbook,” CFA Institute
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Overview
Discussing policy in general, not just GIPS P&P How did we get here? Policy vs. Procedure GIPS: What’s Required & How Much Detail Tips on Construction Example Valuation Policy Conclusion
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http://www.gallup.com/poll/1654/Honesty-Ethics-Professions.aspx
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Bad Company
Ethical Standards Throughout the Years
Ethics Today:o What happened to acting as a fiduciary, exercising
reasonable care and acting in good faith for the benefit of one’s clients, placing their interests above one’s own?
o We relinquish judgment in favor of checklists, sign-offs, waivers, and disclaimers. These things prevent lawsuits.
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The Speed of Trust
“The problem in organizations, however, is that many ‘ethics’ solutions focus on compliance. The compliance definition of ‘ethics’ is not one of integrity or integratedness; it is a watered-down, devalued definition that essentially means ‘follow the rules.’ Ethics training, therefore, is often focused exclusively on Sarbanes-Oxley and other regulatory and rules-based legislation—and not on clarifying values and fostering integrity to those values and to enduring principles.“As a result, companies have huge, complex policy manuals.”
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The Speed of Trust
“Rules cannot take the place of character.”—Alan Greenspan
Former Chairman, US Federal Reserve
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Policy vs. Procedure
Policy reflects the ethical intent of the firm.
Policy is:
Broad – covers a variety of general circumstances
Anticipatory – covers circumstances the manager does not routinely face
Solution oriented – gives guidance as to how to address anticipated and unanticipated circumstances
Stable – does not react to circumstances but precedes them
Policy vs. Procedure
Procedure reflects the competent executionof Policy.
Procedure is:
Specific – covers the firm’s routine circumstances
Current – lists what a firm does today to implement its policy
Oversight oriented – gives guidance as to whocan address unanticipated circumstances
Adaptive – may change as the firm’s personnel, structure, products, and resources change
GIPS: What Areas Require P&P?
FundamentalsScopeDefinitions (Firm, Discretion, Composite)
Composite Membership & ConstructionPortfolio RecordkeepingValuation & AccountingCalculation MethodologyDisclosurePresentation & Reporting
plus
GIPS: What Areas Require P&P?
All universal guidance statements:
AlternativesError CorrectionFeesSupplemental Information
plus
GIPS: What Areas Require P&P?
Any applicable conditional guidance statement:
PortabilityCarve-OutsSignificant Cash FlowsWrap FeesCountry-Specific TaxationEuro Conversion
plus
Any applicable Q&A specific to your circumstance
(Too many to list)
How Much Detail?
Ellis, Investment Policy: Why Policy Matters
“All too often, investment policy is both vague and implicit, left to be ‘resolved’ only in haste, when unusually distressing market conditions are putting the pressure on and when it is all too easy to make the wrong decision at the wrong time for the wrong reasons.”
How Much Detail?
Ellis, Investment Policy: The Purpose of Policy
“Is the policy carefully designed to meet the real needs and objectives of your firm?“Is the policy written so clearly that a competent stranger could understand it?
A competent stranger is someone that is familiar with the subject matter but not with the specifics of your firm or the document itself.
Tips on Construction
Format – Flexible!
CFA Standards of Practice Handbook:1. Standard (Policy)2. Guidance (Explanations)3. Procedures for Compliance (Implementation)4. Applications (Examples)
Format – (continued)
1. Policy - What2. Guidance - Why3. Procedures - How4. Examples
Tips on Construction
Scope
“XYZ strives to adhere to the Global Investment Performance Standards (GIPS), as well as updates, reports, guidance statements, interpretations, or clarification published by the CFA Institute and GIPS Executive Committee. Such standards apply to XYZ, whether specifically mentioned in this document or not.”
Tips on Construction
Definitions
“For the purpose of complying with GIPS, XYZ defines itself as all assets covered by and corresponding to investment management contracts and agreements in which either XYZ Asset Management Co., Ltd. (XYZ Japan), XYZ Asset Management Singapore Limited (XYZ SG), XYZ Asset Management Hong Kong Limited (XYZ HK), XYZ Asset Management U.K. Ltd. (XYZ UK) or XYZ Islamic Asset Management Sdn Bhd (XYZ IAM) is identified as the investment manager, or an advisor.”
Tips on Construction
Incorporation by Reference
“XYZ’s strives to prepare compliant presentations that adhere to the requirements listed in Section 5.A. –Presentation and Reporting -- Requirements of the GIPS Standards.”
“XYZ’s valuation procedures may be found in the document entitled ‘XYZ Valuation Policies and Procedures’.”
Tips on Construction
Clarify intent in Policy…
“XYZ strives to prepare compliant presentations which contain all of the required disclosures specified in 4.A Disclosure – Requirements of the GIPS Standards.”
But take a hard line in Procedure…
“XYZ shall use the most recent GIPS Required Disclosure Checklist (Appendix D) when preparing and disseminating compliant presentations.”
Tips on Construction
Be aware of and judiciously use keywords:
strives to: ethical intentshall/must: you will do this and be held accountablemay/would (be necessary): if circumstances dictate, this is requiredshould: if circumstances dictate, this is recommended
Tips on Construction
Example Valuation Policy
XYZ shall:1. Value portfolios in accordance with the definition of fair value,
the GIPS Valuation Principles, pertinent principles regarding appraisals of fair market value by independent valuation service providers, and local laws and regulations.
2. Value investments using objective, observable, unadjusted quoted market prices for identical investments in active markets on the measurement date, if available.
3. Disclose the use of subjective unobservable inputs for valuing portfolio investments if the portfolio investments valued using subjective unobservable inputs are material to the composite.
4. Disclose if the composite’s valuation hierarchy materially differs from the recommended hierarchy in the GIPS Valuation Principles
Example Valuation Procedures
A firm’s valuation procedures may change over time, and be subject to the resources of the firm or circumstances of the investment. Examples of valuation procedures that must be documented are: Direct citation of the recommended GIPS hierarchy or
description of an alternative process. Data load instructions for pricing files, including use of sources
(i.e. Reuters, IDC), frequency, and quality control process. Circumstances relating to and frequency of use of external third
parties to value investments. Description of each valuation technique used to value an asset,
and the circumstances under which it can be used.
One last time…
“In fact, there is ultimately a limit to how much regulation can do. In the final analysis, you could write all the rules you want, but there has to be a philosophy of ethical behavior that comes from human beings operating in a professional way.”
—William H. Donaldson, CFAFormer Chairman of the US SEC
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Concluding Thoughts
Need policies and procedures Comprehensive
o but manage the detail Words matter Change is good Review annually
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Contact / Questions
Timothy F. Peterson, CFA, CAIA, CIPMPARTNER
ASHLAND PARTNERS & COMPANY LLP
Jacksonville, Oregon, USA
Jersey City Boston Shanghai Tokyo Seoul
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