Code of Conduct

Swedish Code of Conduct for fund management companies adopted by the Board of Directors of the Swedish Investment Fund Association on 6th December 2004. The Code was revised on 5th April 2006, 11th September 2007, 4th July 2008 and on February 2010.

Background

In June 2004, the European association for investment funds companies and asset managers, EFAMA, adopted High Level Principles which were complemented, in November 2005, with Best Practice Recommendations. The European fund manage­ment industry hence now has a “Code of Conduct for the European Investment Man­agement Industry”.

The Swedish Investment Fund Association wishes, by means of this Swedish Code for fund management companies, both to implement, first and foremost, EFAMA’s High Level Principles and to summarise the overall and central principles that the Association believes should apply with regard to investment fund activities in Sweden. The Code is in­tended to promote sound investment fund activities, and thereby to safe­guard public confidence in such funds

The code focuses on the activities conducted by Swedish and foreign fund manage­ment companies in Sweden and refers primarily to operations carried out by the fund management companies them­selves. Where the fund management company has dele­gated to another party to carry out part of these activities, the fund management com­pany shall strive to ensure that the principles of the code are applied by the contrac­tor.

The code comprises a number of rules that are more ambitious than the standards im­posed by legislative and statutory requirements and by the association’s other guide­lines. In those sections where the code exceeds the above-mentioned regula­tions, the principle to be applied is “comply or explain”, since the preconditions may vary for individual fund management companies with regard, for example, to organi­sation and size. Foreign fund management companies may experience difficulties in complying with every aspect of the code due to regulatory differences in their home countries. The intention is, however, that deviations shall not be permitted when the word “must” is used. Members of the Swedish Investment Fund Association must, in their Annual Reports, specifically state that they comply with the code and shall provide an explanation for any deviations therefrom.

The Association has sought, wherever possible, not to repeat matters regulated by law or statute[1].  In some cases, however, the Association has deemed it necessary, for the sake of clarity, to include a reference to such regulation or to the need to include certain regulations in the code.

The code is also complemented by concrete rules of conduct issued by the Associa­tion in other Guidelines. The Swedish Investment Fund Association has also, in ad­dition to this code, issued the fol­lowing Guidelines, which must be adhered to by the Association’s members:

  • Guidelines for information and marketing etc by fund management companies
  • Guidelines for investment fund managers as shareholders
  • Guidelines concerning trading in securities and foreign currencies for own and related person’s account
  • Guidelines for key ratio accounting of investment funds  
  • Guidelines for handling past performance in the merger of investment funds
  • Guidelines for determining month-end values for performance measurement
  • Guidelines for the annual reporting of costs to unit holders
  • Guidelines for the temporary closing of investment funds to deposits and with­drawals.

Fund management companies may, in addition to their investment fund activities, engage in individual portfolio management. This code focuses primarily on the in­vestment fund activities. The operations conducted within the framework of individ­ual portfolio management are regulated by LVPM, the Swedish Securities Operations Act (2007:528) and the Swedish Financial Supervisory Authority Regulations, FFFS 2007:16. In cases where the rules laid down in the code may, in addi­tion to unit hold­ers, include clients in the individual portfolio management sector, the term “investor” is used.

A number of the concepts used in the code are defined in appendix 1.

 

1. Fiduciary duty to unit holders and other investors

The fund management company is tasked with managing the funds entrusted to it and must behave with considerable integrity. In conjunction with the man­agement of an investment fund, the fund management company must, pursuant to investment fund legislation, act exclusively in the common interests of the unit holders.

The company management and employees of the fund manage­ment company must, in all their activities, seek to ensure that public confidence in the fund management company and the industry is not damaged. This applies both in relation to unit hold­ers and other investors and to the media, authorities and com­petitors. 

The company management and employees of the fund management company must act in an ethically acceptable manner. Ethical values are determined by common sense and by the perception prevailing within society of what constitutes right and wrong. A good yardstick when determining whether decisions or actions taken fulfil the ethical requirements imposed is whether the decisions or measures can be ex­plained and justified to unit holders and other investors, superiors and outsiders in such a manner that they appear acceptable to them.

2. Managing the operations

The company management

The company management of the fund management company is responsible for the compliance of the fund management company with the rules laid down by law, regulations and fund provi­sions, or otherwise in accordance with given management mandates and with the Association’s Code of Conduct and guidelines.

In order to ensure that they are able to fulfil their responsibilities to investors, the company management of the fund management company must act with the requisite independence in relation to various interested parties. The company management must ensure that the organisation of the fund management company is such as to achieve this end[2].

Independent Board members

Ensuring that the fund management company acts exclusively in the common inter­ests of the unit holders in conjunction with the management of an investment fund is achieved primarily through openness and the provision of reliable information. The safeguarding of the unit holders’ interests should be further ensured by the presence of independent members on the Board of the Directors of the fund management com­pany.

At least half of the members of a fund management company’s Board of Directors should be independent in relation to the fund management company and its associ­ated compa­nies, and to the management of the company or its associated companies. All members of the Board, however, have the same responsibilities.

A member is deemed to be dependent if he or she

  • is employed by the company or an associated company,
  • has been employed by either of the above during the last three years,
  • is closely associated with a person in the management of the said companies,
  • receives a not insignificant remuneration, over and above Director’s fees, from the fund management company,
  • has extensive commercial links with or represents a party that has extensive commercial links with the fund management company or its associated com­panies.

The mere fact that a Board member has a seat on the Board of more than one fund management company within a corporate group does not mean that the member is disqualified from classification as independent.

At least one of the Board members who shall be regarded as independent in the man­ner pre­scribed above must also be independent in relation to the company’s major share­holders. A Board member who represents a major owner or is an employee or a Board member of a company that is a major owner shall be regarded as dependent. The term, major shareholder, refers to owners who, either directly or indirectly[3], con­trol ten per cent or more of the shares or votes in the company.

 

3. Conflicts of interest

Acting exclusively in the common interests of the unit holders in conjunction with the management of an investment fund means that other interests, such as those of the fund management company or associated companies, must yield in the event of any conflicts of interest.

Identification and handling of conflicts of interest

The regulations[4] issued by the Swedish Financial Supervisory Authority state that the fund management company must identify and in its business plan account for areas where conflicts of interest may arise, e.g. with regard to the fund management com­pany, employees of the fund management company and the fund management com­pany’s commercial partners, and between different unit holders or investors. It is particularly important that conflicts of interest in relation to associated companies are identified (see also point 9, Brokerage commissions, and 13, Investment fund manag­ers as shareholders). The fund management company must also establish internal written guidelines for the way in which conflicts of interest shall be handled. Actions taken with reference to the guidelines should be documented.

Safe custody of assets

It is important, in connection with the handling of conflicts of interest, that the fund’s assets are held by a depository institution and that they are kept distinct from the fund management company’s assets. (See also point 11, Safe custody of assets.)

Remuneration principles

The fund management company must formulate remuneration principles and incen­tive programmes in respect of the management and managers of their own companies such that they correspond to the interests of the investors[5].

The fund management company must also strive to ensure that remuneration princi­ples for fund managers and for employees of companies, to which the fund manage­ment company has, where relevant, delegated management of the fund’s assets, cor­respond to the interests of the investors.

Own account trading

The Association has, in its guidelines concerning trading in securities for own and related persons’ account, regulated such matters as short-selling and trading in units in funds managed by the employee or the employee’s employer. The rules are de­signed to ensure that fund management company employees do not exploit their po­sition in an improper manner. The fund management company should also, e.g. through internal guidelines, regulate the way in which employees who are, for exam­ple, tasked with managing funds, shall execute transactions for their own account in financial instruments in which the fund also invests.

The fund management company must also draw up internal guidelines and have rou­tines that regulate the company’s buying and selling in its own funds so as to ensure that the company does not trade on terms that differ from those applying to other unit holders, and that the company’s investment of assets in its own funds does not expose the company to excessive risks in the light, amongst other things, of the applicable capi­tal requirements.

Disqualification

The fund management company must draw up internal regulations that prohibit em­ployees from processing matters in which the employee has a direct personal interest or in which a person closely associated with the employee has such an interest, or in companies in which the employee or a person closely associated with the employee has a significant interest.

Improper payments and bribes

There are legislative provisions regarding the acceptance of improper payments and bribes on behalf of an individual or the company[6]. The fund management company should also comply with the practice that has developed regarding bribes and con­cerning which information has been disseminated, e.g. through the Swedish
Anti-Corruption Institute[7].

4. The fund management company’s operations

Competence and resources

It is incumbent upon the company management of the fund management company to be fully familiar with the laws, statutes etc. that relate to the fund management com­pany’s activities. The fund management company’s employees must also possess such knowledge relevant to their spheres of responsibility.

The fund management company must, in the course of its activities, act with the req­uisite skill and care, particularly with regard to the safeguarding of investors’ inter­ests. The fund management company must have the resources and routines required to conduct the activities efficiently. The fund management company shall designate a person/persons specifically responsible for the handling of complaints.

The regulations[8] issued by the Swedish Financial Supervisory Authority contain addi­tional rules concerning the activities of the fund management company. They lay down, amongst other things, that the principle of duality shall apply to the assignment of responsibilities and division of labour.

Confidentiality

Legislative regulation exists with regard to confidentiality in respect of the commer­cial or personal relationships of another party to investment funds, fund management companies or depositories[9].

5. Internal control, regulatory compliance, etc.

The fund management company’s internal control must be organised in such a man­ner that routines are in place to ensure that the company’s activities are conducted in accordance with legislative and other provisions and in accordance with internal regulations.

The fund management company must institute a function responsible for regulatory compliance and which must report directly to the company management and submit regular reports to the Board of Directors.

The regulations[10] issued by the Swedish Financial Supervisory Authority contain addi­tional rules concerning internal control, regulatory compliance and independ­ent review.

 

6. Service providers and commercial partners

Service providers

The fund management company should have clear internal regulations with regard to service provider agreements with third parties.

The fund management company can never transfer responsibility for its activities to another party and must hence maintain control over functions carried out by service providers[11].

Choice of commercial partners

The fund management company must choose commercial partners who are serious and should conduct their business on a strictly commercial basis. It is particularly important that devia­tions from such terms do not occur with regard to associated companies. (See also point 9 regarding brokerage commissions.)

 

7. Investment decisions

Fund management companies must put in place the routines required to enable on­going control to ensure that investment decisions comply with the provisions of the investment fund and the fund management company’s internal regulations for the fund, and, where relevant, with instructions issued by investors. This also applies in the event of the delegation (outsourcing) by the fund management company of the management of the fund.

 

8. Best execution

The fund management company should put in place routines that enable investment decisions and other transactions on behalf of the investment fund or other investors to be executed in an optimal manner with regard to price, costs, quality, time ex­pen­diture, ability to execute the transaction, and other relevant factors.

 

9. Brokerage relations, etc.

Choice of broker and other trading partners

The fund management company must have a documented process for choosing bro­kers and other trading partners, and the process must be monitored by the Board of Directors.

Fees

Fees paid to brokers and other trading partners may be used to pay for the execution of trading orders and analysis.

Soft commissions

Soft commissions, i.e. remuneration in the form of goods and services received by fund management companies in conjunction with business transactions and which do not form part of the normal range of services offered by the trading partner, may only be used if they are to the benefit of the investors.

Subscriptions to periodicals, IT hardware and payroll expenses for employees are ex­amples of goods and services that should not be included in soft commissions.

Any use by the fund management company of soft commissions must be reported prominently, e.g. in the Annual Report.

Income from securities loans

Any income derived from securities loans must accrue to the fund.

Executing block orders

The fund management company must set up clear internal regulations and routines for the execution of block orders and must monitor compliance therewith on an on­going ba­sis. The instructions must, amongst other things, state that the allocation between several funds or other investors must be clear before the order is placed, as well as the principles governing the way in which the allocation is made and at what price, e.g. by the size of the fund or the average price.

Trading with associated companies

The Association’s Guidelines for key ratio accounting of investment funds state that fund management companies must, in their Annual Reports, present an account de­tailing how much of the trade in financial instruments has been conducted through associated securities dealers.

The fund management company must further state to what extent the investment funds have invested in shares etc. in companies in conjunction with a stock market flotation or similar handled by an associated company.

 

10. Asset valuation

Valuation of the portfolio

The activities of the fund management company should be organised in such a man­ner that the valuation of assets is distinct from the management func­tion.

The fund’s assets must be assigned a correct value. Assets and liabilities must be val­ued at the market rate on objective grounds specified in advance (e.g. using inde­pendent sources for valuation or specified valuation models.)

Net asset value calculation

Fund management companies must maintain internal regulations for the calculation of the net asset value, and must have internal verification procedures to ensure that the calcula­tion of the net asset value is reliable and complies with legislative, statu­tory and fund pro­visions. Routines must also be in place for handling cases where errors have occurred in pricing.

Returns and net asset values should be specified after deductions for all costs and charges in the investment fund.

Index comparisons

The Swedish Investment Fund Association Guidelines for information and marketing etc by fund management companies include regulations governing index compari­sons, and prescribe, amongst other things, that a relevant index must be used in index comparisons (market index, fund index etc.).

The method by which the selection was made must be clearly stated where compari­sons are made with other funds, as per the Association’s Guidelines for information and marketing etc by fund management companies. The selection must be a fair one.

 

11. Custody of portfolio assets

The investment fund’s assets must be kept distinct from those of the fund manage­ment company by entrusting them to a depository. The depository must act both in­dependently of the fund management company and exclusively in the common inter­ests of the unit holders.

The depository must receive and keep in safe custody the property owned by the in­vestment fund and must ensure that the issue and redemption of units in the invest­ment fund take place in accordance with the fund rules and applicable regula­tions. The depository must also ensure that the value of the units is calculated cor­rectly and that the investment fund invests in accordance with its fund provisions.

 

12. Fund trading

Late trading

All trading in investment fund units must occur at an unknown price to ensure that all unit holders are treated equally and to eliminate the risk of late trading.

Market timing

The fund management company must take steps to limit the opportunity for market timing (exploitation of time zone differences).

Short-term trading

The fund management company should take steps to attempt to prevent short-selling that occurs at the expense of the long-term performance of the investment fund and thereby negatively affects other unit holders. Examples of measures may include charges for short-term trading. The fund management company must provide details of such measures.

Charges

If purchase and redemption charges are levied, the fund management company should state whether the charge accrues to the fund management company or the in­vestment fund. If such charges are levied in order to prevent short-selling, they should accrue to the investment fund.

Retrocessions or discounts

If retrocessions or discounts apply in connection with the investment fund’s trading in units of other investment funds, they should accrue to the investment fund.

 

13. Investment fund managers as shareholders

Fund management companies, acting on behalf of the unit holders and the investment fund, play a role as shareholders in the companies in which the fund management company has chosen to invest. Under the terms of the Association’s Guidelines for investment fund managers as shareholders, fund management compa­nies must main­tain a shareholder policy and must provide details thereof on their web site, for ex­ample, and must also justify the positions taken on important issues. The fund management company must also designate a named contact person responsible for share­holder-related issues.

The role as shareholders must be exercised exclusively in the common interests of the unit holders. Other interests, such as those of the fund management company or asso­ciated companies, must hence always yield in the event of any conflicts of interest.

Fund management companies must, in their shareholder policy, detail the principles that govern the exercise by the fund management company of its voting rights, and its own participation in nomination processes.

14. Marketing and investor information

Under the provisions of the Swedish Investment Funds Act, the investor must be of­fered the investment fund’s simplified prospectus prior to making investment deci­sions. Reference must be made to the full prospectus that must, upon request, be pro­vided or sent out free of charge. Unit holders in an investment fund must, in conjunc­tion with the annual statement, be offered Annual Reports and Half-yearly reports free of charge.

All marketing material must be formulated in accordance with generally accepted marketing practices, which are described in greater detail in the Swedish Investment Fund Association’s Guidelines for information and marketing etc by fund manage­ment companies. These guidelines include an agreement with the Swedish Consumer Agency stipulating, amongst other things, that all marketing of investment funds must include risk infor­mation.

 

15. Fund information and marketing, and financial advice services

Fund management companies must comply with the Swedish Investment Fund Associa­tion’s Guidelines for information and marketing etc by fund management companies in conjunction with the provision of financial advice with regard to its products and the sale of the same.

All financial advisory services conducted by fund management companies within the framework of a licence to provide financial and investment advice must be based on the customer’s requirements. A statutory documentation requirement[12] also exists with regard to the provision of such advice. The Association’s Guidelines for infor­mation and marketing etc by fund management companies include competence re­quirements for such activities.

When information is provided or fund units sold without personal financial advice, it should be clearly stated that the information or selling does not constitute financial advice.

Distributors

The fund management company should maintain internal regulations for appointing distributors. A written agreement must be drawn up between the fund management company and the distributor stating that the distributor undertakes, in con­nection with his or her brokering of the fund management company’s funds, to com­ply both with the Swedish Investment Fund Association’s Guidelines for information and market­ing etc by fund management companies and with other legislative and regulatory re­quirements.

The fund management company must provide the distributor with the requisite prod­uct information and support with regard to the fund management company’s invest­ment fund products such that generally accepted practices with regard to financial advice can be maintained.

 

 

Sources

The Swedish Investment Funds Act (2004:46)

The Swedish Securities Market Act (2007:528)

The Swedish Penal Code (1962:700)

The Swedish Marketing Practices Act (1995:450)

The regulations issued by the Swedish Financial Supervisory Authority, primarily FFFS 2008:11, 2007:16 and 2009:6

The Swedish Investment Fund Association’s own Guidelines and the Simplified Pro­spectus for Investment Funds Manual

EFAMA, “A Code of Conduct for the European Investment Management Industry”, 29th November 2005

OECD, “Governance of Collective Investment Schemes (CIS), Discussion Draft”, July 2004

IOSCO, “Objectives and Principles of Securities Regulation”, May 2003

Financial Services Action Plan: “Progress and Prospects”, Asset Management Expert Group, Final Report, May 2004

 

 

 


Definitions and concepts

Associated companies

Companies within the same corpo­rate group as the fund management company and with which the fund manage­ment company is obliged to submit consolidated accounts.

Block order

Joint trading order for several in­vestment funds or other investors.

Closely associated persons                                                    

Wife, husband, cohabiting partner, registered partner, sibling or rela­tive in a direct line of descent or ascent.

Company management

Defined in FFFS 2007:16 as the Board of Directors and the Managing Director/President.

Depository

A bank or other credit insti­tution that keeps an invest­ment fund’s assets in safe custody and handles the in­vestment fund’s incoming and outgoing payments.

The duality principle

No single person shall exclu­sively execute a transaction throughout the transaction chain.

Full prospectus

A full prospectus that in­cludes, amongst other things, in­vestment fund provisions, as well as more detailed in­formation for the assess­ment of the investment fund and its risks than a simplified pro­spectus, must be pro­duced for every invest­ment fund.

Internal regulations

Policy and steering docu­ments, guidelines, instruc­tions or other written docu­ments by means of which the issuing party (the Board of Directors, the President or any other senior executive) steers the opera­tions.

Investors

Unit holders and other cus­tomers of the fund manage­ment company.

Late trading

Purchase and redemption of invest­ment fund units at a known price.

Market timing

When investors, by means of buying and redeeming in­vestment fund units, exploit time zone differences be­tween the various markets in which the investment fund’s holdings have been invested.

Operating risk

The risk of losses as a result of inap­propriate or failed internal proc­esses, human error, incorrect sys­tems or external events.

Simplified prospectus

A simplified prospectus must be produced for every in­vestment fund, providing overall and fundamental in­formation on the basis of which the investment fund and its risks can be assessed.

 

 

[1] Primarily in the Swedish Investment Funds Act (2004:46) and in the regulations issued by the Swedish Financial Supervisory Authority, primarily 2008:11

[2] See also Swedish Financial Supervisory Authority regulation FFFS 2008:11

[3] If a company owns more than 50 per cent of the capital or votes in another company, the former company is deemed to control the latter company’s holdings in other companies indirectly.

[4] FFFS 2008:11

[5] Further rules on remuneration principles and publication are laid down in FFFS 2009:6

[6] In the Swedish Penal Code and the Swedish Marketing Practices Act

[7] The Institute’s secretariat is based at the Stockholm Chamber of Commerce offices, tel: +46 8 555 100 45, www.chamber.se/IMM.

[8] FFFS 2008:11

[9] Chapt. 2, §19 of the Swedish Investment Funds Act

[10] FFFS 2008:11

[11] Swedish Investment Funds Act (2004:46), chapt. 4, §4

[12] See the Swedish Financial Supervisory Authority regulation FFFS 2007:16, chapt. 16, §§9-18

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