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Portfolio Management Guidelines2010

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2 Portfolio Management Guidelines – SBA – 2010

Preamble

The Board of Directors of the Swiss Bankers Association has adoptedthese Guidelines in order to maintain and enhance the reputation andhigh quality of Swiss portfolio management in Switzerland as well ason an international level. Assets entrusted to Swiss banks formanagement must be managed professionally in the clients’ bestinterest, even if the clients only give their banks general investmentobjectives.

The Guidelines are trade regulations which bear no immediate impact

on the underlying contractual relationship between the banks and theirclients. Such relationships are governed by the legal provisions (inparticular by Art. 394 et seq. of the Code of Obligations) and by therelevant agreements between banks and clients (e.g. AssetManagement Agreement, the banks’ General Rules and Regulationsetc.).

I. Principles

1. The Asset Management Agreement enables the bank to carry outall transactions it considers necessary in the context of regularasset management by banks. The bank pursues its mandate ingood faith and in consideration of the client’s personalrequirements that may reasonably be familiar to the bank. Thebank acts on a discretionary basis, conforming to the client’sinvestment objectives and any special instructions set out by theclient. The Asset Management Agreement does not authorise thebank to withdraw assets.

Note:When the contractual relationship is being established, the bankinforms the client about the content of the Asset ManagementAgreement. The bank discusses the investment objectives directly withthe client and takes appropriate records. The bank has discretion indetermining the asset allocation policy in order to meet saidinvestment objectives. The bank may apply a general asset allocation

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Portfolio Management Guidelines – SBA – 2010 3

policy for all clients or differentiate such policies by categories ofclients.

The bank ensures that its relevant staff thoroughly cares about theasset management mandate, paying particular attention to thepreservation of the customer’s legitimate interests in good faith.

Special instructions (standing or related to a particular transaction)given to the bank by a client supersede these Guidelines. The bankmust record in writing any standing instructions and subsequentamendments thereof. Other instructions must be recorded

appropriately.

If the carrying out of special instructions involves particular risksinherent in the type of transaction concerned, the bank provides theclient with information about these risks.

2. The asset management mandate must be given in writing as perthe bank’s standard Agreement which must bear the client’s

signature.

Note: The verbal expression of a client’s wish to have his or her assetsmanaged professionally is insufficient. M inutes of a meetingcontaining notes of the client’s intention to entrust the bank with themanagement of his or her assets are also deemed inadequate.

By signing the Asset Management Agreement, the client entitles the

bank to carry out – within the context of the previously statedobjectives – all transactions as set forth in these Guidelines withoutany ulterior agreements on particular rules and regulations orinvestment risks and gains.

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3. The bank ensures that its relevant staff carry out the assetmanagement mandate according to these Guidelines and in line

with any internal directives as well as the agreed asset allocationpolicy.

Note: The responsibility is hereby clearly defined: The asset managementmandate is conferred on the bank as an institution and not to anymember of its staff or management personally. This does not prejudicethe personal service rendered by the client’s account officer.

4. A bank that manages assets must have a professionaladministrative organisation suitable to its business operation. Ittakes appropriate measures in order to avoid conflicts of interestbetween the bank and its clients or between its staff and clients.If such a conflict of interest cannot be ruled out, the bank mustprevent any potential discrimination of its clients which mayresult. In the event that discrimination still cannot be ruled out,the bank must inform its clients to this effect.

Note: The bank appoints the executive bodies and members of staffresponsible for determining the asset allocation policy, managing theassets and supervising. They have to be adequately qualified.

An appropriate administrative organisation implies a clear separation,within the staff, of the asset management and asset allocation activityfrom issuing client account and deposit statements.

In order to avoid conflicts of interest, the usual regulation forsecurities trading also applies, adapted to the current context (Art. 8,paragraph 2 of the Code of Conduct for Securities Dealers).

The bank will not on its own initiative restructure the client’s portfolioif this is not in the client’s best interests and serves the exclusivepurpose of increasing the bank’s commission income (“churning”).

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5. The customer receives account and deposit statements byagreement with the bank and for the purpose of control.

Note: This provision ensures that the client is kept aware of the transactionscarried out by the bank for his or her account, even if he or shecontacts the bank only occasionally.

6. The bank’s internal supervisory body must periodically examinethe compliance with these Guidelines.

Note: The examination covers the compliance with these Guidelines and anyinternal directives, but not the allocation of assets.

II. Performance of the Mandate

7. The bank must monitor the assets received from the client under

the mandate on a regular basis.

The bank must carefully select the investments it carries out onthe client’s behalf.

Note: The bank must base its asset allocation decisions on reliable sources ofinformation. It must monitor the investments on a regular basis.However, the bank cannot be held responsible for the decline in value

of previously carefully selected investments.

8. The asset management mandate is restricted to common bankinvestment instruments.

Note:Common bank investment instruments comprise in particular timedeposits and fiduciary deposits, precious metals, money market and

capital market investments (e.g. shares, bonds, notes, loan stock rights)

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and their derivative instruments and combinations(derivatives, hybridinstruments etc.), as well as investment funds, investment companies

and collective investment instruments (investment funds, the bank’sown in-house funds, Unit Trusts etc.).

In the case of investment companies and instruments of collectiveinvestment it is a prerequisite that they on their part invest in commonbank investment instruments or real estate.

Derivative instruments are only admitted if and as far as they meet therequirements of these Guidelines and the asset management mandate.

The bank must apply measures of due diligence and professionalhandling.

Base metals and commodities may be used in the form of collectiveinvestments, derivatives, index or structured products for the purposeof diversifying the overall portfolio. In the case of investmentsinstruments that involve physical delivery of base metals andcommodities, the bank has to ensure that no physical delivery is madeto the client.

Non-traditional investments (Hedge Funds, private equity and realestate), their derivatives and combinations thereof qualify as commonbank investment instruments according to the terms of Art. 12.

Securities lending is subject to the following principles:

• If the bank acts as agent, i.e., on a fiduciary basis, it must hedge therisk inherent in the borrower (counterparty) by demanding

collateral or by restricting its lending to prime borrowers.• If the bank acts as a principal, i.e., for its own account, the risk

must also be diversified with respect to other positions (see Art. 9).

Under these Guidelines, common bank investment instruments excludedirect investments in real estate, base metals and commodities, as wellas their indices and derivatives, unless explicitly permitted under theparagraphs 2 and 4 of the Note to this article.

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The client must issue a written instruction for all transactions that arenot permitted under these Guidelines, as set forth in paragraph 3 of

the Note to lit. 1.

Furthermore, the asset management mandate does not entitle the bankto grant corporate loans to third parties for the client’s account.

9. The bank must particularly avoid entering high risks as a resultof low investment diversification.

Note: The bank must spread the portfolio risk by a diversified assetallocation policy.

10. Investment of assets is restricted to readily marketableinstruments.

The investment in instruments issued by companies which are

directly or indirectly controlled or established via the bank, isrestricted to common public instruments.

Note: The criterion for ready marketability is given by the public listing orby the existence of a regular market for the relevant security. To alimited extent, exception from this rule may be granted for:

• securities with restricted marketability widely used by investors,

such as treasury notes;• Over-the Counter (OTC) instruments.

The latter may only be excepted if the issuer has a recognised creditrating and if market rates are available for these instruments.

Collective investments are regarded as readily marketable wheninvestors are able to terminate their investments after reasonablenotice according to Swiss Investment Fund Law (Art. 25 Investment

Fund Ordinance).

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The regulation as per Art. 10 paragraph 2 does not apply to collectiveinvestment instruments and investment companies.

11. The Asset Management Agreement does not entitle the bank toborrow funds or enter into short positions.

Note:In order to enter into loan or similar transactions, the bank mustobtain the client’s explicit authorisation, even if it complies with thecollateral margins required by the bank’s internal regulations.

Short-term overdrafts may be admitted, provided they are covered byearnings or bond redemptions due in the short term or if they occur asa result of exchange rate fluctuations in arbitrage transactions.

12. Non-traditional investment instruments may be used for thepurposes of portfolio diversification provided they are structuredaccording to the Fund-of-Funds Principle or guarantee an

equivalent diversification and providing that they guaranteeready marketability according to Art. 10 above.

Note:Investments in Hedge Funds, private equity and real estate areconsidered to be non-traditional. Such investments are not necessarilyrestricted to common bank investment instruments or readilymarketable investment instruments.

According to the Fund of Funds principle, the fund is invested inseveral legally independent collective investment instruments. Anequivalent diversification of this principle is given when the investmentis made in one single collective investment but is administeredaccording to the Multi-Manager Principle (i.e. it is administered byseveral different managers all working independently of each other).

The acceptance of non-traditional investment instruments must becovered by the asset allocation policy of the bank.

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The bank is obliged to take appropriate measures to secure the carefuland competent application of non-traditional investment instruments.

Art. 10 paragraph 2 does not apply to non-traditional investmentinstruments.

13. The bank may invest in standardised traded options, providedthey have no leverage effect on the portfolio and that theycomply with the bank’s asset allocation policy.

The same principles apply to transactions with options which arenot standardised (e.g., OTC options, warrants, covered warrantoptions).

For covered warrant transactions (pledging the client’s securitiesas collateral for options issued by the bank or a third party), thebank must obtain the client’s explicit authorisation.

Note:

In the context of this provision, the term ìstandardisedî applies tooptions on standard instruments traded in a regulated market andsettled by a recognised clearing house which guarantees properexecution of option contracts.

In the context of this Guideline, sold or written call and put optionshave no leverage effect on the portfolio, if the portfolio

• holds a position in underlying securities for call options sold, or in

the case of options on stock exchange index, interest rates, basemetals or commodities holds a corresponding position in securitiesthat represent the underlying assets of the option adequately,

• has sufficient liquidity already when selling or writing put optionsto execute the contract at any time to maturity.

When the bank buys call and put options, it must ensure that theportfolio structure still complies with the bank’s asset allocation policyif these options are exercised and that no overdraft results when

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buying a call or respectively no short position in underlying assetsresults when purchasing a put.

Open put and call positions may be offset at all times.

This Guideline governs all prevailing and imminent option instrumentswhich are not traded options by definition.

14. Financial futures may be sold or bought in line with the assetallocation policy as follows:

The bank must cover the sale of financial futures by acorresponding position in the underlying stock. For stock index,foreign exchange, interest rate, base metal or commoditiesfutures, the underlying asset must only be adequately represented.

When buying financial futures, the bank must warrant sufficientliquidity already when buying.

Non-standardised term transactions are ruled by the sameprinciples.

Note:If the bank sells foreign exchange futures, the underlying asset mayparticularly consist of investments denominated in the relevantcurrency.

III. Compensation of the bank

15. The bank stipulates the modalities and elements of itscompensation in the Asset Management Agreement (see Art. 2),an appendix to the Agreement or in a separate agreement.

Note: The purpose of this stipulation is to outline what the client owes theirbank for asset management and related services. With regard to

determining the bank’s compensation, the agreement signed by the

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client may refer to an appendix, a pay scale or the General Terms andConditions. These documents need not be signed. It is also possible to

conclude a separate agreement with the client. The bank must informthe client of amendments in an appropriate manner.

16. The Asset Management Agreement, an appendix to theAgreement or the bank’s General Terms and Conditions specifywho is entitled to potential third-party payments that the bankreceives in connection with the Asset Management Agreement orwhen executing the Agreement. The bank must inform the clientof conflicts of interest arising from the receipt of payments from

third parties (see Art. 4).

Note:In the event that the client makes a claim to the bank for thereimbursement of third-party payments, Art. 400, paragraph 1 of theSwiss Code of Obligations (OR) or the contractual provision isauthoritative.

Pursuant to federal law, payments that are made in direct connection

with the order issued fall under Art. 400, paragraph 1 OR. They mustbe passed on unless there is a contractual provision stating otherwise.At the same time, federal law states that payments received by thebank solely upon executing an order do not fall under Art. 400,paragraph 1 OR and need not be passed on.

17. The bank informs its clients of the calculation parameters or thescope of payments it receives or may receive from third parties. Itmay combine individual products into product classes for this

purpose.

Note: The information provided by the bank regarding calculations or scopemay relate to individual products or product classes. It is free to defineproduct classes as it sees fit. The bank’s disclosure obligation is of ageneral nature and applies to relevant payments that it will or mayreceive in future. For example, its obligation may be met by means offact sheets, securities account statements or via the Internet.

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18. Upon request and on an individual basis, the bank discloses toclients the amount of the payments already received from third

parties, provided they can be clearly attributed to the individualclient relationship with a reasonable amount of effort.

Note: The disclosure obligation includes all compensation from third partiesthat is directly connected with the issued mandate. This is laid down inArt. 400, paragraph 1 OR.

If further compensation from third parties can be attributed to the

individual client relationship with a reasonable amount of effort, thismust also be disclosed. In accordance with Article 16 and within thescope of Article 400 OR, an agreement can made on the exactstructure of the disclosure obligation.

The method and frequency of the financial statements are determinedin agreement with the client. The disclosure may consist ofapproximations, statements taken from an appointed date, or both.

The issue of retrospective disclosure of third-party payments is

separate from that of a potential reimbursement. The contractualprovisions are authoritative in the case of reimbursement (see Art. 16).

IV. Concluding provisions

19. The amendments to Art. 4 of these guidelines come into forcewith immediate effect; the new Art. 15-18 come into force on 1

January 2011.

Note:Subject to Art. 400 OR, Art. 18 is only applicable to transactions thathave taken place since this provision entered into force.

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T +41 61 295 93 93F +41 61 272 53 82

Swiss Bankers AssociationAeschenplatz 7PO Box 4182

4002 BaselSwitzerland

[email protected]

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