1. Explain the importance and benefit of Ethical Conduct in the investment industry?

Ethics can be defined as beliefs, values that guide our behaviour. The code of ethics for an investment company is a set of
principles that clearly states the rules and regulations that will guide the behaviour of professionals and help them to conduct
business with honesty, fairness and integrity. It helps to develop trust and confidence in the investment industry and ensure
that investors puts the interest of clients before their own and act with competence and respect towards their existing and
potential clients. The CFA has 6 code of ethics mention below that all CFA members and candidates must follow
a) To act with integrity, respect, competence and in an ethical manner to all stakeholders (clients, employers
etc) in the global capital markets.
b) To place the integrity of the investment profession and interest of clients before own personal interest.
c) Ensure care and independent professional judgment while conducting investment analysis and other
professional activities.
d) Practice and motivate others to act in an ethical manner.
e) Promote integrity of the global capital market for the benefit of the society.
f) To maintain and improve professional competence and continuously try and encourage other investment
professionals to maintain their integrity and competence.

Ethics benefit all the market stakeholders as it leads to increase investor confidence in global capital market. Not applying the
culture of ethics in the investment sector would mean massive loss of client database, reputation and money. For example if
customers learns that their banks are involved in money laundering can lead the customers to withdraw all their money and
eventually the banks may lose reputation and eventually close down in the long run. Reputation of investment firms lays on
the long term relationship of trust and confidence they construct together with their existing and potential customers. We can
summarize the benefits of ethics as follows:
a) It helps to set the right culture as it builds an environment of trust, integrity and excellence that everyone in a firm
from the bottom line to the board of directors need to adopt.
b) Helps to construct a good reputation for the firm. Nowadays price is not the only concern for consumers but they will
remain loyal to a company that have a good code of ethics. For example a consumer may prefer to buy garments
from a company that do not employ children in its manufacturing unit.
c) Helps remain in compliance with laws and regulations.

2. Provide an overview of the GIPS history and explain the major developments since creation up to now,
describing the purpose and benefits of GIPS to the investment industry?
GIPS can be defined as a set of single voluntary ethical standards that helps to calculate and present investment
performance which are comparable among investment firms irrespective of their locations.

In fact, in the past it was very difficult for investors to evaluate and compare performance data of investment
companies. As a result The Association for Investment Management and Research (AIMR) (now known as the CFA
Institutes) created in 1987 the Association for Investment Management and Research Performance Presentation
Standards (AIMR-PPS). It was a voluntary set of single guidelines used mainly by investment firms in the United
States of America and Canada.

However with the evolution of the investment industry globally and since it was difficult to obtain accurate
comparisons with firms worldwide as many countries have their own specific guidelines of performance, the CFA
funded and managed the Global Financial Standard Committee so as to review all the standards and to develop a
globally accepted standards. The first draft standards were published in 1998 for public comments and it was
endorsed in 1999.

The Global Investment Performance Standards (GIPS) was developed by the CFA Institute together with many
experts and investment organisations worldwide to provide an ethical framework for the calculation and presentation
of the investment performance history.

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Assignment: Ethics and Professional Standards (OUpm014111)
 Since the GIPS Standards were widely used in the world and also continuous evolution in the financial world and for
governance purpose, the Global Financial Standard Committee was replaced in 1999 by the Investment Performance
Committee (IPC) to review all the standards with the main objectives to include other assets (for example real estate)
and also to include other performance standards issues (fees, advertising). Another edition was published in 2005.
In the meantime, in 2005 further development occur as the IPC was dissolved and replaced by the GIPS Executive
committee (which facilitates the decision making of the standards) and the GIPS council (ensures that all sponsors
are involved in the promotion and development of the standards).

In January 2006, major revision were undertaken and all former GIPS standards were transformed into one single
standard. Moreover the GIPS standard which was previously focusing more on the performance now also includes
the risk elements in the 2010 edition.
The GIPS standards are adopted by around 40 countries with more than 1,600 investment firms claiming compliance.

The key features of the GIPS standards are as follows:

 Only firms that manage assets can claim compliance with the GIPS standards.
 It should be noted that with the GIPs standards, the reporting procedures have now changed as there is no
different standards, representative accounts and varying periods for the calculation of performance.
 Firms must comply and adhere with all the recommendations and requirements of the standards so as to
claim compliance.
 The latest edition of the GIPS standards must be used by the investment firms and in order to apply the
standards, they need to regularly review and update all their internal policies and procedures. Moreover, the
new policies must be clearly defined and communicated to all stakeholders so as to achieve the best
practice.
 It is also advisable that all the data and procedures during the whole process are verified by an external third
party so as to show integrity and accurateness in the calculation.
 Firms should comply with all the requirements for a minimum of 5 years or since inception and an additional
year of performance each year must be presented building up a minimum of 10 years’ of GIPS compliance.
 If there are already existing established laws / regulations in a country for the calculation and presentation of
Investment performance, the firm should adopt both the GIPS standard and the laws of its country. In case
there are of conflicts between the two, the firm need to comply with the laws of its country and make a full
disclosure of the conflict in the compliance presentation.
 Investments firms need to include all discretionary and fee paying portfolios in their portfolios so as to ensure
that all accounts portfolio are duly represented and not only good performance portfolios.
 All data that are used to calculate the investment performance must be accurate so as to create credibility
and trust to investors.

The Structure of the GIPS Standards are categorized under requirements and recommendations and firms must meet all
the requirements in order to claim compliance. Below is a summary of some of the requirements and recommendations:

(i) Fundamentals of Compliance.

First of all the firm should be well defined so as to determine the total assets of the firm and also to select the portfolio that
will be included in a composite which is in line with the strategy of the company.

(ii) Input Data

All data and information for a specific portfolio should be captured and maintained in a composite and there should be
consistency in the input of data. Moreover the portfolio must be valued to its fair value and according to the GIPS
valuation principles. The valuations should be made by a third party and the portfolio should be valued on the date of all
external cash flows.

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Assignment: Ethics and Professional Standards (OUpm014111)
 (iii) Construction of a composite
A composite may be defined as the total number of portfolios having the same investment strategy and objectives.
Investment firms must construct a composite that include only actual assets managed by the firm and their representation
should be fair and also include new portfolios.

(iv) Methology:
Uniformity in methods should be used to calculate returns. In the 2010 edition, the time weighted rates of return are being
used.

(v) Disclosure and presentation and reporting

Firm must disclose all the information which are well presented based on the requirements in the GIPS standards so as to
report the investment performance. All data must be presented in a way that a reader can easily read and understand
same easily.

The GIPS standards benefit both the management firms and the prospective clients. The main importance of the GIPS
standards can be highlighted below:
a) It provides accurateness and consistency in investment performance data that are globally accepted thus
building credibility and trust to all stakeholders in the investment industry and also boost the interest and
confidence of investors.
b) By adopting the GIPS standards the investment firm is also improving its transparency and good corporate
governance.
c) It ensures full disclosure and a fair representation of the investment performance so as to help potential
investors to compare the performance between investment firms before taking an investment decisions.
d) It ensures and motivates fair competition among investment firms by enabling investment companies having
no established standards to compete with investment firms having a developed standard in different
countries. No barriers to entry as all performance calculations are standardized.
e) By adopting the GIPS standards, firms are sending a positive signal to their potential customers that their
data are accurate and complete thus building further trust and confidence between the investment company
and its potential customers.
f) Although the standards are voluntary and firms can choose to adopt same however they are widely used
since they save time and also gives incentive for firms to review their internal risk control and gives them a
set of rules for governing input data.

3. Describe five main significant changes brought by the GIPS 2020 Standards compared to the 2010 edition?

Since, the GIPS Standards are not static standards they tend to evolve with the major changes in the global economy. As a
result CFA need to review same constantly and GIPS 2010 edition has now been reviewed. In fact this is the most major
changes effected since 2010 and this new edition has been released on 28 June 2019 and will be effective on 01 January
2020.This new edition was designed to ensure that the standards are applicable to all investment managers (mainly
managers of private equity, hedge fund, real estate and private credit funds) regardless of their structure, client type, asset
class and investment strategy. All the GIPS standards have been reviewed so as to make it easier for anyone to determine
which section is applicable to their firm.

The GIPS 2010 standards were mainly meant for asset managers rather than asset owners although both of them can claim
compliance with GIPS. In fact it did not make any sense for a private equity fund. This is so as when a private equity fund has
already raised capital for one product, it normally no longer market this product. But in the 2020 edition separate divisions are
created for firms and asset owners each having provisions specific for them.

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Assignment: Ethics and Professional Standards (OUpm014111)
 Below are five main changes that have been made:

1. Introduction of pooled funds report

A pool fund can be defined as a way of putting sums of money from many people into a large fund spread across many
investments which are managed by a professional. There are two types of pooled fund: Broad distribution pooled fund (BDPF)
and the Limited distributed pooled fund (LDPF).
BDPF is a pooled fund which is publicly available to multiple investors for example a mutual fund while LDPF are all pooled
fund except a BDPF.
In the 2010 edition, firms had to prepare a single fund composites if the pooled fund did not meet the definition of any existing
composites. As a result some firms had to design many composites that include one pooled fund whose strategy was not
managed for or offered as a portfolio owned by a single client. Now firms will no longer need to prepare a report for BDPF if
the strategy is not offered to separate account clients. If the BDPF is offered to separate clients the BDPF must be included in
the appropriate composites. A composite will now require to include only actual, fee paying and discretionary segregated
accounts. The compliance report is now known as the GIPS report and there are 3 different types of GIPS report:
 GIPS composite report
 GIPS Pooled fund Report
 GIPS Asset Owner report.
The firm can also terminate the composite that was constructed for the pooled funds when the firm no longer markets the
fund. In the 2020 edition the firm must provide the following:
 Complete list of composite descriptions.
 Complete list of pooled fund descriptions for LDPF
 Complete list of (without description) of BDPF

For the 2020 edition a composite may include composite that have terminated for the last 5 years but it is not required to
include terminated pooled funds. A pooled fund report is required for LDPF to prospective client while for BDPF it is only
recommended.

2. Money weighted return

In the 2010 edition time weighted returns were used for all composites and for private equity internal rate of return were used
while for real estate both time weighted and internal rate of return were used. Now in the 2020 edition, in order to have a more
standardized approach the money weighted return is used. It is a return for a period that presents the change in value, timing
and size of external cash flows. The main conditions to comply the money weighted returns are as follows:
a) The firm should have control over external cash flows.
b) The portfolio in the composite should be at least of the following:
 Portfolio/pooled fund is closed ended.
 Fixed life.
 Fixed commitment.
 A significant part of the investment strategy are illiquid investment.
If a firm choose present time weighted return/ money weighted return or both, for each composite/ pooled fund it will need to
constantly use the selected returns for each composite/ pooled fund. Firms can still also use the present time weighted return
but they now also have the option for money weighted return.

3. Carve out
In the 2020 edition now allows firms to include carve out strategies with allocated cash to a composite. A carve out is when a
parent company partially or fully dispose the shares of its subsidiary to the public. This is done normally to raise capital or for
the firms to concentrate more on its core business. Even though the new organization will have new shareholders and board
of directors, the parent company can keep a controlling interest in the new company by giving strategic support.

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Assignment: Ethics and Professional Standards (OUpm014111)
If firms include the carve out strategies with allocated cash they will need to construct carve outs with allocated cash to all
portfolios within the firm and same must be included in the composite. Once a firm maintains standalone portfolio managed in
the same strategy as carve outs the firm must create a separate composite including only the standalone portfolio.

4. Advertising guidelines
In the 2020 edition, advertising guidelines for both BDPF and LDPF are included. Although same is still voluntary in the new
edition firms can choose to advertise specific pooled fund. They have the ability to choose whether to include the gross or net
return or both in the GIPS advertisement. However firms must now also include a benchmark returns where the pooled fund
performance is included and the information must be consistent with all the information in the pooled fund related to the GIPS
report.

5. Valuation
The valuation has also been changed in the 2020 edition where the frequency of valuation will depend on the type of returns
time weighted/ money weighted and the type of portfolio composite or polled fund report. A real estate open fund will need to
have an external valuation at least once every 12 months.

References
Material Reference List /Bibliography
Internet and EBook Why Ethics In Finance Matters? FINANCE & THE COMMON
GOOD/BIEN COMMUN - N° 27 - II/2007
Investopedia
A First Look at the CFA Institute’s Final 2020 GIPS Standards
by Michael S. Caccese,  Michael W. McGrath, Pamela A.
Grossetti,  Britney E. Ryan
2 July 2019
Global Investment Performance Standards(GIPS) for firms 2020 by
CFA Institute
GIPS 2010: What Every Firm Needs to Know Now (and how to react):
Part 2
by Michael S. Caccese and Rebecca O’Brien Radford

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Assignment: Ethics and Professional Standards (OUpm014111)