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CFA Ethics Study Note

Part I: Structure of CFA Institute Professional Conduct Program and the Process of Enforcement
Overlooked by: CFA Institue Board of Governors
Supervises
Enforced by Disciplinary Review Committee
Methods of Enfocement:
Code of Ethics 1) Self Disclosure through Professional Conduct Disclosure
- disclose any legal complaints, written compalints, involvement
in litigation, or other investigation.
Standards of Professional Conduct 2) written complaint received by the committee
3)disclosure from public sources
4)cheating on exams.
Process of complaints:
Step 1: Prof. Conduct Staff investigate issue by
requesting info through
- direct interview to member/complainant
-collect record and document for investigation
Step 2: Designated officer decide on penalty
-nothing happens
-cautionary letter
-displinary actions
**you can appeal the verdict and refer the matter to a panel
of CFA Institue members for hearing.
CFA Institute Bylaws
CFA Institute Professional
Conduct Program
CFA Institute
CFA Code of Ethics (must understand!)
1) Act with integrity, competence, diligence, respect, and in an ethical manner with
the public, client, prospective clients, employers, employees, colleagues in the
investment profession, and other participants in the global capital market.
Enforced by Disciplinary Review Committee Standard I,II,III,IV,V,VI,VII -all standards
2) place the integrity of the investment profession and the interest of clients
above their own personal interests
Standard III,IV,VI
Methods of Enfocement:
1) Self Disclosure through Professional Conduct Disclosure 3) Use reasonable care and exercise indepent professional judgment when
- disclose any legal complaints, written compalints, involvement conducting investment analysis, making investment recommendations, taking
investment actions, and engage in other professional activities.
2) written complaint received by the committee Standard I, II,III,IV,V
4) Practice and encourage others to practice in professional and ehtical
manner that will reflect credit on themselves and the profession
Standard I,II,VII
Step 1: Prof. Conduct Staff investigate issue by 5) Promote the integrity of, and uphold the rules governing capital markets
Stadard I, II, VII
- direct interview to member/complainant
-collect record and document for investigation 6) Maintain and improve ther professional competence and strive to maintain and improve
Step 2: Designated officer decide on penalty the competence of other investment professionals
Standard I,II,VII
**you can appeal the verdict and refer the matter to a panel
Notes to Self
Act with integrity, competence, diligence, respect, and in an ethical manner with
the public, client, prospective clients, employers, employees, colleagues in the you are a professional, so act professionally.
investment profession, and other participants in the global capital market. aka. Being honest, exercise strong moral principles, work hard and respect
-all standards the ones you have contact at life and work.
place the integrity of the investment profession and the interest of clients you are in the service industry, client and employer (firm) always comes first.
Use reasonable care and exercise indepent professional judgment when try your best to be independent in all your actions, do not be biased.
conducting investment analysis, making investment recommendations, taking **reasonable care (this is a legal term, which also indicates you have to always
investment actions, and engage in other professional activities. present to be independent in fact and in presence. Protect yourself from litigation.
Practice and encourage others to practice in professional and ehtical always be professional and supervise others like you to be professional. This
manner that will reflect credit on themselves and the profession is beneficial for the entire CFA reputation, which in return will benefit you!
Promote the integrity of, and uphold the rules governing capital markets don't be a skank and try to cheat off of other people by involving in "unmoral"
activities/misconduct. --> market is a fair game, do not profit at someone elses' expense
Maintain and improve ther professional competence and strive to maintain and improve
keep updated with all relevant information, and always brush up your skills.
aka. Being honest, exercise strong moral principles, work hard and respect
you are in the service industry, client and employer (firm) always comes first.
try your best to be independent in all your actions, do not be biased.
**reasonable care (this is a legal term, which also indicates you have to always
present to be independent in fact and in presence. Protect yourself from litigation.
always be professional and supervise others like you to be professional. This
is beneficial for the entire CFA reputation, which in return will benefit you!
don't be a skank and try to cheat off of other people by involving in "unmoral"
activities/misconduct. --> market is a fair game, do not profit at someone elses' expense
keep updated with all relevant information, and always brush up your skills.
CFA Standards of Professional Conduct explained
1) Professionalism
(related code of ethics: ALL)
A. Knowledge of the Law
-must comply with the stricter set of law, rule or regulation.
-must understand and comply to all laws applicable.
-never involve or turn a blind eye on viiolation of the law.
B. Independence and Objectivity
-not be influenced by external sources. You must appear independent.
(if you are a regular member --> always inform the employer of your status.
must tell the client of your status, if you are a researcher, must include in report
your or potential bias.)
- avoid getting in situtaion that might hinder your independence
C. Misrepresentation
-always present things as they are, do not exaggerate
-always keep proof of your analysis and how you arrive to your conclusion/opinion
-always give credit and do not present things that are not yours, ex. Plagerism, not referencing. Etc
ex. Guaranteeing investment performances, plagiarism
note: models and analysis developed by others at a members' firm are the property
of the firm, and can be used without attriution.
a report written by another analyst employed by the firm cannot be released as
another analyst's work.
D. Misconduct
-Do not involve or engage in professional conduct involving dishonesty, fraud, or deceit etc.
-always mind the reputation impact on CFA as a whole.
-remember what a "professional' is
- be an ethical person
always mind: reputation, integrity and competence.
2) Integrity of Capital Market
(related code of ethics: 1,3,4,5,6)
A. Material Nonpublic Information
- must not act on insider informaion and non public information.
material info: info that might influence a reasonable persons' opionion
of an investment.
- try to avoid proprietary trading --> when firm has possible insider info,
try to avoid trading for gains (unusual trades) around that time.
Mosaic Theory: there is no violation when a perspective analyst reaches
an investment conclusion about a corporate action or event through an
analysis of public info together with items of nonmaterial nonpublic info.
ex. The company repainted their walls etc.
B. Market Manipulaton
-never to distort prices or artificially inflate trading volumes with intention
-always keep proof of your analysis and how you arrive to your conclusion/opinion to mislead market participants.
-always give credit and do not present things that are not yours, ex. Plagerism, not referencing. Etc - the market is always fair and efficient, do not undermine it!
note: models and analysis developed by others at a members' firm are the property
a report written by another analyst employed by the firm cannot be released as
-Do not involve or engage in professional conduct involving dishonesty, fraud, or deceit etc.
3)Duties to Clients
(related codes of ethics: 1,2,3)
A. Loyalty, Prudence, and Care
- act with reasonable care and exercise prudent judgment.
material info: info that might influence a reasonable persons' opionion -always act in benefit of the client and place their interests first
-keep evidence and do actions (ex. Written consent, documents, aggrements
- try to avoid proprietary trading --> when firm has possible insider info, etc.) to prove that you are in the client's best interest, that what you are
doing is justified.
Mosaic Theory: there is no violation when a perspective analyst reaches B. Fair Dealings
an investment conclusion about a corporate action or event through an -deal fairly and objectively (no bias) when dealing with all clients when providing
analysis of public info together with items of nonmaterial nonpublic info. investment analysis, making recommendations or taking investment actions. Etc
Different levels of service is ok, but they must not negatively affect
any clients.
you can disclose the different service levels to all clients and prospects,
-never to distort prices or artificially inflate trading volumes with intention and make premium levels of service available to all who wishes to
pay for them. *****DISCLOSE EVERYTHING
C. Suitability
**Stand in the client's shoes and see how you would like to be treated.
- need to understand the clients and their needs:
investment experience
risk/return objectives
financial constraints
**always have the client fill out form/write down their objectives, mandates
and constraints before taking any action (making recommendations or investing
on their behalf)
- judge the suitability of investment in the context of the clients' total portfolio.
D. Performance Presentation - communication with clients
- must be fair, accurate and complete
-do not misleading info, not misrepresent past performance or reasonably expected
performance, and not state/imply the ability to achieve a rate of retrn similar
to that of the past.
(make reasonable judgment, do not give false hope.)
E. Preservation of Confidentiality
-info about all clients (past/present/prospective) must be confidential unless:
i. info concerns illegal activities on the part of the client
ii. Disclosure required by law
iii. Has client's written consent/client permits to disclose
4) Duties to Employers
A. Loyality
-in employment matters, must act in benefit of employer
-your skill and ability must benefit employer
-do not divulge confidential info
-not cause harm to employer
**member should always place client interests above interest of their employer
but consider the effects of their actions on firm integrity and sustainability.
**special note on when leaving an Employer: you cannot take anything "concrete
with you when you leave: trade secrets, conf. info, client list, existing model, research, etc.
You can still use the skills and knowledge gain from previous employment for new employer
you can disclose the different service levels to all clients and prospects, ex. If you did a research for prev. firm, you cannot take the research
with you to new employer. It is the property of the prev. employer.
you can use the same method for the resaerch (your skill) and do it
again for the new employer, the resaerch is then can be used for the new
employer.
Note: special case for client base, if signed a "non competition agreement", you
cannot contact your clients. If not, you can.
B. Additional Compensation Arrangement
Members must have consent from all parties involved on additional compensation agreements
**compensation that might hinder their independence, objectivity or firm interest.
Mostly consent from employer -- must be written.
C. Responsibilties of Supervisors
Must take resonable efforts to detect and prevent violaton of laws, rules, rugulations and
CFA code of standards by their subjects
-do not misleading info, not misrepresent past performance or reasonably expected - need preventative activities and detective activities.
All firms must have an adequate compliance system that meets industry standards, regulatory
requirements and CFA code of standards.
Supervisory have a role to improve inadequate compliance system and bring issue with
management.
5) Investment Analysis, Recommendations, and Actions
A. Diligence and Reasonable Basis
- member must exercise diligence, independence, and thoroughness in analyzing
investment recommendations, and taking investment actions.
-always have reasonable and adequate basis, supported by appropriate resaerch
and investigation, for any investment analysis, recommendation or action.
Guidance:
**this is a protective measure, imagine in case of client suing you for negligence
of your duties, how would you defend yourself?
**use of 3rd party info: adopt a policy for periodic review of the quality of
theird party research.
with you when you leave: trade secrets, conf. info, client list, existing model, research, etc. **Quantative research and model need to be stree stested under diff. situations
You can still use the skills and knowledge gain from previous employment for new employer **need to have procedures to review external advisors
ex. If you did a research for prev. firm, you cannot take the research
B. Communication with clients and prospective clients
again for the new employer, the resaerch is then can be used for the new - must disclose basic format and general principles of investment process used
to analyze investments, select securities, and construct portfolios.
-must disclose all factors to clients with changes that might materially affect those
processes
-use reasonable judgment in identifying which factors are important to their
investment analyses, recomm, actions etc. --> must disclose to all clients
-must distinguish between fact and opinion in presentation
Members must have consent from all parties involved on additional compensation agreements opion words: expect, likely, we believe etc.
**compensation that might hinder their independence, objectivity or firm interest. -info must disclose to all clients, not just research reports. But in all communications
-need to communicate potential gains.losses on investemnt in terms of total returns.
C. Record Retention
Must take resonable efforts to detect and prevent violaton of laws, rules, rugulations and -need to develop and maintain appropriate records to support investment analysis for
up to 7 years.
- members who changes firms must recreate the analysis documentation suporting
All firms must have an adequate compliance system that meets industry standards, regulatory recommendations using publicly available info or info obtained from new company
and must not rely on memory or materials created at her previous firm.
Supervisory have a role to improve inadequate compliance system and bring issue with
5) Investment Analysis, Recommendations, and Actions 6) Conflict of Interest
A. Disclosure of Conflict
- member must exercise diligence, independence, and thoroughness in analyzing -must disclose all matters that will impare their independence and objectivity
investment recommendations, and taking investment actions. to all client, and employer.
-always have reasonable and adequate basis, supported by appropriate resaerch - also need to update client/employer on the significant change in compensation
and investigation, for any investment analysis, recommendation or action. structure
**this is a protective measure, imagine in case of client suing you for negligence B. Priority Transaction
- clients transactions before company transactions before personal transactions
adopt a policy for periodic review of the quality of - need to be unbiased towards all clients

**Quantative research and model need to be stree stested under diff. situations C. Referral Fees
**need to have procedures to review external advisors Must disclose all referrals fees to employer, clients and prospective clients.
(compensation, consideration, benefit received or paid to others for the
recommendation of product/services)
- must disclose basic format and general principles of investment process used
to analyze investments, select securities, and construct portfolios.
-must disclose all factors to clients with changes that might materially affect those
-use reasonable judgment in identifying which factors are important to their
investment analyses, recomm, actions etc. --> must disclose to all clients
-must distinguish between fact and opinion in presentation
opion words: expect, likely, we believe etc.
-info must disclose to all clients, not just research reports. But in all communications
-need to communicate potential gains.losses on investemnt in terms of total returns.
-need to develop and maintain appropriate records to support investment analysis for
- members who changes firms must recreate the analysis documentation suporting
recommendations using publicly available info or info obtained from new company
and must not rely on memory or materials created at her previous firm.
7) Responsibilities as a CFA Member/Candidate
A. Conduct as Members and Candidate in the CFA Program
-must disclose all matters that will impare their independence and objectivity -always mind how your action will impact CFA reputation or integrity of
CFA insitute or the CFA designation.
- also need to update client/employer on the significant change in compensation - never cheat on exam or share info on the exam
B. Reference to CFA Institute, the CFA Designation and Program
-must not exaggerate or misrepresent
- clients transactions before company transactions before personal transactions -must not relate the CFA designation to "superior" performances
-must disclose all info accurately and truthfully
More-- read the book
Must disclose all referrals fees to employer, clients and prospective clients.
(compensation, consideration, benefit received or paid to others for the
7) Responsibilities as a CFA Member/Candidate
A. Conduct as Members and Candidate in the CFA Program
-always mind how your action will impact CFA reputation or integrity of
CFA insitute or the CFA designation.
- never cheat on exam or share info on the exam
B. Reference to CFA Institute, the CFA Designation and Program
-must not exaggerate or misrepresent
-must not relate the CFA designation to "superior" performances
-must disclose all info accurately and truthfully
Notes to answering Ethics Questions
1) Who am I?
Member of CFA
Firm doing financial business
2) What is my role?
Analyst - for recommendation to clients
- for researching and publishing reports to clients
-for making investment decisions for clients
-for managing a portfolio for clients
Supervisor/Director
Independent Practioner
Employee
3) Who is involved? Who do I owed my duty to?
Current Client
Past Client
Prospective Client
Current employer/employee
Former employer
3rd party: Bank, legal system, security issuer, other CFA members, family members
etc.
4) What has happened?
Which situation of the code applies
5) impact of my decision.
6) determine possible violation
8)what might the "virtuous" CFA do?
9)What should I do so that I am protected and sustains my reputation and the reputation of CFA.
3rd party: Bank, legal system, security issuer, other CFA members, family members
9)What should I do so that I am protected and sustains my reputation and the reputation of CFA.