Professional Documents
Culture Documents
Members must understand and comply with laws, rules, regulations, and Code and Standards of any
authority governing their activities. In the event of a conflict, follow the more strict law, rule, or
regulation. Do not knowingly participate or assist in violations, and disassociate from any known
violation.
Know all the laws that apply to your work activities. Know them and obey them.
If two laws say different things about an action, follow the strictest law (or Standard)
Even if an action is legal in every country, if it violates the Standards, don't do it.
The only time it is okay to even think about violating the Standards is if by obeying the
Standards, you would be breaking a country's laws.
There will come a point when people will say "anyone with half a brain would have known what
was happening - or at least should have."
Ask yourself if it likely that the correct answer to an exam question will be something to the
effect of: "Lots of illegal stuff was going on around him, but who could have known this? No
violation here."
If your firm manages an investment product, say a mutual fund, that is sold in multiple
countries, do you need to be an expert in the securities laws of each of these countries? No.
However, the reading says that you should "make reasonable efforts to review whether..." the
firms that are marketing your fund in various countries are following those laws.
Also you should "undertake the necessary due diligence when transacting cross-border
business..."
CFAI only gets to ask you a certain number of questions, so you should ask yourself how likely it
is that one of those questions is going to be used to test you on this relatively recent addition to
the curriculum (within the last 5 years).
At the moment, there is probably not enough of a consensus on this subject for it to be test
(although it, like everything else in the curriculum, is fair game).
What recommendations would you give me for complying with this Standard?
Stay current on developments in laws that are relevant to your work. Do not assume that your
employer will tell you what you need to know (although they should).
Of course, you should also keep reference materials in your office for all those times that co-
workers stop by to discuss ethics.
It is never a bad idea to encourage your firm to adopt a code of ethics for employees, develop
clear procedures for handling alleged violations, and generally providing employees with lots of
information on laws, regulations, policies, etc.
If you know about a violation and don't dissociate, you are considered to be complicit
Bring the violation to your supervisor's attention and encourage them to act
It is never a bad idea to talk to your firm's compliance officer or in-house counsel
There may be cases when you need to seek independent counsel - again, this is never a bad idea
There are prep materials that make a point of saying that there is nothing in this Standard that
requires anyone to report anything to any government authority. In reality, CFAI is unlikely to
write a question where the correct answer involves knowing that something bad was happening
but refusing to provide this information to the authorities.
If after taking some or all of the above steps, it is obvious that your firm is unwilling to take any
action to stop or prevent violations, you need to be prepared to quit your job.
While this reading provides suggestions for firms, it is important to keep in mind that the
Standards relate to individual activities.
In reality, how firms deal with ethics matters greatly, but don't fall into the trap of thinking that
violations of the Standards resulted from the firm's failings.
Firm activities (as opposed to individual activities) are addressed in Reading 6, which covers
the Asset Manager Code of Professional Conduct.
Members and candidates must use reasonable care and judgment to achieve and maintain
independence and objectivity in their professional activities.
Members and candidates must not offer, solicit, or accept any gift, benefit, compensation, or
consideration that reasonably could be expected to compromise their own or anothers independence
and objectivity.
This Standard is primarily about analysts and how important it is for them to not only be
objective, but to appear to be objective as well.
The idea that analysts may be pressured to alter a report does show up later in the curriculum
(see 23m)
Analysts produce and sell a product called investment research, but who but who buys it?
It turns out that the biggest customers are Institutional Investors (aka. buy-side clients), who are
covered in Reading 15.
Imagine that a pension fund portfolio manager calls up an analyst and says something to the
effect of: "Hi. I love your research and I'd really like to continue being your biggest customer and
doing a whole bunch of other business with your firm. So, if you could stop downgrading the
stocks that I'm holding in my portfolio, everything will be just fine."
Okay, so maybe there might be a few buy-side clients who try to pressure analysts, but nobody else,
right?
Wrong.
If you work for, say, an endowment and part of your job is to choose the managers who get to
invest a portion of these funds, isn't it great when the managers that you pick provide excellent
returns (adjusted for risk, of course)?
Yes it is.
But, isn't it better when these managers provide excellent returns AND let you stay at their
beach house for two weeks every year?
YES!
What about investment banking relationships? I bet nobody has been pressured to compromise their
objectivity over to maintain an investment banking relationship.
If you are an equity analyst, there's a good chance that your firm also employs investment
bankers (who, by the way, probably bring in a much higher portion of the firm's revenue than
the equity analysts).
As a general rule, executives do not send thank you cards to analysts who downgrade their
company's stock.
Therefore, the perception exists that these executives might punish an analyst's employer by
refusing to take any of their company's investment banking business there.
So, analysts whose employer fails to protect them from spiteful investment bankers may be at
risk of having their objectivity compromised.
Would the companies whose stock the analyst covers ever try to compromise their objectivity?
"My company's share price doesn't reflect its true value." - Every. Executive. Ever.
"Hi, Investor Relations? That idiot analyst at MonkeyBank downgraded us again. He is dead to us
now. His phone calls don't get returned and I want you to start looking through his garbage to
see if he's hiding any nasty secrets." - Every? Executive? Ever?
Okay, but the opinions issued by credit rating agencies are always objective, right?
"Hello AAA++++ Ratings4Sale? My company, HighLow Inc., wants to issue publicly-traded debt.
The problem is, nobody will buy it unless it's rated. So I'm going to hire you to issue a rating for
our debt. You can come by whenever and look through whatever files you want and then issue
whatever rating that you believe is objectively appropriate. In exchange, I will ensure that your
payment doesn't mistakenly get deposited in your competitor's bank account. Okay? Ha, totally
kidding about that last part... except I wasn't..."
This is how the credit rating business operates. And you still wonder how all those toxic
mortgage-backed securities were rated as safe as Swiss Government bonds?
"Hello, Ms. Analyst. I'm the CEO of NearFar Corp. You probably haven't heard of us because
we're pretty small and no analyst has bothered to cover our stock. But you know what would
make our stock more attractive? That's right. If an analyst covered our stock. Anyway, people
really seem to value that whole "independent and objective" you've got going on, and they will
probably listen to what you have to say. So I'd like to pay you a boatload of money to write an
"independent" report about NearFar. Waddya say?"
Is there anything about the term "issuer-paid research" that sounds remotely objective?
Can analysts ever accept anything from the companies they cover?
They shouldn't be in the habit of doing so, and paying for travel and accommodation is no
different.
The only exception to this is if there is no commercial alternative the transportation and
accommodation that the company is providing (ie. visiting a sawmill in the middle of nowhere).
Internal "firewalls" should be used to ensure that information is not obtained by anyone who
has no business knowing it.
If a company being covered is being petty, put it on a "restricted list". This means that analysts
will only issue factual information (and not opinions) about that company.
Restrict "special cost arrangements (ie. generally don't let the companies that an analyst covers
pay for any of her expenses, with the exception of travel/accommodation when there are no
commercial alternatives.
The curriculum says that "members and candidates should encourage" their employer to
develop policies regarding employee share purchases and that firms "should" impose strict
limits on its employees acquire shares in IPOs and private placement, but if a question involves
an analyst receiving shares in an IPO, your default assumption should be that a violation has
occurred.
Ideally, firms should have an "Independence policy" that is enforced by a compliance officer, but
as was noted in the discussion of S1A, recommendations regarding what firms should do are
most likely to be addressed in Reading 6.
Members and candidates must not knowingly make any misrepresentations relating to investment
analysis, recommendations, actions, or other professional activities.
For example, you would never make a multi-million dollar delivery of widgets in exchange for an
"accounts payable" without some level of trust.
By lying?
Correct.
Misrepresentations?
Right again.
Yes.
Written, oral, sign language, semaphore, smoke signals, carrier pigeons... you get the idea.
Is it possible that misrepresentation could have a negative impact on investment practices?
You work for an endowment and part of your job is to choose the managers who get to invest a
portion of these funds.
Isn't it great when the managers that you pick provide excellent returns (adjusted for risk, of
course)?
Yes.
But isn't it better when these managers provide excellent returns AND you take all the credit?
YES!
Furthermore, if you are talking to a client and you use the words "guaranteed return" or some
variant thereof when referring to anything other than a GIC, that's misrepresentation.
If you are talking about your firm offers a "full suite of financial services" and your firm has three
employees, that's also misrepresentation.
Of course.
Don't copy other people's work verbatim or with only small changes without citing them.
You are not a journalist. You must name your sources and cite them when you use their ideas.
Don't present forecast data from someone else's model and either pass it off as your own or
neglect to include important qualifying statements or caveats.
Can I plagiarize or take credit for work done by people who are no longer with my firm?
If an employee develops a model while at a firm and later leaves, the model remains property of
the firm (see S4a)
While the firm does not need to credit their ex-employee after he leaves, "a member or
candidate cannot, however, reissue a previously released report solely under his or her name."
Firms can also provide guidelines so that employees don't misrepresent its capabilities and
services offered.
If you purchase 3rd party research, try to give it a once-over before you pass it along to your
clients.
To avoid plagiarism, it is a good idea to keep good records of the materials that you used in
preparing a report or presentation.
Be sure to cite the sources that you quote directly, but also sources that you paraphrase and
summarize.
Members must understand and comply with laws, rules, regulations, and Code and Standards of any
authority governing their activities. In the event of a conflict, follow the more strict law, rule, or
regulation. Do not knowingly participate or assist in violations, and disassociate from any known
violation.
"Any act that involves lying, cheating, stealing, or other dishonest conduct is a violation of this
standard if the offence reflects adversely on a member or candidate's professional activities."
The curriculum goes on to specify that "...the Code and Standards are primarily aimed at
conduct and actions related to a member's or candidate's professional life."
Essentially, CFAI won't police your private life as long as you refrain from doing anything
that reflects poorly on the profession.
However, personal bankruptcy that involves fraud or deceit would actually be a violation
of Standard.
Misconduct can take the form of a sin of omission, such as failing to conduct proper due
diligence.
But what if I want to use the Standards as a way of settling a personal grudge?
Actually, the Reading specifically mentions that "Individuals may attempt to abuse the CFA
Institute Professional Conduct Program by actively seeking CFA Institute enforcement of the
Code and Standards, and Standard 1(D) in particular, as a method of settling personal, political,
or other disputes unrelated to professional ethics. CFA Institute is aware of this issue, and
appropriate disciplinary policies, procedures, and enforcement mechanisms are in places..."
What if someone gets arrested for a non-violent crime that has nothing to do with the investment
profession or violating trust?
If a CFA member who gets arrested for participating in some kind of non-violent protest for
some cause that nobody can really disagree with, it is not actually a violation.
Have a Code of Ethics with clearly defined violations and associated sanctions.
Members and candidates who possess material nonpublic information that could affect the value of an
investment must not act or cause others to act on the information.
Put another way, anything that would change the price of a security
There is a long list of examples in the reading, but it's the sort of stuff you'd expect
However, if the source is not reputable, the information may not be material
Information is only becomes public when it is released to the marketplace (ie. in a press release)
You can trade on information as soon as it becomes public - you do not need to wait until
everyone reads their mail
I just got some material non-public information. What do they mean when they say that I "must not
act or cause others to act on this information"?
What if I don't actually make the trades, but I get someone else to do it? No.
Material Non-
Material
An analyst can use every other type of information that isn't material and non-public
But it is important to document what you know in case you have to defend yourself against an
insider trading charge
I'm always getting material non-public information and I would like to avoid going to prison, what
should I do?
The first thing you should do is talk to your firm's legal/compliance department
Note: You really should get your own personal lawyer, but somehow that advice doesn't show
up in the curriculum
You also need to keep records so that you can prove what you knew and what you did
Yes.
As always, the Standards apply to individuals and it is unlikely that the correct answer to a
question will be something to the effect of: "This individual can't be blamed. The firm messed up
by not adopting the proper compliance procedures."
Nevertheless, the reading recommends that firms take the following actions:
Develop information "firewalls" and require approvals before information can move
from one side to the other
Does this mean that firms should stop their proprietary models from trading in a shares of a firm
about with the firm has material non-public information?
No.
It would be "prudent" for them to suspend arbitrage trading, but wrong to stop market making
activities.
Restrict trading in shares when the firm has material non-public information related to them by
using either a restricted list or a watch list, or preferably both.
Issue press releases before earnings calls so that analysts do not come into possession of
material non-public information.
Members and Candidates must not engage in practices that distort prices or artificially inflate trading
volume with the intent to mislead market participants.
Any practice that distorts prices or trading volume with an intent to deceive
You can't spread rumours or put out false information (ie. "pump and dump")
You can't buy one fund's shares from your other fund to give the impression of momentum
You can't corner the Frozen Concentrated OJ market and bankrupt Duke & Duke
You can trade in a thinly-traded security, even if it results in a significant price change
You can exploit a difference in "market power" or take advantage of other market inefficiencies
You can execute trades motivated by tax considerations, such as selling a security and
immediately buying it back
Don't do any of the things I mentioned when you asked me what Market Manipulation is.
First, a portfolio manager might trade some of client A's shares for some of client B's
shares directly, which is intended to reduce transaction fees and taxes. This is
completely fine and can even be done without notifying the clients (assuming the
securities are appropriate for each client).
Second, a market maker such as an exchange can promise a minimum level of liquidity
in, say, a new derivative product, which is done to give investors confidence that they
can sell it if they no longer want to hold it. This practice sounds fishy, but it not actually
a violation IF investors are told that this artificial liquidity is being done and when it will
stop.
Members and Candidates have a duty of loyalty to their clients and must act with reasonable care and
exercise prudent judgment. They must act for the benefit of their clients and place their clients interests
before their employers or their own interests.
Good question. For portfolio managers who work with individual investors, each one is a client.
However, if you manage a pension fund or trust, the client is the beneficiary - NOT the person
who originally hired you.
If you manage a trust designed to benefit multiple generations, you may not place the interests
of current beneficiaries over those of future beneficiaries (or vice versa).
If you work for a publicly-traded company, the shareholders are your client.
It is always a good idea to think of the entire investment community as being your client, in the
sense that you don't want to cause widespread damage by, say, manipulating markets (Standard
2b).
For exam purposes, the client is likely to be an individual or institutional investor, but, as
noted above, even in these relatively straightforward cases, you may need to take a
second to think about who the "client" actually is
If you follow the procedures outlined in SS4 (for individual clients) and SS5 (for institutional
clients), you will not be in violation of this Standard
Brokers keep offering me free stuff, which is great, but this seems unethical.
You will need to use the services of a broker in order to execute the asset allocation that you
and your client have agreed and you are obligated to
seek out the broker that offers "best price" and "best execution" (See 39n)
Brokers will compete for you business and may make you an offer along the lines of: "If you do
your trading business with me, I will give you..."
Stop right there. This sounds shady, but we do not yet know if a violation has occurred until we
learn whether this gift (or "soft commission") benefits the client. Some possible endings include:
The one exception to this rule is if the client orders you to direct all trades through a certain
broker ("directed brokerage"), but you need to remind them that this broker may not be
providing either best price or best execution.
I get all these notices to vote proxies on behalf of my clients. Do I need to learn about each one of
them, decide what is in the best interests of each client, and vote
accordingly?
But, you do have a duty to vote proxies "in an informed and responsible manner," so you can't
just vote without thinking or blindly take management's side
And your firm should have guidelines on proxy voting and disclose them to clients
Also, you can skip out on a really important vote
However, if you do a "cost-benefit analysis" and determine it is not in your client's interest to
vote on a particular matter (especially if it's routine), you don't have to vote - but this should be
done according to the proxy voting policies noted abvove
When the client is an individual or institution (as opposed to your company's shareholders, or
the overall market), the key to conforming with this Standard is the IPS.
Before taking any action for a client's account, make sure that it is consistent with what is
written in the IPS.
When you are answering any ethics question you should be asking yourself the following
question: "How does any of this affect the client? Has anything happened that goes against the
client's interests?"
The legal term for this is fiduciary duty, but it might be easier to use the following metaphor:
Think of the client as being a helpless kitten who has lost its mother and comes to you seeking
food, shelter and love. You are not allowed to let anything bad happen to this helpless kitten.
Members and Candidates must deal fairly and objectively with all clients.
I don't particularly care for some of my clients. Am I allowed to treat them unfairly?
No.
Could I, for example, not send them any investment recommendation until after I have sent them to
all my other clients?
No. Investment recommendations must be distributed to all clients "in such a manner that all
clients have a fair opportunity to act on every recommendation."
However, this does not mean that you wait for every client to open their mail (assuming this is
the method of communication they have chosen) before trading for clients with e-mail.
Also, if a client places an order that goes against the most recent recommendation, you have to
advise them of this before accepting the order.
Fine, but do I have to give them a cut of any IPO shares that I get my hands on?
Yes, you do. Or, at least, you do if those shares fit within the objectives and constraints of their
IPS.
And, if the IPO is oversubscribed, you need to allocate the shares you do get pro rata based on
each client's order size.
And, you need to disclose your firm's policies on how IPO shares are allocated to all clients and
prospective clients (whether you like them or not).
Is pro rata Latin for "the clients get what's left over after I get all the shares that I want"?
No. Technically, it might be okay for you to buy IPO shares for your personal account if there are
any left after all of your clients and your firm get all the shares that they want, but I cannot
image the correct answer to a CFA ethics question involving a member or candidate obtaining
shares in a "hot" IPO without any violations having occurred. Can you?
As I said, you have to disclose your firm's Trade Allocation Procedures to all clients and
prospective clients, which means that these procedures need to exist in the first place.
You are allowed to offer higher levels of service to clients willing to pay an additional fee, but
these service levels and fees need to be disclosed.
I'm getting the impression that CFAI is big on disclosing stuff to clients.
You're right, but they are also big on disclosing "stuff" to prospective clients.
Again, I think it's much more important for exam purposes to focus on what individuals should
do about complying with the Standards, but there are a number of steps that a firm can take in
order to reduce the likelihood of its employees committing a violation. It all starts with the
moment an analyst make the decision to issue a change to their previous investment
recommendation.
Above all, there should be established rules to govern people's actions during these
situations.
The amount time between when the analyst makes such a decision to when this
information is released should be as short as possible.
The number of people who know about this decision (and therefore have the
opportunity to leak this information) should be limited.
An effort should be made to ensure that recommendations are distributed to all clients
at the same time.
Keep a list of all clients and their holdings (as if it would be remotely appropriate not to
keep this information in the first place) so that it is possible to react quickly to new
recommendations.
S3C Part 1) When Members and Candidates are in an advisory relationship with a client, they must:
- Make a reasonable inquiry into a clients or prospective clients investment experience, risk and return
objectives, and financial constraints prior to making any investment recommendation or taking
investment action, and must reassess and update this information regularly.
- Determine that an investment is suitable to the clients financial situation and consistent with the
clients written objectives, mandates, and constraints before making an investment recommendation or
taking investment action.
- Judge the suitability of investments in the context of the clients total portfolio.
S3C Part 2) When Members and Candidates are responsible for managing a portfolio to a specific
mandate, strategy, or style, they must make only investment recommendations or take investment
actions that are consistent with the stated objectives and constraints of the portfolio.
There are a LOT of words in this Standard. It's going to take forever to understand it, right?
No, it can basically be summed up by saying: Do the readings in SS4 and SS5 on Investment
Policy Statements. Work with your client to write an IPS and then stick to it. Meet with the client
regularly to discuss it and make changes as appropriate.
But, if you know your IPS material, there is nothing new in this Standard.
So, what should I do to avoid violating this Standard?
Also, it features prominently in the River City Pension Fund Case in 3b2.
It should. SS17 is about measuring portfolio performance and SS18 is about GIPS, or the Global
Investment Performance Standards.
So, I can probably learn everything that I need to know about this Standard by doing those readings?
Yes.
But isn't GIPS voluntary? Can't I follow this Standard without taking part in GIPS?
Members and Candidates must keep information about current, former, and prospective clients
confidential unless:
- The information concerns illegal activities on the part of the client or prospective client.
- Disclosure is required by law.
- The client or prospective client permits disclosure of the information.
As I mentioned in our discussion of Standard 3b, I don't particularly care for some of my clients. Am I
allowed to post their confidential information all over the Internet?
No.
Okay, I see how it might be "unethical" to disclose the confidential information of current clients. But
nothing's stopping me from doing this to ex-clients, right?
2. If CFAI requests this information as part of an investigation under the Professional Conduct
Program.
So there are exceptions to this rule. Can I post confidential client information on the Internet and say
that the law required me to do it?
No.
Are there any circumstances in which it would be okay for me to post confidential client information
on the Internet?
I'm not a lawyer, but I really can't imagine that this would ever be okay.
Alright, other than refraining from posting confidential client information on the Internet, what can I
do to avoid violating this Standard?
Ideally, your firm should have written policies and procedures to protect confidential
information - particularly when this information is in digital form.
You don't have to be an expert in data storage and management, but you do need to
"understand and follow" your firm's policies and procedures.
This is actually a good question. If you suspect that you client is doing something illegal, you
should talk to your firm's in-house counsel and follow their advice.
You are not yet at the stage of being legally required to disclose confidential client information
until a formal legal investigation is started.
In matters related to their employment, Members and Candidates must act for the benefit of their
employer and not deprive their employer of the advantage of their skills and abilities, divulge
confidential information, or otherwise cause harm to their employer.
Does my employer have any responsibilities to me?
Yes. Lots.
There are many examples in the the ethics curriculum where it is recommended that employers
develop guidelines, policies, procedures, etc. Following those is a good place to start.
Also, you are not allowed to deprive you employer of your best efforts, which means that you
are not allowed to be a slacker.
As mentioned in the discussion of Standard 3a, your first responsibility is always to the client. However,
your responsibility to your employer comes a close second. The curriculum isn't exactly biased, but it is
pretty employer-friendly.
For example, there is a grudging acknowledgement that Whistleblowing may be necessary under certain
rare circumstances. The authors feel compelled to point out that this sort of insubordinate action is
only permissible "if the intent is clearly aimed at protecting clients or the integrity of the market, not for
personal gain."
So, for exam purposes, it is not a bad idea to err on the side of the employer.
This Standard won't stop you from doing that, but it does require you to follow certain rules if
you do (and it's paid work).
You have to inform your employer of exactly what you plan to do, how long you plan to do it,
and how much you plan to charge for your services.
Plus, you can't do any extra work until your employer consents. This point is dealt with in
Standard 4b.
That seems onerous. I think I'm going to quit and start my own firm. Then I wouldn't have to follow
any of their "rules," right?
Not exactly.
You can give notice that you'll be leaving, but you still need to follow the rules during your
notice period.
While you are allowed to do the administrative work involved in setting up your own firm, you
are not allowed to actually practice until you are no longer an employee of your current firm.
So, I give my notice and I still have to keep coming into work, but at least I get to solicit their clients to
move over to my new firm, right?
No, at least not until you are no longer working there (and this isn't prohibited by any kind of
non-compete agreement that you may have signed).
No.
Can I at least take the work that I did while I was working there?
What can I do to avoid violating this Standard? And don't say that I have to be aware of the firm's
policies with respect to blah, blah, blah, because I'm getting tired of you saying that.
You need to know and conform to the firm's policy on employees competing with them.
You also need to know the firm's policies related to the termination period between when you
either quit or get fired and when you actually stop working for the firm.
Not as far as CFAI is concerned. You still need to live by the Standards, but your firm might have
different policies for employees compared to contractors.
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.
Not much is written about this Standard and there are only three examples given in the curriculum.
Does that mean that it isn't important?
Well, every in the CFA curriculum is important (especially the Ethics material). But this Standard
seems to exist in case there is any gap between Standards 4a (ie. don't compete with your
employer) and 6a (ie. disclose any conflicts).
1. You have to get written consent from your employer before you can accept any compensation
for any work you do other than the work you do for them.
In a word: everything.
An investor offered me a fat bonus if I beat the index, can I accept it?
Actually, this is probably the one kind of gift that you are technically allowed to accept, because
you're assumed to be working in the client's interests, so there's no conflict.
HOWEVER, you cannot accept this until you getwritten permission from your employer.
Members and Candidates must make reasonable efforts to detect and prevent violations of applicable
laws, rules, regulations, and the Code and Standards by anyone subject to their supervision or authority.
When you think about this Standard, the first words that come into your head should be "detect" and
"prevent."
Another important point about this Standard is that, if you are asked to be a supervisor but do not
believe that you firm has adequate compliance procedures (ie. they don't conform to the Standards),
you should decline in writing until such time as adequate compliance procedures are adopted.
I really like all the extra money I get for being a supervisor, but I'm not crazy about the responsibilities
that come with the job. Can I make someone else do that?
You are allowed to delegate authority - particularly if you oversee a large number of employees.
But you can't delegate the responsibility. Ultimately, you are responsible for the actions of the
people you supervise.
My role model as a supervisor is David Brent. I'm not a boss, I'm a friend and I let my friends do
whatever they need to do in order to get the job done - or not - the important thing is that they get to
do what they want.
That's a really bad idea and I strongly urge you to take up a different managerial style.
Specifically?
Not really.It's about ensuring that all employees under your supervision are adhering to all
relevant laws, regulations, firm policies, and the Standards.
It's not too complicated, just make sure that you have written procedures for complying with all
of these and meet regularly with employees to review their compliance.
So, I hand out copies of all the rules and regulations and laws that my employees have to follow and
sit back and wait for them to come tell me when they've violated any of them?
No. You have to take proactive steps to prevent and detect violations.
During your investigation, it may be necessary to limit the suspected employee's activities.
Since this Standard more or less assumes that adequate compliance procedures exist (or at least
describes what to do if they don't), there isn't much to recommend other than comply with the
compliance procedures.
S5a Investment Analysis, Recommendations, and Action: Diligence and Reasonable Basis
As mentioned, there is no hard-and-fast rule about what constitutes either "diligence" or "reasonable
basis," so it is usually pretty evident when this Standard has been violated.
One of the examples in the curriculum discusses an analyst who needs is up against a deadline and
"creates a report based on a few news articles and what the conventional wisdom of the markets has
deemed 'hot' that day." So, pretty clearly not a reasonable basis for an investment recommendation.
In another example, a CIO see that returns for his fund's real estate investments were "in line with the
fund's benchmark" but not extraordinary. His friend, who has recently started an asset management
firm, is hoping to get some business managing the fund's real estate portfolio. The CIO "decides to help
out his old friend..." and hires him without telling anybody. Is this a "sufficient due diligence"? Obviously
not.
This Standard does not require you to analyze every microscopic detail that could possible
influence an investments' performance.
However, you must "make reasonable efforts to cover all pertinent issues when arriving at a
recommendation."
You are also strongly urged to keep detailed records (see Standard 5c) in the event that you are
later asked to justify why you make a particular recommendation.
There is no checklist for compliance (ie. you can't just say "Well, I looked into these six things, so
I've complied.")
You are definitely allowed to use second and third-party research when doing analysis in
advance of making an investment recommendation.
Of course, you are not allowed to pass it off as being your own original work (see Standard 1c)
But if you ever begin to suspect that a source "lacks a sound basis," you must stop using it.
Finally, if your firm has selected the information sources that you get to access, you are allowed
to trust their judgement.
You don't have to be a technical expert in modelling, but you do need to talk to your clients
about "the importance of the quantitative research and how the results were used in the
decision-making process."
Note: This section was added post-2008, so it's probably important to point out that
quantitative models can be flawed, but there is no real guidance here
There's nothing much here beyond the need to ensure that your firm has "standardized criteria
for reviewing external advisers."
If you working with a group to write a report and you disagree with the consensus finding, it is
tempting to think that you are obligated to remove your name from the resulting report.
However, you only have to do this if you believe that the group failed to demonstrate diligence
and a reasonable basis.
If they did demonstrate these, it is acceptable to keep your name on the report.
There isn't much that you can do as an individual beyond "encourage your firm to consider" the
policies and procedures listed below (and, of course, follow them).
Develop "measurable criteria" for assessing outside service providers and third-party
research
Is there a hard-and-fast rule or checklist approach for compliance with this Standard?
Not really.
This is yet another example of a Standard that lists maintaining adequate records (seeStandard 5c) as
the main recommendation for compliance.
As with Standard 5a, you need to maintain adequate records in case the client requests more
information, or you need to defend a particular recommendation.
The objective is for you to employ "clear, frequent, and thorough communication practices."
This is another example of the "give the client all the possible information and let them make up
their own mind" theme.
This Standard also covers every sort of communication - even if it's just a single word (ie. "buy"
or "sell").
Does that sound like something you would be allowed to not do?
Clients and prospective clients need to be made aware of "the manner in which the member or
candidate conducts the investment decision-making process."
You don't have to give them every single detail, but you clients must be able to "thoroughly"
understand what they are being asked to invest in.
Also, and this could easily be tested on the exam, youmust inform clients if there are any
changes to the investment decision-making process or - especially - if there is a change in
investment style or mandate.
When writing reports and recommendations, you need to apply a consistent methodology
You should also point out any methodological shortcomings and risks inherent in your analysis
You are allowed to "emphasize certain areas, touch briefly on others, and omit certain aspects
deemed unimportant."
Beyond the obvious of stating an opinion as if it were fact, you can violate this Standard by
"failing to identify the limits of statistically developed projections"
Be on the lookout for wording that suggests something is an opinion (that later gets stated as a
fact).
One of the examples in the curriculum discusses a mining analyst who performs "his own
assessment of the geological extent of mineral reserves..." and later writes a recommendation
that starts with "Based on the fact that..."
Members and Candidates must develop and maintain appropriate records to support their investment
analysis, recommendations, actions, and other investment-related communications with clients and
prospective clients.
Does that sound like something you would be allowed to not do?
It is incredibly important to "paper your files" by keeping detailed records and documenting how
you arrived at decisions.
As we learned in Standard 4a, records that you maintain while at a firm are the property of that
employer and may not be taken with you should you move to another employer (unless you
receive written consent from your former employer).
As we learned in Standard 1a, in the event that local record retention requirements are less
strict than this Standard, it is necessary to conform to this Standard.
1) Make full and fair disclosure of all matters that could reasonably be expected to impair their
independence and objectivity or interfere with respective duties to their clients, prospective clients, and
employer.
2) Ensure that such disclosures are prominent, are delivered in plain language, and communicate the
relevant information effectively.
Yes.
In fact, you are also required to disclose anything that might have the appearance of being a
conflict.
It is not unusual for conflicts (or potential conflicts) to exist, so the best advice is to disclose
them and allow clients, potential clients, employers and everybody else to make up their own
mind about whether they think you can be trusted.
However, there is no hard-and-fast rule about disclosure - you need to exercise your own
judgement on a case-by-case basis
The most obvious example is the need to disclose any ownership (direct or beneficial) that you
have in a security about which you are making a recommendation.
It is recommended that firms disclose their compensation structure to clients and potential
clients - particularly with respect to options.
Investment transactions for clients and employers must have priority over investment transactions in
which a Member or Candidate is the beneficial owner.
"Priority of Transactions"? I'm guessing this means that the client's trades have to happen before
mine.
As discussed in the context of Standard 6a, you are not expected to be free of conflicts (real or
apparent), but you are expected to manage them in a professional manner.
You are obviously allow to make trades for your own personal benefit as long as in doing so you
do not disadvantage a client, benefit personally from trades made on behalf of the client, or
break any laws or regulations.
Similarly, you are allowed to have investments and make trades for personal gain, as long it
doesn't hurt the client's interests.
There is nothing in this section of the reading that goes beyond what appears in Standard 2a.
You are not allowed to convey any nonpublic information that you are in possession of until it
becomes public.
Can I avoid the rules by claiming that you didn't benefit from some activity because all of the profits
were deposited into your wife's account.
No.
So I should always discriminate against my family members when placing trade orders?
No.
It is wrong to discriminate against anyone in an attempt to appear unbiased.
Just treat your clients who are family members like you treat your clients who aren't family
members.
As discussed in the context of Standard 3b, the whole idea of personally investing in IPOs is best
avoided altogether.
While not a violation, there is nothing in the curriculum that encourages you to participate in
IPOs.
Yes.
In order to prevent personal trades before client trades (aka. "front-running"), firms should
establish blackout or restricted periods when employees are prevented from trading in certain
securities.
However, it is left to each firm to decide how they want to do this (if at all).
This is another should recommendation, so there is no requirement, but firms are encouraged
to:
Members and Candidates must disclose to their employer, clients, and prospective clients, as
appropriate, any compensation, consideration, or benefit received by, or paid to, others for the
recommendation of products or services.
My colleague and I refer clients to each other all the time. Is this a violation?
Does money (or some other consideration) change hands as a result of these referrals?
No.
Well, such arrangements are still allowed under this Standard. However, you are required to
disclose this arrangement to your employer (remember Standard 4b), and any clients or
potential clients.
These are examples of "consideration" and therefore this arrangement must be disclosed, just
as if it was a cash-based arrangement.
But my referral arrangement is with someone in my own firm, not someone from an outside firm.
Whether the referral arrangement is in-house or with an outside service provider makes no
difference under this Standard. If it's a referral arrangement, it must be disclosed.
I get a bonus if I bring new clients into the firm. Does that have to be disclosed?
Actually, no. There is no need to disclose any bonus or other compensation that is given for
bringing new clients into the firm (although disclosing such arrangements wouldn't be frowned
upon).
Members and Candidates must not engage in any conduct that compromises the reputation or integrity
of CFA Institute or the CFA designation, or the integrity, validity, or security of the CFA examinations.
Yes. A lot.
Think of the CFA brand as being like your family's good name - so many before you have given so
much to make it what it is today, so don't go and ruin everything that they worked for.
No.
No.
The first rule of the CFA exam is "Don't talk about the CFA exam."
When referring to CFA Institute, CFA Institute membership, the CFA designation, or candidacy in the CFA
Program, Members and Candidates must not misrepresent or exaggerate the meaning or implications of
membership in CFA Institute, holding the CFA designation, or candidacy in the CFA Program.
Are there a bunch of really specific rules about how I can use the letters "CFA"?
Yes. For example: CFA is not a noun. You will never be "a CFA", you may one day be a "CFA
Charterholder"
If you do earn the right to call yourself a CFA Charterholder and you wish to continue doing so,
you need to keep your membership current, which involves paying your dues and completing a
Professional Conduct Statement (remember theProfessional Conduct Program?) every year.
No.
Then, no.
The CFA trademark can only be associated with individual charterholders, NOT with a firm.
Can I imply that the CFA charter gives me super investing powers?
Maybe?
Wrong. You are not allowed to imply that the CFA charter (if and when you get it) gives you
super investing powers.
Does that sound like something you would be banned from doing?
Maybe?
Since I've already passed the Level 2 exam, can I call myself a CFA (Level 2)?
Unfortunately not.
There is no partial designation, so you're either going to pass this exam or end up with no letters
after your name.
Can I can't make the letters CFA more prominent than my name or anything else on my business card,
letterhead, e-mail signature, etc.?
Are you sure that you passed the Level 1 and Level 2 exams? No.