ETHICS READING NOTES

1.ETHICS AND TRUST IN THE INVESTMENT PROFESSION

Ethics can be described as a set of moral principles and rules of conduct that provide guidance for our
behavior. Ethical principles can be described as societies’ beliefs about what is considered good or bad
conduct.
A code of ethics is a written set of moral principles that can guide behavior by describing what is
considered acceptable behavior. Standards of conduct serve as benchmarks for the minimally acceptable
behavior of community members. A professional code of conduct can increase public trust in the
profession.
A profession refers to a group of people with specialized skills and knowledge who serve others and agree
to behave in accordance with a code of ethics. A professional code of ethics is a way for a profession to
communicate to the public that its members will use their knowledge and skills to serve their clients in an
honest and ethical manner. The investment management profession and investment firms must be
interdependent to maintain trust.
There are following characteristics:
They provide a service to society, are client focused, encourage and facilitate continuing education,
monitor professional conduct to maintain integrity and reputation of an industry, are recognized oversight
bodies, encourage the engagement of members to develop expertise and ethics and to advance the
profession. A requirement to put client interests first and are required high standards of expertise,
knowledge, and skill.
Trust leads to smooth functioning and efficient capital markets, which in turn helps in the development of
the economy.
CFA charterholders and CFA Program candidates are required to “adhere to the Code and Standards and
to annually sign a statement attesting to that continued adherence”. Charterholders and candidates must
“maintain and improve their professional competence and strive to maintain and improve the competence
of other investment professionals”. Fostering public confidence and publicly communicating established
principles are both goals of the CFA Institute Code of Ethics.
Overestimating one’s morality: People often believe they are more ethical than they actually are. This
overconfidence can sometimes lead to faulty decision-making.
Situational influences: These are external factors such as cultural, social, and environmental factors that
influence one’s thinking, behavior, and decision-making. E.g. When an honest person allows the promise of
bonus to negatively influence her behavior. Decision of receiving a bonus can have disproportionate
influence on our decision making because it can cause us to focus on short term outcomes rather than long
term. This is situational influence which often cause people to not consider other important consideration
when making decisions. Situational influences in decision making will most likely be minimized if longer-
term consequences are considered.
Some of the common situational influences are:
Money and prestige: which can lead individuals to act in their own short-term interests, potentially
compromising ethics (e.g. bonus/promotion)
Loyalty to employer, employee, and colleagues: can be positive to encourage ethical growth, or negative,
leading to decisions that fall short of ethical standards.
Compliance culture: may limit ethical thinking by promoting a “check the box” approach, focusing on what
is allowed (What can I do?) rather than what is right (instead of “What should I do?).

Correct. The single most important factor in promoting ethical behavior within an investment firm is done
by the development, maintenance, and demonstration of a strong culture of integrity by the firm’s senior
management.
Ethical vs. Legal Standards:
Illegal and unethical:
Legal and ethical:
Illegal but ethical: civil disobedience & whistleblowing (Whistleblowing is raising the curtain off an illegal or
corrupt activity)
Legal and unethical: Recommending investment in a relative’s firm without disclosure may be legal, but
would be considered unethical. Trading while in possession of material nonpublic information.
Compared to complying with laws and regulations, complying with a code of ethics often involves more
judgment.

New laws and regulations can create opportunities for different unethical behavior. Encourage staff
retention with increased benefits is also unethical (demand for a higher-returns increases and the demand
for investments decreses). Unethical behavior ultimately harms investment firms. Clients are not attracted
if they suspect unethical behavior, leading to less business and lower revenues. Investment firms may also
experience higher relative costs because regulators are more likely to have cause to initiate costly
investigations.

Strong Ethical behavior: whistleblowing & corporate code of ethics helps to build strong ethical behavior.
Ethical conduct encourages us to: Go beyond what is legally required, Consider the impact on all
stakeholders to Make good choices, even in the absence of clear laws and regulations. Ethical conduct goes
beyond what is legally required
A compliance approach can oversimplify decision making.
Ethical Decision-Making Framework: An ethical decision-making framework helps decision makers to see
situations from multiple perspectives not just for personal perspectives and help decision makers to see
best course of action when alternatives are available. Employing a framework for decision-making that
includes the ethical aspects of the decision is most likely to balance the interests of various stakeholders.
The following ethical decision-making frameworks are:
Identification phase: The Identification Phase of ethical decision-making involves recognizing key elements
of a situation. This includes identifying relevant facts (e.g., employer details, deal or IPO info, applicable
rules), identifying stakeholders If you are seeking guidance from the firm’s code of ethics or written
policies, you are in the Consider phase of the ethical decision-making framework. This phase involves
taking time to consider the situation influences as well as personal behavioral biases that could affect your
thinking and decision making. During this phase, you may also seek guidance from such trusted sources as
the firm's compliance department or outside counsel. involved (such as clients, employers, investors, or
colleagues), and the ethical principles that apply—like client interests, loyalty, and confidentiality. It also
requires spotting potential conflicts of interest, such as between duties to different clients, personal
financial incentives, or pressure from supervisors versus ethical responsibilities.
Consideration phase: The Consideration Phase involves seeking guidance to overcome situational
influences and personal biases that may affect ethical judgment. These influences could include potential
fees, expected bonuses, or personal attachment to high-profile deals. Guidance can be sought from the
firm’s compliance department, peers, supervisors, or resources like the CFA Institute Code and Standards.
Decide and act: Make a decision and act.
Reflect: The Reflect Phase involves evaluating the outcome of the decision to determine if it achieved the
intended ethical result. If not, reflect on what went wrong—whether stakeholders were properly identified,
conflicts of interest were considered, ethical principles were applied, and if appropriate guidance was
sought to handle situational influences and personal biases.
The regulator only sets a legal standard when requiring a financial adviser to merely consider suitability
when making recommendations to their clients. Requiring advisers to act as fiduciaries would be setting
both a legal and an ethical standard; it would require the interests of the client to be above those of the
firm or employee.
When an ethical dilemma occurs, an investment professional should most likely first raise the issue with a
senior individual in the firm.

2 &3. CODE OF ETHICS AND STANDARDS OF PROFESSIONAL CONDUCT & GUIDANCE FOR STANDARDS I–
VII
All CFA Institute members and candidates enrolled in the CFA Program are required to comply with the
Code and Standards. The CFA Institute Board of Governors maintains oversight and responsibility for the
Professional Conduct Program (PCP).
Disciplinary Review Committee (DRC) works in conjunction with the PCP and is responsible for enforcement
of the Code and Standards.
Basic structure for enforcement of CFA PCP is Bylaws & Rule of Procedure.
Two principles of the Rules of Procedure for Proceedings Related to Professional Conduct are
confidentiality of proceedings and fair process to the member and candidate.
If application law is less strict than standards, we must follow the code & standards.
Ethical conducts are those actions that are perceived as Beneficial & confirming to ethical expectations of
society. Expectations of Ethical conduct cannot be stipulated in law.
Professional Conduct inquiries can be prompted by several reasons:
Professional Conduct inquiries can begin due to:
Self-disclosure of civil/criminal matters,
Written complaints to CFA Institute,
Public evidence (e.g., Received from Public sources/media coverage),
Exam-day violations reported by proctors, and
Post-exam monitoring (e.g., social media leaks).

Once an inquiry begins, the Professional Conduct staff investigates. If a violation is found, sanctions are
proposed—such as public censure, suspension, or revocation of the CFA charter. If the member or
candidate accepts the charges, the proposed sanction is directly applied, which can include serious
penalties like revocation. If they reject the charges or sanctions, the case is referred to the Disciplinary
Review Committee (DRC), which makes the final decision after reviewing all materials.
sanctions available to CFA Institute do not include monetary fines.

The Standards of Professional Conduct require members and candidates to promptly disclose any changes
that might materially affect investment processes.
6 Codes of Ethics: Members/candidates of CFA designation must:
1. Act with integrity, competence, diligence, and respect and in an ethical manner with the public, clients,
prospective clients, employers, employees, colleagues in the investment profession, and other participants
in the global capital markets.
2. Place the integrity of the investment profession and interests of clients above their own personal
interests.
3. Use reasonable care and exercise independent professional judgment when conducting investment
analysis, making investment recommendations, taking investment actions, and engaging in other
professional activities.
4. Practice and encourage others to practice in a professional and ethical manner that will reflect credit on
themselves and the profession.
5. Promote the integrity and viability of the global capital markets for the ultimate benefit of society.
6. Maintain and improve their professional competence and strive to maintain and improve the
competence of other investment professionals.

Interviewing with a competitor during lunch or taking clients out to lunch do not necessarily violate any
Standard unless specifically prohibited in company policies.

The Standards of Professional Conduct are:

1.Professionalism
Knowledge of the Law, Independence and Objectivity, Misrepresentation, Misconduct and Competence.
2.Integrity of Capital Markets
Material Nonpublic Information & Market Manipulation
3.Duties to Clients
Loyalty, Prudence, and Care, Fair Dealing, Suitability, Performance Presentation & Preservation of
Confidentiality
4.Duties to Employers
Loyalty, Additional Compensation Arrangements & Responsibilities of Supervisors
5.Investment Analysis, Recommendations, and Actions
Diligence and Reasonable Basis, Communication with Clients and Prospective Clients & Record Retention
6.Conflicts of Interest
Avoid or Disclose Conflicts, Priority of Transactions & Referral Fees
7.Responsibilities as a CFA Institute Member or CFA Candidate
Conduct as Participants in CFA Institute Programs & Reference to CFA Institute, the CFA Designation, and
the CFA Program
1. I. PROFESSIONALISM
A. Knowledge of the Law: Follow all applicable laws and regulations. When there's a conflict, follow the
stricter rule (Requirement to be licensed by capital market if not licensed then violation). Members and
Candidates must not knowingly participate or assist in and must dissociate from any violation of such
laws, rules, or regulations.
Keep employees informed of the changes in applicable laws, Periodically review firm’s written compliance
procedures, encourage employer to maintain, copies of current rules, and regulations, Seek the advice of
independent legal counsel if the compliance department was not helpful.

B. Independence and Objectivity: Use care and judgment to stay objective. Don’t give/accept gifts or
benefits that could compromise their own or another’s objectivity.

Negotiate Flat fee and disclose this relationship in his report, not required to disclose amount of
compensation. Members must strictly limit type of compensation they accept for conducting issuer-paid
research. Recommendation is to limit gifts, not to prohibit.
For issuer-paid services, prior to writing their report to negotiate flat fee for their work (no extra any
warrants, only flat fee), also prior approval of research report by covered company before they published.
(Companies who pay flat fee + warrant & obtain approval prior to publishing report is violation).
Members should pay for commercial transportation and hotel charges & place a covered company on
restricted list if firm unwilling to disseminate adverse opinion on company. Also prohibits employees from
receiving reimbursement from corporate issuers for air transportation even attending meeting at issuer’s
headquarter.
If commercial transportation is not available members can accept modestly arranged travel to participate
in appropriate info gathering events, such as property tours and trips strictly for Business and member not
accepting irrelevant hospitality.
Firm should appoint a senior officer to ensure compliance with the firm’s code of ethics.

C. Misrepresentation: Do not misrepresent facts in investment-related work/ must not knowingly make
any misrepresentation relating to investment activities.

Using the research report of another firm, and then redistributing it by changing the names. A research
report based on multiple sources of information without naming the sources. (unethical and violations)
Does not require that a benchmark always be provided in order to comply.
Creating a post on social media, knows that news will have positive impact (violation).
Presenting false information. (violation)
Disclose & cite the sources of their information, so client is not misled (failing to cite their work is
violation).
Preparation of research report based on multiple sources of information without acknowledgement
(violation)
Prohibits members for guaranteeing clients any specific return, like you will earn 8% return (misleading).
(Outperformance of the S&P 500 over 10-year period is violation), Investment likely to outperform over 1
year & with this product 100% principal protection, you will not lose money. (Both are not violations).
Members should encourage their employers to develop procedure for verifying info of third-party firm.
Firms can prevent misrepresentation by specifically designating which employees are authorized to speak
 on behalf of the firm.
Firms can assist members compliance by periodically reviewing employer correspondence & documents
contain representation of individual/firm qualifications.
Members may use research conducting/models developed by others within the same firm without
committing violation.
Firm may issue future reports without providing attribution to prior analysts.
Members must disclose their intended use of external managers and must not represent those manager’s
investment practices as their own.

D. Misconduct: No dishonest, fraudulent, or deceitful behavior. Don’t engage in any actions that harm your
professional reputation. (lying, cheating, stealing, or other dishonest conduct).

Stating he had obtained MBA degree in fact he had not (violation).

Personal Bankruptcy (not violation). If Bankruptcy is fraudulent (then Violation).
Allocating for her personal account shares from an oversubscribed IPO reflects poorly on member’s
personal integrity (violation).
Members can check reference of employees to ensure they are of good characters & encourage firm to
disseminate/communicate to all employees list of potential violations by investment personal and
associated disciplinary sanctions imposed by the firm.
Misconduct addresses all conducts that reflects poorly on professional integrity, good reputation or
competence of members, standard does not address all actions in member’s private lives.
Getting arrested for participating in non-violent protest during holiday weekend in country where such
protests considered act of civil disobedience (not violation). Such conduct does not reflect poorly on
member’s professional reputation, integrity.

E. Competence: Must have sufficient knowledge, skills, and abilities to work in a specific role with success.
Members are recommended to:
Participate in continuing education, professional development, or employer-provided training.
Acquire professional designations.
Attend relevant seminars or conferences.
Participate in professional organizations.
Engage in informal self-study.
Acquire new skills or knowledge, as necessary, when their professional responsibilities change

2. II. INTEGRITY OF CAPITAL MARKETS

A. Material Nonpublic Information:

• Do not act or cause others to act on material nonpublic information.

• As per the Mosaic theory, an Analyst can use material public information and nonmaterial
nonpublic information in the analyst’s analysis.
• Acquiring controlling position in an underlying asset based on market rumors that stock will be part
of a buyback is not a violation.
• Overhearing a company’s tender offer and acting on it is a violation.
• Making optimistic projections that induce trading by other market participants is a violation.
 • Taking an aggressive position in a security to exploit market inefficiencies is not a violation (If non-
public information is used, then it is a violation).
• If a member shares a recommendation with all firm clients and there is no evidence of insider info
in the report, it is not a violation.
• Gathering info from experts not connected to XLK about XLK’s project viability is not a violation; the
info is not material. There is no violation for using nonpublic info that is not material or for not
making a recommendation public.
• If discussed changes are unlikely to affect investment perception of a bank, members can use the
info when making investment recommendations.
• Firewalls and personal trading limitations are widely used approaches to prevent trading on
material non-public information.

B. Market Manipulation:

• Must not engage in practices that distort prices or artificially inflate trading volume with the intent
to mislead market participants.
• Members must uphold market integrity by prohibiting market manipulation.
• Posting on social media knowing it will positively impact stock price is a violation (also
misrepresentation).
• Spreading false rumors to induce trading by others is a violation.
• Issuing overly optimistic projections to induce trading is a violation.
• Members can earn arbitrage profits legally. Buying large quantities of securities in one market and
creating a dominant short position in derivatives in another to exploit price differences is not a
violation, as long as there's no intent to manipulate prices.
• Acquiring dominant positions in both futures contracts and underlying assets to exploit mispricing
between the two is not a violation.
• Acquiring a dominant position in a derivative to exploit (but not control) the price of the related
underlying is transaction-based manipulation.
• Taking aggressive positions to exploit market inefficiencies for personal trades is not a violation.
• Selling a small holding of a stock for profit, even if aware that the transaction could significantly
impact the price, is not a violation, unless the intent is to mislead.
• Places both buy and sell orders of a stock at the same price to increase trading volume.

3. III. DUTIES TO CLIENTS

A. Loyalty, Prudence, and Care:

• Always act in the client’s best interest, with prudence, loyalty, and care.
• Client interest comes before employer's or personal interest.
• Even if no legal fiduciary duty, members must still uphold high ethical responsibility.
• Duty of loyalty is owed to the ultimate beneficiaries, e.g., pension plan participants, not the
sponsoring company.
• Soft dollars/commissions must be used only if they benefit the client.
 • Avoid soft dollar arrangements that do not provide direct benefit to the client.

Proxy Voting:

• Vote proxies in an informed, responsible manner in the client’s best interest.

• Not all proxies need to be voted — follow cost-benefit analysis.
• Cannot automatically vote with management without evaluating the proposal.
• Proxy voting policies should be disclosed upon request.
• Disclose any changes to proxy policies.

Other Responsibilities:

• Submit client statements at least quarterly.

• If unsure about action, discuss in writing with client and obtain approval.
• Make investment decisions in context of total portfolio, not in isolation.
• Establish client objectives: return goals, risk tolerance, experience, constraints.
• Disclose compensation arrangements.
• Maintain client confidentiality at all times.

B. Fair Dealing:

• Deal fairly and impartially with all clients.

• Establish systematic account review procedures.
• Cannot selectively offer different service levels to prospective clients. (Violation)
• Can provide premium services to clients who pay higher fees, but must disclose availability to all
clients.
• Offering premium services only to selected clients without informing all. (Violation)
• Must ensure all clients receive recommendations simultaneously and can fairly act on them.
• Cannot exclude sister’s fee-paying account from recommendations. (Otherwise, Violation)
• When trade quantity is short, reduce each client’s allocation proportionally (pro rata or weighted
basis).
o Example: If 100,000 shares ordered but only 50,000 received, reduce each client’s allocation
accordingly.
• All client accounts in a block trade must receive same execution price and commission.
• Trade allocation procedures must be disclosed to clients.

C. Suitability:

• Members are required to determine the suitability of the fund for the investor.
• Sell-side analysts and members executing instructions are not responsible for suitability analysis.
• Required to invest in a manner consistent with the stated mandate of the fund.
• Advisory role: Understand client goals, constraints, and experience before recommending suitable
investments.
 • Managing to a mandate: Make investment recommendations that align with portfolio objectives
and constraints.
• Client financial constraints must be documented before the initial investment action.
• Suitability should be judged in the context of the client’s total portfolio.
• Must measure client’s risk tolerance to match investment suitability and appropriateness.
• IPS (Investment Policy Statement) must be updated regularly (at least annually) to reflect changing
conditions and expectations.
• If a client requests a trade that deviates from the IPS, do not proceed until discussing with and
educating the client.
• Both individual and institutional investors must have an IPS.
• Investment advisors—not clients—must determine suitable investments using personal data (e.g.,
age, occupation).
• Information such as return requirement should be included in the written IPS.
• Violation: If a client approved the purchase of only one below-investment-grade bond, but the
portfolio manager purchased several additional such bonds without approval, it is a violation.

D. Performance Presentation:

• Present performance fairly, accurately, and completely.

• Avoid misstating performance or misleading clients.
• Should not state that past performance will be replicated.
• For brief presentations, detailed information must be available on request.
• Encourage firms to adhere to Global Investment Performance Standards (but this is not a
requirement).
• Consider the sophistication of the audience when presenting performance.
• Present the performance of a weighted composite of similar portfolios, not a single account.
• Include terminated accounts in the firm’s performance history, and disclose when these accounts
were terminated.
• The use of simulated results is permitted but requires full disclosure.
• Prorate oversubscribed issues on a round lot basis to avoid odd-lot distribution. (If issued on an
odd-lot basis, it’s a violation.)
• Disclose whether performance presented is gross or net of fees.

E. Preservation of Confidentiality:

• Keep client information confidential unless:

o It involves illegal acts.
o It is required by law.
o The client permits disclosure.
• Even if an entity is no longer a client, members and candidates must maintain the confidentiality of
client records.
• Sharing 5 of 15 clients' information with a third-party tax accountant is a violation.
 • If permissible under law, members and candidates must cooperate with CFA Institute Professional
Conduct Program (PCP) and provide information about a client in support of an investigation. Any
information given to PCP remains confidential.
• If local law requires a firm to maintain client confidentiality, members must refuse to disclose
information about a client during an investigation by CFA Institute PCP. If a client is involved in
illegal activities and the law requires members and candidates to maintain confidentiality, the
information must not be disclosed.
• Members should determine if applicable securities regulations require disclosing records before
providing confidential information concerning their client investment. This means they should check
with their firm's compliance department to determine their legal responsibilities.

4. IV. DUTIES TO EMPLOYERS

A. Loyalty:

• 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.
• No requirement to prioritize employer over personal/family obligations; a balance should be
maintained.
• Encouraged to provide employer with a copy of the CFA Code and Standards.
• Employers should avoid compensation structures that promote unethical behavior.
• A departing employee can prepare for a competing business during personal time before leaving,
but without violating loyalty.
• Issuing contradictory research reports can confuse clients and cause reputational harm to the firm.
(Violation)
• Must not make disparaging statements about the employer (e.g., expressing lack of confidence in
leadership is a violation).
• Must notify employer of outside services, expected duration, and compensation.
• Issuing a new report based solely on personal judgment that conflicts with earlier conclusions may
confuse clients and is less appropriate.

B. Additional Compensation:

• Must not accept gifts, benefits, or compensation that could create a conflict with employer’s
interests unless written consent is obtained from all parties (employer and third party).
• Token gifts (e.g., calendar or pen) do not need to be reported.
• Must make immediate written disclosure to supervisor and compliance officer for any proposed
compensation. (No need to disclose to client.)
• Details of any performance-based compensation should be verified by the offering party.
• Bonus based on future performance = requires prior written consent.
• Bonus for past performance = treat as a gift, must disclose to employer under Standard I(B).
• Must obtain employer’s permission before accepting any third-party compensation.
• Teaching for a nominal fee during holidays is not a violation.
 • Must refuse any gift that could create a conflict unless written consent is received from employer
and third party.
• If a client offers a donation to a charity in return for investment advice, emailing compliance is not
sufficient — written permission must be obtained.
• Disclosure of compensation details (nature, amount, duration) is only to supervisor, not to clients.

C. Supervisory Responsibility:

• Supervisors must make reasonable efforts to ensure that employees follow laws and the CFA Code
of Ethics and Standards.
• In case of a violation, supervisors must promptly investigate, increase supervision, place limitations
on the wrongdoer’s activities, and ensure that the violation is not repeated until the investigation
is complete.
• Supervisors should ensure employees are aware of the rules, firm policies, and Code of Ethics.
• If a firm’s compliance procedures are inadequate, supervisors must bring this to senior
management’s attention or decline supervisory responsibility.
• Supervisors are responsible for detecting violations and ensuring that compliance procedures are
implemented and followed. If a violation occurs despite adequate compliance procedures,
supervisors may not be held responsible but should reassess the adequacy of the procedures.
• Integrating a Code of Ethics is not enough; supervisors must also ensure effective enforcement,
ongoing monitoring, and proper training are in place.
• Supervisors must have a thorough understanding of the CFA Code and Standards.
• Supervisors should encourage their firm to provide the Code of Ethics to clients.
• Supervisors should encourage their firm to:
o Provide the Code of Ethics to Clients.
o Writing the Code in plain language and include fiduciary concepts without unnecessary
detailed procedures.
• A senior trader does not have safeguards in place to determine whether a junior trader under their
supervision is following the firm’s policies regarding best execution (violation).

5. V. INVESTMENT ANALYSIS, RECOMMENDATIONS, AND ACTIONS

A. Diligence and Reasonable Basis:

• Members must exercise diligence, independence, and thoroughness in investment analysis and
recommendations.
• When using third-party or secondary research, members must make reasonable efforts to ensure
it is sound and reliable.
• Firm should have a policy for regular review of approved third-party research providers. If no such
policy exists, the member must encourage the firm to adopt formal review practice.
• Research reports should have a reasonable and adequate basis, supported by proper investigation.
• Firms should provide written guidance for conducting proper research and due diligence.
• A set of standards must be in place to evaluate external advisers and define how often they’re
reviewed.
 • Members managing quantitative models must:
o Understand the technical aspects of the models.
o Ensure models incorporate a wide range of possible input expectations.
• Members can encourage firms to develop scenario testing standards for financial modeling tools.
• It’s acceptable to rely on a competent colleague to evaluate third-party research.
• Information from blogs, social media, and informal websites is allowed but requires a higher level
of review than information from more reputable sources.
• If the member has reason to doubt the quality or reliability of third-party research (even from an
approved provider), they must refrain from using it.
• The member may use local research vendors if they’ve conducted their own due diligence.
• If a member disagrees with a research report, they can request their name be removed from the
report — full dissociation is not required unless ethical violations exist.
• Members should encourage their firms to assign specific employees or teams to review research
reports for a reasonable and adequate basis.
• A member gives Islamic investment advice to pension trustees with only one hour of preparation,
based solely on general retirement planning knowledge. This is a violation, as it lacks proper
diligence and specific knowledge in Islamic investment principles.

B. Communication with Clients:

• Members must disclose the nature of services provided to clients and prospective clients.
• Must provide details about the cost of services and the general investment process.
• Clearly disclose significant limitations and risks of the investment strategy.
• Must distinguish between facts and opinions in all investment analyses and recommendations.
• Any material changes in the investment process must be disclosed promptly to clients.
• If part of the client’s assets is outsourced to an external manager, this must be communicated.
• Omission of information deemed “unimportant” by the member can still be a violation if it affects
the integrity or completeness of the analysis.
• Changes in methodology used in analysis should be highlighted and explained. Members must
inform clients of limitations, such as liquidity issues or market access constraints. If the firm uses
an outside advisor, clients must be made aware of this.
• Failing to disclose Simulated or backtested results is a violation.
• Clients must be informed about any known errors, such as trading system failures or execution
issues.
• Large or unusual purchases of securities and external manager usage without client knowledge are
violations.
• Does not limit the type or number of staff responsible for external communication.

C. Record Retention:

• Members must maintain appropriate records to support their investment analysis,

recommendations, and actions.
• Records created during professional activities are the property of the firm — cannot be taken when
leaving without the firm’s consent.
 • Cannot reuse past research reports unless the supporting documentation is available.
• Must keep third-party research reports, including those from external sources.
• Retention applies to all investment decisions, including buy/sell actions and analyses that didn’t
lead to a change.
• Records may be hard copy or electronic form.
• In absence of regulatory guidance/firm policies, CFA Institute recommends keeping records for at
least 7 years. If local regulator or firm policy exists, then maintain record for 5 years.
• When moving firms, members must recreate research using public sources or info directly from the
company — cannot rely on memory or use documents from previous employer.
• Cannot use historical recommendations from the old firm without proper support.
• If a compliance system is missing or inadequate, and member cannot fulfill supervisory duties
properly, they must decline in writing until proper systems are in place.

6. VI. CONFLICTS OF INTEREST

A. Disclosure of Conflicts:

• Must avoid or fully disclose any matters that could impair independence/objectivity or interfere
with duties to clients, prospects, or employer.
• Disclosures must be prominent, in plain language, and effectively communicate relevant
information.
• Must disclose special compensation arrangements with employer (e.g., bonuses based on short-
term performance, commissions, incentive/performance/referral fees).
• If receiving commissions for recommending mutual funds to clients, this must be disclosed.
• Material ownership in a stock or investment that you are recommending must be disclosed.
• Personal investments (e.g., holding stocks in your own account that your firm also recommends)
may lead to conflicts and must be disclosed.
• If a research analyst at a brokerage firm is pressured by the investment banking division to issue
favorable reports, such relationships must be disclosed in the research reports.
• If putting companies on a restricted list is not possible, then full disclosure of investment banking
relationships is mandatory in all relevant reports.
• Volunteer work at a charity that takes up significant time and energy — even if unpaid and
unrelated — must be disclosed to the employer if it affects job performance or creates a conflict.

B. Priority of Transactions:

• Client and employer transactions must be given priority over transactions in which a member or
candidate is the beneficial owner.
• Members must not participate in IPOs where participation may create a conflict of interest or the
perception of being influenced.
• Firms should have clear procedures to manage conflicts from personal investing, including:
o Restrictions on IPO and private placement participation by employees.
o Blackout/restricted periods before client trades—no front running allowed (i.e., purchase
or sale of securities in advance of anticipated client or employer purchases and sales).
o Reporting procedures such as:
 ▪ Duplicate trade confirmations
▪ Disclosure of personal holdings and beneficial ownership
▪ Pre-clearance of trades
• Personal and family accounts that are also firm clients must be treated the same as any other
client—no special treatment.
• Members must disclose to clients their firm’s policies regarding personal investing.
• Members should pre-clear trades in fee-paying client accounts where they have beneficial
ownership.
• Members must direct their brokers to send duplicate trade confirmations to their employer.
• Strict limits must be placed on investment personnel acquiring securities in private placements,
and proper supervisory procedures must be in place.

C. Referral Fees:

• Members and Candidates must disclose to their employer, clients, and prospective clients any
compensation, consideration, or benefit received from or paid to others for recommending
products or services.
• Disclosures must include:
o The nature of the consideration (e.g., flat fee, percentage basis, one-time or ongoing
benefit, performance-based).
o The benefit may be in the form of research provision or other non-cash benefits, and
members must disclose the estimated dollar value of such benefits.
o Whether the fee was received or paid for a referral.
• Disclosures should be made before entering into any formal agreement with the client or
prospective client.
• Members must notify clients of any approved referral fee programs.
• Clients should understand the total cost of investment and the benefit received by the member.
• Examples:
o Referring a client to a fixed-income advisor and receiving a fee—must disclose.
o Recommending a mutual fund that pays the member a commission—must disclose.
o Paying a referral fee to someone for referring a client—must disclose to the client.
• Members should encourage their employer to develop clear procedures regarding referral fee
approval and disclosures.
• If allowed by the firm, members must provide quarterly updates to their employer on the amount
and nature of any compensation received from referral arrangements.

7. VII. RESPONSIBILITIES AS A CFA INSTITUTE MEMBER OR CANDIDATE

A. Conduct in CFA Programs:

• Members and Candidates must not engage in any conduct that compromises the reputation,
integrity, or security of the CFA Institute, CFA designation, or CFA Program.
• Prohibited Conduct Includes: (violations)
o Cheating or attempting to cheat on any CFA examination.
o Violating CFA Program testing policies, including calculator policy and Candidate Pledge.
 o Any violation of exam policies, including:
▪ Bringing unauthorized materials.
▪ Failure to follow rules and instructions.
▪ Improper behavior during the exam.
o Disclosing confidential exam content, such as:
▪ Specific exam questions or content.
▪ Broad Topic area/formulas tested or not tested.
▪ Details of how questions are scored or the grading process.
o Improper use of CFA designation or affiliation for personal or professional gain.
o Misrepresentation in the Professional Conduct Statement (PCS) or CFA Institute
Professional Development Program.
• Permissible Conduct: (not violation)
o Members and Candidates may discuss non-confidential curriculum material during
preparation.
o Expressing personal opinions or feedback about the CFA Program (e.g., saying the exam was
not a good representation of the curriculum) is not a violation, as long as no confidential
content is revealed.
o Candidates must specify membership requirements.
B. Reference to CFA Institute or CFA Designation:

• 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.
• Violations include:
o Claiming the CFA designation proves superior analytical skills.
o Suggesting best value in trade execution due to CFA designation.
o Stating “Passed the CFA course” (this implies earning the charter)
o Implying partial designation (e.g., "CFA Level II" as a title).
o Stating expected completion dates (e.g., "CFA Level 2 candidate, expected 2025").
o Using language that implies elitism (e.g., “places her in an elite group”).
• Membership requirements to use the CFA designation:
o Submit the Professional Conduct Statement (PCS) annually.
o Pay annual CFA Institute dues.
o Fulfill all other membership obligations.
o Failure to do so results in loss of active membership and the right to use the designation.
• Definition of a Candidate:
o Registered for a specific CFA exam and has not yet sat for it, or
o Has taken the exam and is awaiting results.
• Acceptable statements (not violations):
o “I enrolled in the CFA Program to obtain the highest set of credentials in the global
investment management industry.”
o “The skills the CFA Program cultivates are key assets for my future career development.”
o “I passed all three levels of the CFA Program in 3 consecutive years.”
o “The CFA charter is a key asset in developing my investment career.”
o “By becoming a CFA Charterholder, I significantly improved my standing within the firm.”

4.INTRODUCTION TO THE GLOBAL INVESTMENT PERFORMANCE STANDARDS (GIPS)

The Global Investment Performance Standards (GIPS) are a set of ethical principles developed by industry
practitioners to provide a standardized approach for investment firms in calculating and presenting
historical performance. These standards aim to ensure fair representation and full disclosure, helping
firms avoid misrepresenting results and allowing prospective clients to make informed evaluations based
on complete and consistent information.
Misleading practices in the absence of GIPS included:
• Representative accounts: Showcasing only the top-performing portfolio to represent the firm’s overall
investment results.
• Survivorship bias: Excluding poorly performing portfolios and presenting an average performance
history.
• Varying time periods: Presenting performance for a selected time-period during which the mandate
produced excellent returns.
The objectives of the GIPS standards are:
• To promote investor interests and instill investor confidence.
• To ensure accurate and consistent data.
• To obtain worldwide acceptance of a single standard for calculating and presenting performance.
• To promote fair, global competition among investment firms.
• To promote industry self-regulation on a global basis.
Claiming Compliance:
Asset management firms & Pension Fund can claim compliance.
Consultants, software and the vendors cannot claim compliance.

Software developers/investment consultants, may state that they endorse GIPS but may not claim
compliance with GIPS.
A firm has only two options with regard to compliance with the GIPS standards:
• Fully comply with all requirements of the GIPS standards and claim compliance through the use of the
GIPS Compliance Statement; or
• Not comply with all requirements of the GIPS standards and not claim compliance with, or make any
reference to, the GIPS standards.
• Compliance enables GIPS-compliant firms to participate in competitive bids against other
compliant firms globally.
• Compliance may strengthen the firm’s internal controls.
• Firms self-regulate their claim of compliance.
• Compliance is a firm-wide process that cannot be achieved on a single product or composite.
• Complying with the GIPS standards is voluntary. (Not a requirement)
• Compliance with the GIPS standards does not eliminate the need for due-diligence, but it enhances
the credibility of investment management firms that have chosen to undertake this responsibility.
Asset owners provide performance information to their oversight bodies to facilitate investment decisions
and evaluate fund performance. If asset owners hire external managers who comply with the GIPS
standards, reporting to the oversight body using the same principles makes it easier to understand the
sources of risk and excess return in the funds under supervision.
Key concepts of the GIPS standards that apply to firms:

• Ethical Standards: The GIPS standards ensure fair representation and full disclosure of investment
performance.
• Best Practices: To meet objectives of fair representation and full disclosure, firms should follow
GIPS recommendations beyond the minimum requirements for optimal performance calculation
and presentation.
• Compliance: Firms must comply with all applicable requirements of the GIPS standards, including
Guidance Statements, interpretations, and published Q&As by CFA Institute.
• Ongoing Evolution: The GIPS standards do not address every aspect of performance measurement
and will evolve over time to cover more areas.
 • Composites Requirement: Firms must create and maintain composites for all strategies they
manage or market to segregated accounts.
• Data Integrity: Accurate data is critical to create reliable performance presentations, and firms
must follow specified calculation methodologies for comparability.

Composites:

• Composites: An aggregation of portfolios managed with a similar investment mandate, objective,

or strategy.
• The use of composites prevents firms from cherry-picking only the best-performing accounts for
performance reporting.
• Example strategies:
o Strategy A: Aggressive growth (small-cap stocks with high growth potential).
o Strategy B: Large-cap value (large-cap value stocks).
• Firms must provide a list of composite descriptions upon request.

A composite must include all actual, fee-paying, discretionary portfolios managed in accordance with the
same investment mandate, objective, or strategy.

By “discretionary”, we mean the investment management firm has the right to determine and purchase
suitable securities for a portfolio. If there is a portfolio where the client determines what securities should
be purchased, then it is non-discretionary.
Nine major sections of the GIPS standards:
The major sections are: fundamentals of compliance, input data, and calculation methodology, composite
and pooled fund maintenance, composite time-weighted return report, composite money-weighted return
report, pooled fund time-weighted return report, pooled fund money-weighted return report, and GIPS
advertising guidelines.
Fundamentals of Compliance: Several core principles create the foundation for the GIPS standards,
including (1) properly defining the firm, (2) providing compliant presentations to all prospective clients, (3)
adhering to applicable laws and regulations, (4) and ensuring that information presented is not false or
misleading.

According to the fundamentals of compliance of the GIPS standards, If documented client-imposed

restrictions interfere with the implementation of the intended strategy to the extent that the portfolio is
no longer representative of the strategy, the firm may determine that the portfolio is non-discretionary.

Standard 1.A.22 specifies that firm must maintain a list of composite descriptions and include terminated
composites on this list for at least five years after the composite termination date. A complete list of
pooled fund descriptions for limited distribution pooled funds is also required. A complete list of broad
distribution pooled fund names only, but not the descriptions, is required. Firms are not required to
include terminated limited or broad distribution pooled funds on the list.
According to the GIPS standards, in cases in which laws and/or regulations conflict with the GIPS
standards, firms are required to comply with the laws and regulations and make full disclosure of the
conflict in the GIPS Report.
Verification:

• Verification is voluntary, just like GIPS compliance.

• A firm can hire an independent third-party to perform verification to increase confidence in the
firm’s GIPS compliance.
• Verification is undertaken by the compliance department in the absence of a third party.
• Verification is performed with respect to the entire firm, not individual portfolios or accounts.
• Verification report confirms processes and procedures are designed to calculate and present
performance results in compliance with GIPS standards.

• Firms are required to initially present a minimum of 5 years of annual investment performance.
• If the firm has existed for less than 5 years, performance since inception or the composite
inception date must be presented.
• An additional year of performance is required to build up to a 10-year record.
• A 12-year record is optional but not required.

• A GIPS-compliant firm reports performance of segregated accounts to current clients and

performance of pooled funds to current investors.
• For prospective clients or investors, the firm must not make statements in accordance with GIPS
standards using segregated account performance.
• For prospective clients or investors, only composite reports (not segregated accounts) should be
presented.

All actual fee-paying discretionary portfolios have 500m in large cap, of which non fee paying have 50m
and fee paying non-discretionary have 75m.
Firm must have to present: 500-50-75= 375m
When providing GIPS reports to prospective clients and investors, firms must ensure the reports are
updated to include information through the most recent annual period end, along with the 12-month
period ending on that annual period end. This ensures the data reflects the most current performance
information available.