CAIA Ethical Principles: Level II Allocator Decisions
At Level II, apply ethical judgment to the allocator’s decision process: mandate design, manager selection, communication and oversight. Explain how the institution should act when evidence, incentives and client interests conflict.
The key decisions, at a glance
| Concept | What to do | Watch for |
|---|---|---|
| Mandate | State whose capital is managed and what obligations govern it. | An attractive return target cannot override the mandate. |
| Selection process | Apply comparable evidence standards to every candidate. | An affiliation should not bypass independent evaluation. |
| Communication | Describe limits, conflicts and uncertainty to decision-makers. | A selective track record can mislead without a false number. |
| Oversight | Assign challenge, escalation and follow-up responsibilities. | Committee approval is not the end of accountability. |
1. Mandate
State whose capital is managed and what obligations govern it.
Watch for: An attractive return target cannot override the mandate.
2. Selection process
Apply comparable evidence standards to every candidate.
Watch for: An affiliation should not bypass independent evaluation.
3. Communication
Describe limits, conflicts and uncertainty to decision-makers.
Watch for: A selective track record can mislead without a false number.
4. Oversight
Assign challenge, escalation and follow-up responsibilities.
Watch for: Committee approval is not the end of accountability.
Original worked case
A committee member’s affiliated manager
Given: A pension committee member proposes an affiliated manager. The proposal highlights exited winners, omits remaining holdings and asks to skip the usual independent review.
01 Conflict
Record the affiliation and apply the institution’s conflict process, including independent consideration.
02 Evidence
Request the full portfolio record and comparable net performance.
03 Decision
Defer a recommendation until the missing evidence and process exceptions are resolved.
Answer and interpretation
A disclosed affiliation alone does not cure selective evidence or a weakened review process.
Change one assumption
A complete record may support selection, but the decision still requires a defensible, independently challenged process.
Independent teaching example with the stated assumptions. Not an official exam question, marking key or observed market trend.
Understand the method
Part 1
Locate the duty within the institutional decision chain
An institutional investment decision can involve beneficiaries, trustees, a committee, staff, consultants and external managers. Their responsibilities overlap but are not identical. Identify who sets the mandate, who recommends, who approves and who monitors. Delegation changes who performs a task; it does not automatically remove the institution’s responsibility to oversee it.
A recommendation should connect the proposed investment to the institution’s purpose and constraints. A consultant’s preferred manager may be attractive in isolation yet unsuitable for a pension plan’s cash needs. Ethical analysis therefore requires both competent investment work and a governance process that gives decision-makers a fair view of benefits, risks, conflicts and uncertainty.
Part 2
Manage conflicts through process and decision rights
A committee member’s relationship with a manager can affect both the recommendation and the appearance of impartiality. Record the relationship, determine the member’s role under the institution’s policy, and obtain independent evaluation. Where appropriate, recusal should cover deliberation and voting rather than merely a verbal disclosure followed by unrestricted influence.
Consider incentives at the organisational level as well. A consultant may receive revenue from services sold to managers it evaluates. A manager may prefer a continuation transaction that extends fee income. Neither fact alone establishes an improper outcome, but each creates a reason to test the process, terms and evidence independently. The solution should address the specific channel through which judgement could be distorted.
Part 3
Make dissent and uncertainty visible in the record
A committee pack should distinguish facts, forecasts and unresolved assumptions. If an investment case depends on an exit multiple, valuation date or liquidity estimate, show the sensitivity and the evidence supporting the input. Hiding an unresolved operational issue in an appendix can make the main recommendation misleading even if the appendix is technically available.
Document credible dissent and the response to it. A minority concern about key-person concentration or unverifiable assets is useful information, not an obstacle to eliminate for presentation consistency. Independent challenge works only when reviewers have sufficient time, access and authority to alter the decision. An approval obtained after the commitment has effectively become irreversible provides weak governance.
Part 4
Close the loop when monitoring reveals a problem
Ethical oversight continues after allocation. A late valuation, unexplained reconciliation difference or change in withdrawal terms should be assigned to an owner with a deadline and escalation route. Determine whether the issue affects existing investors, new commitments or reporting. A response that protects the institution’s reputation while withholding material information can compound the original failure.
Remediation may involve correcting a report, pausing further funding where permitted, obtaining independent verification or reassessing the mandate. Keep the response proportionate to verified facts and contractual authority. Record the condition for closing the issue and the control improvement that reduces recurrence; a verbal assurance that the manager is “handling it” is not a completed action.
Governance evidence by decision stage
Mandate
- Required reasoning
- Why the exposure serves beneficiaries
- Reviewable record
- Objectives, constraints and authority
Selection
- Required reasoning
- How conflicts and alternatives were assessed
- Reviewable record
- Comparative analysis and conflict disposition
Approval
- Required reasoning
- Why material uncertainties are acceptable
- Reviewable record
- Decision, dissent and conditions
Monitoring
- Required reasoning
- What triggers intervention
- Reviewable record
- Issue owner, deadline and closure evidence
More worked practice
Original teaching cases. Use the stated assumptions; these are not official exam questions or marking keys.
An unresolved valuation before a committee vote
Given: A committee is asked to approve a new commitment. Staff cannot reconcile a material private holding to independent records. A senior sponsor asks staff to remove the issue because the manager is well known.
- 1Retain the material uncertainty in the recommendation and describe the missing evidence.
- 2Assign independent verification and explain whether approval should be deferred or made conditional within the committee’s authority.
- 3Record the decision and prohibit treating an unresolved condition as completed merely because the manager is reputable.
Interpretation: Reputation does not substitute for evidence. The institutional ethical response protects the quality of the decision process and the accuracy of communication to those responsible for the capital.
Check your understanding
Answer first, then open the explanation. These checks are original practice and do not generate an exam score.
1. Does using an external consultant eliminate committee oversight?
No. The institution still needs an appropriate mandate, conflict review and monitoring of the delegated work.
2. What is wrong with recording only the final vote?
The record may omit material dissent, assumptions and conditions needed to understand and monitor the decision.
3. When is a remediation item closed?
When the specified evidence and authorized review establish that the issue has been resolved or consciously accepted under the institution’s policy, not merely when someone promises a fix.
Common questions
Is every affiliated-manager allocation unethical?
No. Evaluate the conflict, disclosure, selection evidence and governance safeguards. The example fails because material evidence and normal review are omitted.
How is this different from Level I ethics?
The underlying professional principles are shared. This lesson focuses on applying them to institutional decision-making and ongoing oversight.
Sources and scope
The sources below establish their stated framework or subject context. Calculations and cases are our own teaching material; these sources do not endorse them or establish complete exam coverage.
- CAIA Ethical Principles
The professional principles. Our case decisions are independent applications, not an official answer key.
- AIMA: Investment manager due diligence questionnaires
Industry due diligence framework. Our workpapers are original examples, not reproduced AIMA templates.
- CAIA curriculum and study tools
Official curriculum, companions and required readings for the exam year. The current page now links to 2027 materials.
- ILPA: Principles and best practices
Alignment, governance and transparency in private fund relationships. Our fee and transaction cases use independently stated terms.
- CAIA 2027 curriculum overview
Published topic categories and Emerging Topics reading titles for 2027. The overview is not the complete learning-objective list.
By MiloPrep editorial team. Updated 10 October 2026. Independent study notes, not affiliated with or endorsed by CAIA Association. How we prepare our content.
Notes
- * Study scope: Selected study concepts, not complete curriculum coverage. Match your sitting to the official exam-year materials; CAIA’s current resource page now links to 2027. ↩ Return to content