CFA Ethics

I.

PROFESSIONALISM
a. Knowledge of the law
i. When applicable law and codes of standard require different
conduct, member must follow the more strict one.
Even when operating in less developed country, as a
Singapore
ii. If a member has reasonable grounds to believe that imminent
or ongoing client or employer activities are illegal or
unethical, the member or candidate must dissociate or
separate from the activity. In extreme cases dissociation may
means resignation.
Steps to dissociate:
1. Attempt to stop by bringing it to attention of supervisor
or compliance department
2. Consulting legal counsel. However, the reliance to
advice from legal counsel do not absolve member of
any liability. When in doubt, report to supervisor, seek
independent legal opinion or notify the regulator.
3. write a complaint in writing to CFA
4. Dissociation:
-removing name from written reports, recommendation
-asking to be moved to different assignment
-refuse to accept the client
* inaction combined with continuing association may
be construed as participation
iii. Stay informed of the current laws, regional law, cultural law
(e.g. syariah law)
b. Independence and Objectivity
i. Use reasonable care and judgment to achieve and maintain
independence and objectivity.
ii. Do not offer, solicit or accept any gift, benefit, compensation
that may compromise their independence. Benefit includes
luxury travel arrangement or accommodation. Opt for
commercial plane and business accommodation.
iii. Fend yourself from:
1. Sell-side client division (investment bank) may
pressure buy-side client to write good report on the
company
Recommended procedure:
-

Protect integrity of opinion through separation of reporting lines

Create restricted list of controversial company from the research
universe, so no pressure is created among divisions
Restrict special cost arrangement: no corporate issuer should
reimburse travel arrangement of researchers. Only modest
arrangement can be accepted. It best to have your own
company to pay for your expenses.

Limit gift: customary ordinary business related entertainments

are allowed as long as its purpose not to influence member.
Other forms of gifts could be accepted as long as it is disclosed
to their employers and within the norms.
Restrict personal investment of member from client company
Never promise client or your boss on the result of your research.
When your compensation is closely linked to the certain product
performance, member should not be affected by compensation
pressure. Am I able to justify that the market price has been
fairly adjusted? Is this good investment for my client?
Fair fee arrangement: As a researcher, you should only accept
flat fee when a company asks you to write a recommendation
about itself. Compensation should not be tied to companys
stock performance.
Do not get affected by the general trend of the market or
managers desire to follow the historical norms. Use best
practice method.

c. Misrepresentation
i. Must not knowingly make any misrepresentations.
Misrepresentation could be oral or written. If unknowingly
make misrepresentation, member needs to take steps to
cease distribution of information, correct the error and inform
those who have received the erroneous information. Member
could not say that he has unknowingly use error set of data
when it has happened for years.
Misrepresentation could include credential of the writer. E.g.
Say you are a degree holder when you are not.
ii. Must not omit certain type of information, e.g. member is
related to the firm he covers.
iii. Exercise diligence when incorporating third party information
iv. E.g. of misleading statement: I can guarantee unless
institution has agreed to cover any losses
v. Prohibit plagiarism
In the case of distributing third party research, member
should not represent himself as the author
Other forms of plagiarism: citing specifications as leading
analyst and investment experts without naming the specific
references, presenting statistical estimates of forecasts
prepared by others and identifying the sources but without
including the qualifying statements or caveats that may have
been uses, using charts without stating the sources, copying
proprietary computerized spreadsheets without seeking
cooperation from the creators, using model developed by
others (even though you have modify the model, you should
still acknowledge the source)
Candidate need to give credit to sources.
In the case where member use the work previously
developed by leaving employee, it is allowed as long as the

work is done for the employer and hence belong to the firm.
Member, however, cannot release the report solely under his
name. He needs to cite his firm.
Even if you are putting normal definition such as what is P/E
in your report, you should still acknowledge the source.
You also can copy description of concepts without
acknowledging. For instance, you would like to describe what
P/E means. Although this is general knowledge, you still need
to cite the source.
Always cite from the original information. E.g. you learn abt a
study by reading financial times. You need to refer back to
the original script of study instead of relying to financial
times representation.
When you cannot understand a certain security, never invest
or let your client invest in it since you cannot properly explain
the risk involved.
Recommended procedures:
-

Factual presentations
Present your qualification summary on your research
Verify outside information. Providing information to clients from
3rd party means that member share a responsibility to the
accuracy of the marketing, distribution of the material.
When maintaining webpages, members should ensure that the
information is current.
Maintain copies of article you cite, attribute quotation, attribute
summary

d. Misconduct
i. E.g. fraud, deceit, etc.
ii. Include non illegal action such as abusing alcohol during
business hours, personal bankruptcy, deceitful business
conduct
iii. In certain cases, absence of appropriate conduct can be
counted as violation
e.g. A is an environmental activist. As the result of her participation
in nonviolent protest, A has been arrested for trespassing the
property of firm that is accused of damaging environment. In this
case, As civil disobedience in support of personal beliefs does not
reflect poorly on the integrity of financial profession. CFA standard is
not meant to covel legal transgression of this nature.
II.

INTEGRITY OF CAPITAL MARKETS

a. Material Nonpublic Information
i. Members who possess material nonpublic information that
could affect the value of an investment must not act or cause
others to act on the information

ii. So long as the material has not been made public, member
should not act on the information
iii. When the source of material is not reliable, for instance your
doctor who follows market thinks that company A is going to
be an acquisition target. In this case, you could act on the
information.
iv. Mosaic theory: analyst may use significant conclusion derived
from the analysis of public and NONMATERIAL nonpublic
information as the basis of their recommendation or decision.
They are however should save and document all their
research. Example of NONMATERIAL information: opinions of
designers, retailers
Example of MATERIAL information: quarterly earnings, new
innovative products, changes in management, legal disputes,
government reports of economic trends, orders for larger
trades before being executed, change in auditors qualified
opinion, new license/patents, bankruptcy, impending
transaction/merger, etc.
Interesting type of information: research recommendation
from well-known or respected analyst, for instance Goldman
Sachs recommend a SELL for company A. This info alone may
have an effect on the market and thus considered material.
However, we presume that the analyst arrives at the
conclusion by using public available information and his
expertise. Thus, when his client acts upon it, it s not
forbidden. The analyst also does not have the obligation to
make his recommendation public.
However, if he has decided to make his information public,
parties other than his own client who got hold of this
information should not act on it first. Example: A is a famous
analyst. He is scheduled on air to give his recommendation to
public. B is a television producer. B gets hold of the
information before the show goes on air. B quickly tells his
broker to sell his stocks. Bs act is considered violation of the
standard.
Interesting case:
A is Bs golf buddy. B is an executive at company C. During
their golf session, B says that his company is going to make a
surprise with good earnings. A thinks that B as a professional
would not disclose insider information. He acts on this.
However stock company C decreases due to other factor. Is A
guilty?
Yes. Why?

1. Although A believes that B would not disclose insider

information, it is As duty to actually ensure that the
information is not insider information.
2. It does not matter if A gains or losses money in the trade.
It is still a form of violation
Recommendation of procedures:
-

Separating reporting system, personnel, physical data

Firewall element
Public dissemination of information, press release
Appropriate interdepartmental communication
Personal trading limitation
Record maintenance, be it internal or external communication
Proprietary trading information

b. Market manipulation
i. Members must not engage in practices that distort prices or
artificially inflate trading volume with the intent to mislead
market participants
ii. Information based manipulation: spreading false rumors
iii. Transaction based manipulation: securing a dominant position
in a financial instrument, manipulate the price of a related
derivatives, doing back and forth trading of certain security
to create artificial growing volume of trading and liquidity
iv. Pump priming strategy: an exchange company enteres into
agreements with members in which they commit to a
substantial minimum trading volume on the new contract
over a specific period in exchange for substantial reductions
in regular commission. This helps to increase liquidity of the
instrument. However this is not actual formal liquidity. It
misled investors when the agreed period is offered.
Pump priming strategy is allowed if the exchange FULLY
DISCLOSE the agreement with members to boost transaction
for initial launch period. By fully disclosing the exchange is
not there to harm investors but to give them better service.
III.

DUTIES TO CLIENTS
a. Loyalty, Prudence and care
i. Identifying the actual investment client: who are they? Will
serving these clients create conflict of interest with existing
client?
ii. Developing the client s portfolio:
1. Ensure that the clients objective and expectation is
realistic
2. Provide clear and factual disclosures of circumstances
whereby there is conflict of interest
3. Help the client to judge the investment decision as part
of the clients total portfolio, tax implications,
diversification, cash flow, etc.
iii. Soft commission policies

iv.

v.
vi.
vii.
viii.
ix.

1. E.g. use client brokerage to purchase research service

or other benefits that will not benefit clients
2. This needs to be disclosed
Proxy voting policies: they should use the voting proxies in
informed and responsible manner. Failing to vote, or voting
without considering the impact is considered violation of
standard
Place client interest FIRST, above your employer and yourself
Maintain confidentiality
Consider short term and long term prospects for client
Seek the best price and execution for client
Should not charge client for things beyond what needed to
make the investment decision. E.g. extended personal
holiday while visiting target company should not be charged
to client.

Recommended procedures:
- Regularly updating clients , at least quarterly
- In times of uncertainty, ask for clients approval

b. Fair Dealing
i. Must deal fairly and objectively with all clients. Fair implies
that member must take care not to discriminate against
clients when disseminating investment information.
Disseminate information at the same time. Do not
disseminate during lunch a week before disseminate to all
clients. Seconds difference is okay.
ii. If the issue is oversubscribed, then the issue should be
prorated to all subscribers. Should also forgo sales to
themselves or their immediate family
iii.
Recommended procedures:
-

Simultaneous dissemination
Develop and document trade allocation procedures, time
stamped
First in first out basis
Fair pricing for all clients
Clearly disclose level of service to clients for the same fee or
different fees. Are you only acting as broker or also as advisers?

Interesting case
W uses email to issue a new recommendation to all clients.
However he calls his 3 largest client to discuss the recommendation
in detail? Violation?

NO. he has widely disseminated the information. Larger clients

receives greater service presumably because they pay higher fees
c. Suitability
i. When members are in an advisory relationship with a client,
they must make a reasonable inquiry into a clients
investment experience, risk and return objectives, etc.
Example of investment policy statement
1. Client identification
2. Investor objectives
3. Investor constraints
4. Performance measurement benchmark
ii. Determine if the investment is suitable with the situation
iii. Judge the suitability against the clients total portfolio
iv. Suitability test policy:
1. Impact of investment on portfolios diversification
2. A comparison of the investment risks with the clients
assessed risk and tolerance
3. The fit of investment with the required investment
strategy. Low beta investment for low risk client.
d. Performance Presentation
i. Members should make reasonable efforts to ensure that it is
fair, accurate and complete
ii. Full disclosure of investment performance data to CURRENT
client and PROSPECTIVE client. Performance record has to be
factual.
iii. Even if the presentation is brief, member must make
available the detailed information supporting the
communication upon request. Best practice dictates that
member include a reference to the milited nature of the
information provided.
iv. Member should consider the knowledge and sophistication of
the audience to whom a performance presentation is
addressed
v. When including terminated accounts as part of performance
history, member need to be clear when the accounts were
terminated
vi. Include full disclosures of how the performance is calculated,
e.g. after tax, net fees. Etc.
vii. Maintain detail data and records that are used to calculate
the performance
viii. When using simulated results (using his method of trading
using historical data), has to be accompanied by full
disclosures and retrospective method.
e. Preservation of Confidentiality
i. Members must keep information abt current, former and
prospective client confidential unless:
1. Information concerns illegal activities on the part of the
clients
2. Disclosure is required by law

IV.

3. Client or prospective client permit disclosure

ii. Should not disclose information even if it is well-intended. For
instance, client talked about giving 50,000 to charity to
reduce income tax. A happens to be in charity organization. A
advises charity organization to approach her client. Not
allowed.
iii. If member knows that the client is doing sth illegal, he should
approach legal counsel on appropriate step and considering
to resign from being the clients adviser.
DUTIES TO EMPLOYERS
a. Loyalty
i. Should act for the benefit of their employment and should not
deprive their employer of the advantage of their skills,
abilities or divulge confidential information that may harm
your empplyer
ii. Understand well some of policies in the employment contract:
1. Competition policy: restriction to offer similar service
outside the firm while employed or for certain period
after being employed
2. Termination policy
3. Incident-reporting procedures
iii. Unless permitted, departing member may not take employer
property, records, reports, etc.
iv. A proper employee led buyout is allowed so long as it is to
the benefit of shareholders and done in appropriate manner
v. Although there is no proper contractual obligation, when you
are working part time, your work considers belong to
company if you use company resources to finish the work.
vi. In the case of internship or probono work, your completed
work is still the companys property. You are considered to
have received benefits in the form of work experience and
knowledge.
vii. In the presence of non competing agreement, contacting
former client without permission from former employer is not
allowed because client records are considered the property of
the firm. Only in the absence of a non compete and as long
as member maintains his duty of loyalty to his employer until
he has left his former firm and does not make us of material
from his former employer after he has left he does not violate
the codes.
e.g. a knows his former clients well. He now moves to another
firm. He knows that the clients will follow him to his new
employer. He is not in violation so long as there is no nonc
ompete agreement.
Soliciting can only be done after you leave your former
employers. Contacting former client is done by obtaining
client contact from public records. You cannot take clients
contact details from your former employers list. When you

leave, you should clear your personal computer and phone

from those contact information.
viii. While working for company A, B is also preparing his own
company in the same business. It is allowed as long as B only
uses his spare time outside office hours to do preparation and
do not solicit clients from his employers. Soliciting can only
be done after he has officially left company A.
ix. When you take up a position outside your work that may take
a lot of time, you should discuss your outside activity with
your employer. For instance, you are going to be selected as
president of some big organization.
b. Additional Compensation arrangement
i. Members and candidates must not accept gifts. Benefits,
compensation or consideration that competes with or might
reasonably be expected to create a conflict of interest with
their employers interest unless they obtain written consent
from all parties involved.
ii. For instance, to serve as non executive board director in
another company, A has to disclose all the benefits and non
monetary compensation that he receives
c. Responsibilities of supervisors
i. Members must make reasonable efforts to detect and prevent
violation of applicable standards or laws
ii. Establish reasonable
1. Detection procedures
2. Compliance procedures
3. Inadequate procedures
4. Enforcement of non investment related policies
iii. Check to ensure that your subordinate had a reasonable and
adequate basis for his recommendation
iv. As supervisor, you need to be especially sensitive towards
potential conflicts between your self interest and supervisory
responsibilities
v. Non action to investigate of peculiar situation is considered
as violation
V.

INVESTMENT ANALYSIS, RECOMMENDATIONS, AND ACTIONS

a. Diligence and Reasonable basis
i. Exercise diligence, independence and thoroughness in doing
his work
ii. Have a reasonable and adequate basis, supported by
appropriate research and investigation. General knowledge,
market sentiment and a few news article do not constitute an
adequate support.
iii. Minimize the unexpected downside of events
iv. When using secondary or third party research, member has
to ensure that these research has a sound basis, assumption,
good rigor of analyst performed, timeliness of the research,

evaluation of independence of the recommendation. Ensure

that the third party material is of quality standard
v. When using quantitative oriented research (model, formula,
etc.), members need to have a good understanding of the
parameters used in the model. They must at least be able to
explain to clients the important of the quantitative research,
its limitation and its use in decision making process.
Members should ensure that data used for the model is not
out of date.
Members may need to present various scenarios of the model
to ensure the rigor of the analysis. Do sufficient scenario
testing.
vi. When choosing external advisers or subadvisers, member
need to follow certain criteria regarding the external advisers
internal control procedures, published return information,
adherence to its strategy and codes of ethics, etc. Do not
base solely on the fee structure alone. Select based on
suitability and ability of the external advisers. Decision should
not be arbitrary or based on personal judgment.
vii. When member not confident or have doubt during the
discussion as a part of group research, he may decline to put
his name on the report. Only agree to put you name on it
when you are satisfied with the decision making process.
b. Communication with clients and prospective clients
i. Explain statistical significance of the results from the model
they use to clients.
ii. Remind client that past performance do not guarantee future
performance. It is merely an indication.
Guidance:
1. Inform clients of the process, inherent risk, actual and
implied risl, basic process and logic of recommendation
2. Different forms of communication carry similar weight.
You still need to be responsible in verbal
communication
3. Identify limitations of analysis
4. Distinguish between fact and opinion
5. Update client if there is any changes with data, model
or investment process adopted by the firm
c. Record retention
i. Develop and maintain appropriate records to support their
recommendation and past communication with clients
ii. Records are property of the firms even if the employee made
it themselves. When member leaves the firm, they cannot
take the property without express consent from previous
employer.
iii. Failure to maintain record is considered violation of the
standard.

VI.

CONFLICT OF INTEREST
a. Disclosure of conflicts
i. Conflict with employer disclose
ii. Conflict with clients disclose
1. Need to disclose his compensation arrangement which
may create conflict of interest with his client
iii. Cross departmental conflicts
iv. Conflicts with stock ownership
1. Even when the holding may not be material now,
member should still disclose in case the holding
become material after stock price increases
v. Conflicts as director
When there is conflict of interest, member should disclose to all
related parties or consider from dissociating himself from one of the
activities.

VII.

Even
b. Priority of transactions
c. Referral fees
RESPONSIBILITIES AS A CFA INSTITUTE MEMBER OR CFA CANDIDATE
a. Conduct as members and candidates in the CFA program
b. Reference to CFA Institute, the CFA Designation and the CFA
program