Why a Code of Ethics for the Luxembourg Mutual Fund industry?

In light of the different Corporate Governance scandals, which hit the U.S. Mutual Fund industry, the Board of ALCO was solicited by its members in order to launch a working group focussing on the theme of “Code of Ethics” for the Luxembourg Mutual Fund industry. Initially, the definition and the scope for the working group to be agreed on were not simple. The reasons for that were diverse: ALFI just had finished the update of their Code of Ethics for Luxembourg funds. Furthermore numerous other ALFI initiatives such as “the Fair Value Pricing and Arbitrage Protection” and the “Code of Conduct for the Investment Management industry” working groups had seen the daylight.

On its side, ALCO had by the end of 2002 completed a comprehensive review of the CSSF Circular 2000/15 with the objective of sharing interpretations and practical experiences in the application of the Circular among Compliance Officers as well as the rest of the industry. Bearing in mind all different efforts, it was the group’s determination to avoid any duplication of efforts. The objective was to be complementary towards all ongoing efforts in the Corporate Governance arena by assessing core Compliance issues that Compliance Officers within the Fund Industry are facing on a day-to-day basis. Eventually the group with the Board’s support decided to focus on the following core principals:

a Code of Ethics should not be limited to setting general guidelines, but should as well take a clear stance towards questions such as:   - Affected persons and transactions, - Administrative and pre-clearance procedures.   a Code of Ethics should namely deal with the following (“core concerns”), although it is understood that the industry, depending on the nature of services provided, will be impacted in a distinct way by each of these concerns. For example, a registrar agent and an investment manager will not treat “insider trading” or “best execution” in the same way.

- Personal trading - Best execution - Gifts and invitations - Conflict of interests - Insider dealing information

The Group furthermore emphasised the importance of having effective “Chinese Walls” in place between people working in different departments, to avoid, to a certain extent, any risks of insider trading or conflicts of interests. In that context, it is important to note that the defined list of principals is not to be conceived as an exhaustive list of the core items that a Code of Ethics should deal with. The Group indeed always considered items such as the KYC principle as “core”, but resolved to concentrate on the 5 items listed above.

The clarifications and guidelines, detailed in the report, consequently focussed on the 5 above-mentioned concerns. In a first step, the working group reviewed the regulatory requirements with regard to the drafting of a Code of Ethics in the following countries: USA, UK, The Netherlands, Germany, France, Italy, Ireland and Switzerland. The majority of the countries reviewed required indeed that FSPs (Financial Sector Professionals) put in place a Code of Ethics defining persons, transactions as well as administrative procedures, to prevent any potential conflict of interest that may arise from personal account trading. The implication indicated that the FSP should have internal procedures to proactively control staff trading, and to take appropriate sanctions regarding any infringement of these procedures. In addition to the requirements on personal account dealing, the majority of regulators referred to some extent to the core items (including the set up of Chinese Walls) that the ALCO working group had identified and which are analysed in their report. The group always emphasized that the various principles analysed in these different jurisdictions were not exhaustive. It merely represents the aspects that the working group has in common with these different jurisdictions.

All in all the ALCO Code of Ethics was a response to the growing preoccupation of its members active in the Mutual Fund business. The objective of the report was to provide recommendations to the growing ethical challenges that the Luxembourg Fund industry is facing on a day-to-day basis. In that sense the Board of ALCO always specified that the report itself was to be perceived as a complementary document to all ongoing Corporate Governance efforts that ALFI had initiated.