Frank Litman Case Scenario
Twain hires a compliance officer and subsequently experiences significant change during the following year. The compliance officer immediately begins to update the firm’s policies and procedures even though Twain adheres to the Asset Manager Code of Professional Conduct. In addition, after a thorough analysis, Twain senior management decides to outsource its back-office operations and hires an independent consultant to review client portfolio information. At the same time, they add several research and investment staff members and upgrade the information management system. They also eliminate paper records in favor of electronic copies and develop a business-continuity plan based on current staffing.
Eighteen months later, the compliance officer resigns. Rather than hire an external replacement, management designates one of Twain’s senior portfolio managers as the new compliance officer. The compliance officer reviews both firm and employee transactions and reports to the CEO rather than to the board of directors.
With respect to its current compliance officer, do Twain’s actions and procedures most likely comply with the recommendations and requirements of the Asset Manager Code of Professional Conduct?
- No, with regard to reporting to the CEO.
- Yes.
- No, with regard to independence.
Solution
C is correct. According to the recommendations and guidance in the Asset Manager Code the compliance officer should be independent of any investment and operations personnel.
B is incorrect because the compliance officer should be independent of any investment and operations personnel.
A is incorrect because the compliance officer should report to the CEO or to the Board. The compliance officer reports to the CEO.
Vision 2020 Capital Partners Case Scenario
Recommendation 2: To take advantage of their vast business experience, the board of directors should implement new policies. Specifically, the board should
Policy 1 | take an active daily role in managing the Fund’s assets, |
Policy 2 | designate an existing employee as a compliance officer, and |
Policy 3 | disclose any conflicts of interest arising from their business interests. |
Which of Akinyi’s policies in Recommendation 2 would least likely comply with the Asset Manager Code of Professional Conduct and its general principles if implemented?
- Policy 1
- Policy 2
- Policy 3
Solution
A is correct. The board of directors have corporate finance experience and business experience but not asset management experience. Consequently, they may not act with skill or competence, as required by the fourth principle of the General Principles of Conduct. Therefore, they should hire professional asset managers to manage the Fund.
B is incorrect because by appointing an existing employee to act as a Compliance Officer the Fund would be in Compliance with the Asset Manager Code assuming that the employee is competent, knowledgeable, and credible and is empowered to carry out their duties.
C is incorrect because the Directors should disclose any conflicts of interest arising from their business associations outside of V2020, namely their positions as trustees for small pensions funds.
Can anyone clarify what needs to be checked for Compliance Officer –
One case says Independent required – No existing operational or Investment related employee permitted and Vision 2020 case states existing employee to act as a Compliance Officer the Fund would be in Compliance with the Asset Manager Code assuming that the employee is competent, knowledgeable, and credible and is empowered to carry out their duties.
1st case study
Based on the information provided in the scenario, Twain’s actions and procedures do not comply with the recommendations and requirements of the Asset Manager Code of Professional Conduct with regard to independence. The Asset Manager Code recommends that the compliance officer should be independent of any investment and operations personnel. However, in this scenario, the compliance officer was a senior portfolio manager who was part of the investment team before being designated as the new compliance officer. This lack of independence can potentially lead to conflicts of interest and undermine the effectiveness of the compliance function.
In addition, the scenario does not provide sufficient information to determine whether Twain’s updated policies and procedures and other actions comply with the Asset Manager Code. The Asset Manager Code requires firms to establish and maintain policies and procedures that are reasonably designed to prevent violations of applicable laws, regulations, and the Code itself. However, it is not clear from the scenario whether Twain’s updated policies and procedures meet this requirement.
Finally, the fact that the compliance officer reports to the CEO rather than to the board of directors does not necessarily violate the Asset Manager Code’s recommendations and requirements. The Code allows for some flexibility in the reporting structure of the compliance function, as long as the compliance officer has access to the board or a designated committee of the board and is able to report on compliance matters independently of management.
2nd case study
The fourth principle of the General Principles of Conduct states that asset managers should act with skill, competence, and diligence in managing client assets. As the board of directors of Vision 2020 Capital Partners do not have asset management experience, taking an active daily role in managing the Fund’s assets may not meet the standard of acting with skill and competence. Therefore, this policy may not comply with the Asset Manager Code of Professional Conduct and its general principles.
However, it’s important to note that this is a hypothetical scenario and a more comprehensive analysis would require a thorough understanding of the specific requirements of the Asset Manager Code of Professional Conduct and the policies of Vision 2020 Capital Partners.
I had no doubt why Policy 1 is not in compliant, My doubt is why Policy 2 is compliant.
One case says Independent required – No existing operational or Investment related employee permitted
and Vision 2020 case states existing employee to act as a Compliance Officer the Fund would be in Compliance with the Asset Manager Code assuming that the employee is competent, knowledgeable, and credible and is empowered to carry out their duties.