Professional Documents
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© EduPristine CFA -Level – I (Ethics)
Mapping to Curriculum
Reading 1 & 2: Standards for Professional Conduct
Reading 3 & 4: Global Investment Performance Standard
Institutional
Buy-Side Analyst Sell-Side Analyst Company
Investor
Possibly same entity
Retail investor
Retail investor
No direct connect
Investor Investor
Investment Company
Investor Investor Banker
Needs capital
Investor Investor
Network of investors
Understanding of the above three situations is extremely important to put yourself into the
shoes of the decision maker and answer the question correctly in exam
The PCP is applicable on all the Members of the CFA institute as well as CFA candidates
(henceforth referred to as accused).
If a disciplinary sanction has been issued against the accused then the accused can accept or reject
the sanction.
If Sanction has been rejected by the accused, the matter will be referred to the panel of CFA
institute members for a hearing.
Ethical practices by investment professionals benefit all market participants and stakeholders and
lead to increased investor confidence in global capital markets.
Clients are reassured that the investment professionals they hire have client’s best interest in mind
and investment professionals benefit from the goodwill generated.
Ethical practices instill a public trust in the fairness of markets, allowing them to function efficiently.
3. Do practice examples.
I Professionalism
A
B
C
D
II Integrity of Capital Markets
A All the above standards apply to
B
III Duties to Clients members and candidates of CFA
A
B Institute. In the following slides only
C
D the term “member” will be used but
E
IV Duties to Employers all the standards apply to the
A
B candidates as well
C
V Investment Analysis, Recommendations and Actions
A
B
C
VI Conflicts of Interest
A
B
C
VII Responsibilities as a CFA Institute Member or CFA candidate
A
B
B. Independence and Objectivity. 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 another’s independence and
objectivity.
C. Misrepresentation. Members and candidates must not knowingly make any misrepresentations
relating to investment analysis, recommendations, actions, or other professional activities.
D. Misconduct. Members and candidates must not engage in any professional conduct involving
dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional
reputation, integrity, or competence.
B. Market Manipulation. Members and candidates must not engage in practices that distort prices
or artificially inflate trading volume with the intent to mislead market participants.
Remarks
Material Non-public Not Allowed to Used
Material Public Allowed
Non-material Public Allowed
Non-material Non-public Allowed
E. Preservation of Confidentiality. Members and candidates must keep information about current,
former, and prospective clients confidential unless:
1. The information concerns illegal activities on the part of the client or prospective client,
2. Disclosure is required by law, or
3. The client or prospective client permits disclosure of the information.
B. Additional Compensation Arrangements. 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 employer’s interest unless they obtain written consent
from all parties involved.
B. Priority of Transactions. Investment transactions for clients and employers must have priority
over investment transactions in which a member or candidate is the beneficial owner.
C. Referral Fees. Members and candidates must disclose to their employer, clients, and prospective
clients, as appropriate, any compensation, consideration, or benefit received from, or paid to,
others for the recommendation of products or services.
B. Reference to CFA Institute, the CFA Designation, and the CFA Program:
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.
Comment :
Nic must comply with the most strict laws and regulation among US corporate laws, CFA Institute
Standards and the laws of the United Kingdom.
United States > CFA Institute Standards > United Kingdom
Since his area of work is the country where participation in IPOs for personal accounts is strictly
prohibited. He must not participate in the IPO for his personal account, however he can recommend
the IPO to his clients.
Comment:
Jones Smith should report the problem to his supervisor. If the statements are not fixed by the firm
he should disassociate himself from the underwriting and seek legal advice for additional reporting
requirements.
Is
No the activity is Yes
unethical/illegal
Report to
No action required
supervisor
Does he
No takes actions Yes
Dissociate
“OK”
your name
Does your
No employer allows Yes
Disclaimer: The dollar value of acceptable gifts is not given in the text book. However, gifts
should be disclosed to your supervisor irrespective of its cost.
Comment :
The Standard I B has not been violated here as the gift given by the client is not based on the
performance going forward and also the gift has been disclosed to the employer. If the gift was
contingent on future performance then the fund manager had to take permission from the employer
as the employer need to ensure that the manager doesn’t give any advantage to the client as
compared to other clients.
Comment:
The Standard I B has been violated here since the compensation depends on the reports
conclusion. Flat fees as compensation for issuer paid research is permitted with proper disclosure.
The analyst needs to disclose that the research is paid by the subject company. If the analyst fails to
disclose the agreement or enters into a contract based on the number of investors that he can
attract for the company then he is in violation of the CFA Standard of Professional Conduct.
Comment 1:
This is a violation of Standard I C. Matt is plagiarizing the reports and to comply with the standards
he should inform the clients that the research report is not an in house report but rather a third
party report from a large investment firm.
Comment 2:
Joe has clearly violated the standards relating to misrepresentation of information. He has knowingly
distributed the document that misrepresents his qualifications. By creating a wrong picture about his
credentials Joe is misleading his potential clients. As a CFA Candidate and member of the program
Joe must set very high standards and ensure that there is full disclosure of his true academic
credentials.
CFA Institute discourages any sort of unethical behavior by member but the Codes and Standards
are only limited to the professional lives of members.
Comment 2:
Generally Standard I D doesn’t cover legal transgression resulting from civil disobedience in support
of personal beliefs .So this is not a violation of the Standard.
Comment 1:
Lock has violated the standards as he has acted on material non public information. Unless the
information was made public through a press release Lock should not act or make any
recommendation on the information.
Example 2:
Bruce Wayne is a member of CFA Institute and has a friend who is an active investor, he tells Bruce
that based on his research Microsoft stock will be bought in huge amounts in the near future. Bruce
does his own research and purchases the stock.
Comment 2:
There is no violation since Bruce’s friend doesn’t have any inside information. This information is not
material as a reasonable investor would not want to know what Bruce’s friend thinks about a
particular stock.
Example 1:
Gloria Foster a member and a Level I candidate works in consort with a group of friends by posting
wrong information about a firm on the Internet. They spread the information through IRC chat, web
forums and other stock-tips related sites. The information is picked up by a number of shareholders
and creates panic in the market. This results in a lot of shareholders selling their stake. This results in
the price falling very drastically.
Comment 1:
This is a violation of Standard as it distort the prices of stock by misleading the market participants.
As a CFA Institute member Gloria is expected to maintain the highest levels of professionalism and
not resort to any kind of market manipulations.
Comment 1:
As a investment professional Neil should follow the highest ethical standards. After being allocated
5,000 shares he is supposed to allocate it among all the participating clients on a pro-rata basis. By
allocating it into his own account and that of related persons Neil has violated the standards relating
to fair dealing.
Example 2:
Mark Smith after considerable amount of investigation writes a research report and recommends
purchase for shares of small analytic firm. He calls his best client and tell him about the
recommendation, this recommendation has to be disseminated to the clients in the next week.
Comment 2:
The Standard has been violated, as Mark has disseminated the purchase recommendation to his best
client before the recommendation was sent to all clients. He has not dealt fairly with his clients.
2. When members and candidates are responsible for managing a portfolio to a specific mandate,
strategy, or style, they must only make investment recommendations or take investment actions
that are consistent with the stated objectives and constraints of the portfolio
Gather client information in the form of Investment Policy Statement (IPS).Consider clients needs,
circumstances and risk appetite.
If a particular mandate is to be followed then make sure the investments are consistent with the stated
mandate.
Comment 1:
The Standard has been violated, as Mark has not considered clients needs ,circumstances and risk
appetite before allocation shares to the client account.
Example 2:
David Kilde a member of the CFA Institute is a portfolio manager for a pension fund. The pension
fund has a mandate for investing in high quality debt investments that are rated AAA or in large-cap
stocks. David notices that the small-cap index has been outperforming the market for the last six-
months. He decides to invest a part of the portfolio in small-cap stocks. He argues that he will
liquidate the holdings within a two month period. This will allow him to show higher returns on his
portfolio.
Comment 2:
This is a violation of the standard. The pension fund mandate clearly states that investment is to be
made in only high quality debt instruments or in large-cap stocks. By investing in a portfolio of small-
cap stocks he is violating his mandate.
Comment 1:
Mark Zooberg is in violation of the Standard III D. He should have mention that 30% growth occurred
only once .Also by stating that you can expect a steady 30% growth, he has also violated Standard I C
which prohibits statement of assurances regarding an investment.
Example 2:
Steve Bastoni is preparing a brochure for his investment management firm. He reproduces the
results of a study that he had performed while in B-school. The study simulated the returns from an
ideal portfolio that will be selected using a proprietary model prepared by Steve. The brochure
claims that the results are actual ones and are the result of Steve’s experience in the investment
management industry.
Comment 2:
The Standard has been violated as the brochure gives a wrong impression of the results being actual
ones instead of being simulated.
You cannot disclose client information, even in the case where the client makes profits.
If you require to discuss the holdings of a client, that must be done on a no-name basis.
This standard extends to former clients as well.
This Standard is not intended to prevent members from cooperating with CFA Institute
Professional Conduct Program (PCP) investigation.
Members should avoid disclosing information about clients except to authorized co-workers who
also work for the same client.
Comment 1:
The member has violated the standard by disclosing the information about a client which he learned
in the course of business relationship.
Example 2:
David Crowe manages portfolio of James Trust, CEO of Real estate company. Crowe believes that
CEO is embezzling money from the corporation and putting it in his personal investment account.
Comment 2:
Crowe should check with his firm’s compliance department and also the outside counsel to
determine whether applicable regulation requires stating the CEO’s financial records.
E. Preservation of Confidentiality. Members and candidates must keep information about current,
former, and prospective clients confidential unless:
1. The information concerns illegal activities on the part of the client or prospective client,
2. Disclosure is required by law, or
3. The client or prospective client permits disclosure of the information.
Members may violate duty to one’s employer in order to protect clients interest or to protect the
integrity of the capital markets.
Comment:
Debby violated the Standard by failing to disclose to her employer the benefits (which may or may
not be monetary received in exchange for her services on the board of directors.
B. Additional Compensation Arrangements. 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 employer’s interest unless they obtain written consent
from all parties involved.
Comment 1:
The Standard has been violated, as using only the maximum production levels doesn’t provide a
reasonable basis for the purchase recommendation.
Example 2:
A member is an analyst in a small investment firm that bases its security recommendation on the
third party research that the firm buys.
Comment 2:
This is not a violation as long as the research the firm purchase meets the criteria of objectivity and
reasonability.
Facts are historical figures and Opinions are future projections made with sensitivity analysis.
Developing and maintaining proper communication is important for providing high quality financial
services.
This standard requires members to effectively distinguish between opinion and fact. Also members
must illustrate to the clients and prospective clients their investment decision making process.
All type of communications are included in the standard(oral, written, research report, background
reports etc).
Comment 1:
If Mac issues the report as written, he will violate Standard V(B). His calculation of the gold reserves
is an opinion and not a fact. Opinion must be distinguished from fact when writing a research
report.
Example 2:
A members firm changes to a new model for equity selection and doesn’t inform the clients about
the change.
Comment 2:
As there is a significant change in the investment process, it should be disclosed to the clients. By
not disclosing it to the clients the member and his firm has violated the Standard.
Members must maintain the research reports that supports the analyst conclusions and
investment actions. If no other regulatory standards are present that CFA Institute recommends
7 years as Holding Period.
This holding period is for a firm, and not its employees/candidates.
All these reports are property of the firm.
Comment :
The Standard has been violates as the document is investment related, so the information must be
retained for at least 7 years for future references.
I Professionalism
A
B
C
D
II Integrity of Capital Markets
A
B
III Duties to Clients
A
B
C
D
E
IV Duties to Employers
A
B
C
V Investment Analysis, Recommendations and Actions
A
B
C
VI Conflicts of Interest
A Disclosure of conflicts
B Priority of Transactions
C Referral Fees
VII Responsibilities as a CFA Institute Member or CFA candidate
A
B
Comment 1:
The Standard VI A regarding Disclosure of Conflicts has been violated. She must disclose her
additional compensation to her employer and clients whenever she recommends the stock. This is to
ensure that the client and employer can determine the extent to which additional compensation
might affect member’s objectivity. By disclosing the agreement Carrie ensures that there are no
conflict of interest and she has the clients best interest whenever she makes any recommendations.
Comment 2:
A member should disclose any interest in the stock that they are recommending. Since Larry’s wife
owns a significant number of stocks in TrixAm , he has a personal interest in the stock. To avoid any
potential conflicts the ideal situation would be that Larry avoid issuing any research reports on the
stock. However since he has released the report any subsequent reports should carry a full and fair
disclosure indicating his holdings in the company.
Clients
(and Family ONLY IF they are clients)
The priority of a
Family Member’s
The Firm Transaction depends
on whether they are
clients.
Self
(and Family if they are NOT clients)
Comment 1:
The Standard has been violated. The member is seeking to benefit personally at his employer and
clients expense. Also the Standard states the Interest of client and employer comes before the
member’s personal interest.
Example 2:
A member allows an employee who is a CFA candidate to continue his duty without signing the
required report of his personal trading activity. The employee has been purchasing securities for his
personal account before the purchase recommendation have been released by the firm.
Comment 2:
The employee has violated the Standard VI (B) by purchasing securities for his personal account
before the recommendation has been made public. Also the member has violated the Standard by
not fulfilling his role of supervisor and hence violated the Standard IV (C).
Members before entering into formal agreement must disclose to the clients or prospects any
benefits received or given for recommendation of any service by the member .Also disclose the
nature of benefit.
B. Priority of Transactions. Investment transactions for clients and employers must have priority
over investment transactions in which a member or candidate is the beneficial owner.
C. Referral Fees. Members and candidates must disclose to their employer, clients, and prospective
clients, as appropriate, any compensation, consideration, or benefit received from, or paid to,
others for the recommendation of products or services.
Comment 1:
Alex has violated the Standard by giving his friend an unfair advantage and thus compromising the
integrity of CFA examination.
Example 2:
A candidate keeps on writing on CFA level 3 exam even when the proctor at the Exam has asked to
stop writing.
Comment 2:
By taking extra time the candidate has gained an unfair advantage and thus violated the Standard.
Comment 1:
The Standard has been violated. It is permissible to state that their principals are CFA charterholders
who have passed the examination in the first attempt but to imply that because of that the firm has
achieved superior performance is a violation.
Example 2:
A member puts CFA logo on his business card, letterhead and the company letterhead.
Comment 2:
By putting the logo on company letterhead the member has violated the Standard. He can put the
logo on his personal business card and letterhead without violating the Standard.
B. Reference to CFA Institute, the CFA Designation, and the CFA Program:
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.
I Professionalism
A Knowledge of the law
B Independence and objectivity
C Misrepresentation
D Misconduct
II Integrity of Capital Markets
A Material non-public information
B Market Manipulation
III Duties to Clients
A Loyalty, Prudence and Care
B Fair dealing
C Suitability
D Performance Presentation
E Preservation of confidentiality
IV Duties to Employers
A Loyalty
B Additional Compensation Arrangements
C Responsibilities of supervisors
V Investment Analysis, Recommendations and Actions
A Diligence and Reasonable Basis
B Communication with clients and prospective clients
C Record Retention
VI Conflicts of Interest
A Disclosure of conflicts
B Priority of Transactions
C Referral Fees
VII Responsibilities as a CFA Institute Member or CFA candidate
A Conduct as Participants in CFA Institute programs
B Reference to CFA Institute, the CFA designation and the CFA Program
Comparing firms that were considered to be the epitome of ethical practices was also difficult
since there might be completely different methodologies that are used for calculating the results.
The determination of whether a portfolio will be included in a particular composite must be done
according to a pre-established criteria and not after the performance measurement.
• This is to done to ensure that there is no bias in the performance measurement.
2. After initial compliant performance presentation, one year of compliant performance must be
added each year to required performance history of ten years.
3. Along with #1 above, firms may present periods of noncompliant performance immediately prior
to the compliant performance history as long as noncompliant performance is presented for any
periods prior January 1, 2000
Firms must specify which performance results are noncompliant & the ways in which such (noncompliant)
performance does not comply with GIPS.
C. Claims of Compliance
1. A firm must use the following compliance statement to indicate its compliance with the GIPS standards –
"[Insert name of Firm] has prepared and presented this report in compliance with the Global Investment
Performance Standards ( GIPS®)“.
2. If a firm does not meet all the requirements, or a statement regarding the compliance of a calculation
methodology with GIPS or the performance of a single client as being in compliance is strictly prohibited.
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Verification for GIPS ® (like certification/ audit)
Requirements
Verification is performed by an independent third party to verify their claims of compliance.
Verification of compliance is voluntary.
Aspects to be verified:
1. Whether the investment firm has complied with all the composite construction requirements of GIPS on a
firm-wide basis (construction of composite is correct?).
2. Whether the firm’s processes and procedures are designed to calculate and present performance results in
compliance with the GIPS standards (presentation has been as per the Standard?).
3. Verification applies on the entire firm’s performance measurement practices & methods, not a selected
composite.
Recommendation
Firms are encouraged to pursue independent verification.
Verified firms should also include the following disclosure language:
“[Insert the name of the firm] has been verified for the periods [insert dates] by [name of verifier].
A copy of verification report is available upon request.”
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Case Study
Ted Elliot, CFA is discussing the GIPS standards with Keira Harris a CFA Level 1 candidate and an
analyst in his firm. Elliot’s investment management firm is planning to become compliant with the
GIPS standards he wants Keira to chalk out a strategy plan that the firm will use to become
compliant. Elliot states that a firm which wants to be in compliance with the GIPS standards must
comply with all the requirements given in the standards. It should maintain GIPS compliant
performance records for at least five years. If information is not available for that period, the
records should be compliant for the period for which the fund has been in existence. Keira
enquires whether they can state that a particular fund is in compliance with the standard. She
also states the following:
Statement 1: One of the key requirements of the GIPS standards is the aggregation of portfolios
that have been created with similar horizons into composites.
Statement 2: Another key requirement of the standard is the use of an independent third-party
for verifying the firm’s compliance with the GIPS standards.
Elliot states that there are required and some recommended provisions in the GIPS standards and
Keria must go back and study it more thoroughly. He also asks her to study the recommendations
regarding the firms fundamental responsibilities. He states that the firm cannot differentiate
between clients and all clients must receive the same GIPS compliant presentation.
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Case Study - Questions
1. Elliot states that a firm must be compliant with all the requirements of the standards to claim
GIPS-compliance. Also he makes a statement regarding the number of years for which the firm
should present compliant data. He is most likely
2. When Keira states that whether a fund can claim GIPS compliance for a particular fund, she is
most likely
A. Correct, since a firm can start by becoming compliant for a single fund
B. Incorrect, since the GIPS standards state that the fund should be in compliance with the standards for at
least five years before claiming compliance
C. Incorrect, since compliance is firm wide and not for a particular fund.
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Case Study - Questions
3. Regarding Keira’s first statement she is most likely
A. Incorrect, since a composite is an aggregation of portfolios belong to the same client
B. Incorrect, since a composite is an aggregation of portfolios with similar investment objectives or strategies
B. Incorrect, since verification by an independent verifier is a recommendation and not a required provision
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Case Study - Questions
5. A firm can provide discretionary services to its fee-based clients. The firm can also provide
different GIPS compliant presentations to different clients based on their asset-size. The
statement is most likely
A. Incorrect, since a firm should always provide the same presentation to all clients irrespective of their asset-
size
C. Correct, since it is the firm’s discretion to provide different level of disclosures depending on the clients
sophistication
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Case Study - Solution
1. A. A firm must be in compliance with all the provisions of the standards to claim to be in
compliance with the GIPS standards. Also a firm should at least provide GIPS compliant data for 5
years, if they are available or from the date of inception.
2. C. There should be firm-wide compliance of the standards for the investment management firm
to claim to be GIPS compliant. A firm is strictly prohibited from claiming GIPS compliant for a
single fund.
3. B. A composite is an aggregation of portfolios with similar investment objectives or strategies.
4. B. A firm is expected to comply with certain provisions to claim compliance. But verification by an
independent third party verifier is not a required provision.
5. A. A firm should not differentiate between clients and should always try to provide full and
complete disclosure.
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