CFA Ethics Study Note

Part I: Structure of CFA Institute Professional Conduct Program and the Process of Enforcement

Overlooked by: CFA Institue Board of Governors

Supervises

Enforced by Disciplinary Review Committee

Methods of Enfocement:

Code of Ethics 1) Self Disclosure through Professional Conduct Disclosure

- disclose any legal complaints, written compalints, involvement

in litigation, or other investigation.

Standards of Professional Conduct 2) written complaint received by the committee

3)disclosure from public sources

4)cheating on exams.

Process of complaints:

Step 1: Prof. Conduct Staff investigate issue by

requesting info through

- direct interview to member/complainant

-collect record and document for investigation

Step 2: Designated officer decide on penalty

-nothing happens

-cautionary letter

-displinary actions

**you can appeal the verdict and refer the matter to a panel

of CFA Institue members for hearing.

CFA Institute Bylaws

CFA Institute Professional

Conduct Program

CFA Institute

CFA Code of Ethics (must understand!)

1) Act with integrity, competence, diligence, respect, and in an ethical manner with

the public, client, prospective clients, employers, employees, colleagues in the

investment profession, and other participants in the global capital market.

Enforced by Disciplinary Review Committee Standard I,II,III,IV,V,VI,VII -all standards

2) place the integrity of the investment profession and the interest of clients

above their own personal interests

Standard III,IV,VI

Methods of Enfocement:

1) Self Disclosure through Professional Conduct Disclosure 3) Use reasonable care and exercise indepent professional judgment when

- disclose any legal complaints, written compalints, involvement conducting investment analysis, making investment recommendations, taking

investment actions, and engage in other professional activities.

2) written complaint received by the committee Standard I, II,III,IV,V

4) Practice and encourage others to practice in professional and ehtical

manner that will reflect credit on themselves and the profession

Standard I,II,VII

Step 1: Prof. Conduct Staff investigate issue by 5) Promote the integrity of, and uphold the rules governing capital markets

Stadard I, II, VII

- direct interview to member/complainant

-collect record and document for investigation 6) Maintain and improve ther professional competence and strive to maintain and improve

Step 2: Designated officer decide on penalty the competence of other investment professionals

Standard I,II,VII

**you can appeal the verdict and refer the matter to a panel

Notes to Self

Act with integrity, competence, diligence, respect, and in an ethical manner with

the public, client, prospective clients, employers, employees, colleagues in the you are a professional, so act professionally.

investment profession, and other participants in the global capital market. aka. Being honest, exercise strong moral principles, work hard and respect

-all standards the ones you have contact at life and work.

place the integrity of the investment profession and the interest of clients you are in the service industry, client and employer (firm) always comes first.

Use reasonable care and exercise indepent professional judgment when try your best to be independent in all your actions, do not be biased.

conducting investment analysis, making investment recommendations, taking **reasonable care (this is a legal term, which also indicates you have to always

investment actions, and engage in other professional activities. present to be independent in fact and in presence. Protect yourself from litigation.

Practice and encourage others to practice in professional and ehtical always be professional and supervise others like you to be professional. This

manner that will reflect credit on themselves and the profession is beneficial for the entire CFA reputation, which in return will benefit you!

Promote the integrity of, and uphold the rules governing capital markets don't be a skank and try to cheat off of other people by involving in "unmoral"

activities/misconduct. --> market is a fair game, do not profit at someone elses' expense

Maintain and improve ther professional competence and strive to maintain and improve

keep updated with all relevant information, and always brush up your skills.

aka. Being honest, exercise strong moral principles, work hard and respect

you are in the service industry, client and employer (firm) always comes first.

try your best to be independent in all your actions, do not be biased.

**reasonable care (this is a legal term, which also indicates you have to always

present to be independent in fact and in presence. Protect yourself from litigation.

always be professional and supervise others like you to be professional. This

is beneficial for the entire CFA reputation, which in return will benefit you!

don't be a skank and try to cheat off of other people by involving in "unmoral"

activities/misconduct. --> market is a fair game, do not profit at someone elses' expense

keep updated with all relevant information, and always brush up your skills.

CFA Standards of Professional Conduct explained

1) Professionalism

(related code of ethics: ALL)

A. Knowledge of the Law

-must comply with the stricter set of law, rule or regulation.

-must understand and comply to all laws applicable.

-never involve or turn a blind eye on viiolation of the law.

B. Independence and Objectivity

-not be influenced by external sources. You must appear independent.

(if you are a regular member --> always inform the employer of your status.

must tell the client of your status, if you are a researcher, must include in report

your or potential bias.)

- avoid getting in situtaion that might hinder your independence

C. Misrepresentation

-always present things as they are, do not exaggerate

-always keep proof of your analysis and how you arrive to your conclusion/opinion

-always give credit and do not present things that are not yours, ex. Plagerism, not referencing. Etc

ex. Guaranteeing investment performances, plagiarism

note: models and analysis developed by others at a members' firm are the property

of the firm, and can be used without attriution.

a report written by another analyst employed by the firm cannot be released as

another analyst's work.

D. Misconduct

-Do not involve or engage in professional conduct involving dishonesty, fraud, or deceit etc.

-always mind the reputation impact on CFA as a whole.

-remember what a "professional' is

- be an ethical person

always mind: reputation, integrity and competence.

2) Integrity of Capital Market

(related code of ethics: 1,3,4,5,6)

A. Material Nonpublic Information

- must not act on insider informaion and non public information.

material info: info that might influence a reasonable persons' opionion

of an investment.

- try to avoid proprietary trading --> when firm has possible insider info,

try to avoid trading for gains (unusual trades) around that time.

Mosaic Theory: there is no violation when a perspective analyst reaches

an investment conclusion about a corporate action or event through an

analysis of public info together with items of nonmaterial nonpublic info.

ex. The company repainted their walls etc.

B. Market Manipulaton

-never to distort prices or artificially inflate trading volumes with intention

-always keep proof of your analysis and how you arrive to your conclusion/opinion to mislead market participants.

-always give credit and do not present things that are not yours, ex. Plagerism, not referencing. Etc - the market is always fair and efficient, do not undermine it!

note: models and analysis developed by others at a members' firm are the property

a report written by another analyst employed by the firm cannot be released as

-Do not involve or engage in professional conduct involving dishonesty, fraud, or deceit etc.

3)Duties to Clients

(related codes of ethics: 1,2,3)

A. Loyalty, Prudence, and Care

- act with reasonable care and exercise prudent judgment.

material info: info that might influence a reasonable persons' opionion -always act in benefit of the client and place their interests first

-keep evidence and do actions (ex. Written consent, documents, aggrements

- try to avoid proprietary trading --> when firm has possible insider info, etc.) to prove that you are in the client's best interest, that what you are

doing is justified.

Mosaic Theory: there is no violation when a perspective analyst reaches B. Fair Dealings

an investment conclusion about a corporate action or event through an -deal fairly and objectively (no bias) when dealing with all clients when providing

analysis of public info together with items of nonmaterial nonpublic info. investment analysis, making recommendations or taking investment actions. Etc

Different levels of service is ok, but they must not negatively affect

any clients.

you can disclose the different service levels to all clients and prospects,

-never to distort prices or artificially inflate trading volumes with intention and make premium levels of service available to all who wishes to

pay for them. *****DISCLOSE EVERYTHING

C. Suitability

**Stand in the client's shoes and see how you would like to be treated.

- need to understand the clients and their needs:

investment experience

risk/return objectives

financial constraints

**always have the client fill out form/write down their objectives, mandates

and constraints before taking any action (making recommendations or investing

on their behalf)

- judge the suitability of investment in the context of the clients' total portfolio.

D. Performance Presentation - communication with clients

- must be fair, accurate and complete

-do not misleading info, not misrepresent past performance or reasonably expected

performance, and not state/imply the ability to achieve a rate of retrn similar

to that of the past.

(make reasonable judgment, do not give false hope.)

E. Preservation of Confidentiality

-info about all clients (past/present/prospective) must be confidential unless:

i. info concerns illegal activities on the part of the client

ii. Disclosure required by law

iii. Has client's written consent/client permits to disclose

4) Duties to Employers

A. Loyality

-in employment matters, must act in benefit of employer

-your skill and ability must benefit employer

-do not divulge confidential info

-not cause harm to employer

**member should always place client interests above interest of their employer

but consider the effects of their actions on firm integrity and sustainability.

**special note on when leaving an Employer: you cannot take anything "concrete

with you when you leave: trade secrets, conf. info, client list, existing model, research, etc.

You can still use the skills and knowledge gain from previous employment for new employer

you can disclose the different service levels to all clients and prospects, ex. If you did a research for prev. firm, you cannot take the research

with you to new employer. It is the property of the prev. employer.

you can use the same method for the resaerch (your skill) and do it

again for the new employer, the resaerch is then can be used for the new

employer.

Note: special case for client base, if signed a "non competition agreement", you

cannot contact your clients. If not, you can.

B. Additional Compensation Arrangement

Members must have consent from all parties involved on additional compensation agreements

**compensation that might hinder their independence, objectivity or firm interest.

Mostly consent from employer -- must be written.

C. Responsibilties of Supervisors

Must take resonable efforts to detect and prevent violaton of laws, rules, rugulations and

CFA code of standards by their subjects

-do not misleading info, not misrepresent past performance or reasonably expected - need preventative activities and detective activities.

All firms must have an adequate compliance system that meets industry standards, regulatory

requirements and CFA code of standards.

Supervisory have a role to improve inadequate compliance system and bring issue with

management.

5) Investment Analysis, Recommendations, and Actions

A. Diligence and Reasonable Basis

- member must exercise diligence, independence, and thoroughness in analyzing

investment recommendations, and taking investment actions.

-always have reasonable and adequate basis, supported by appropriate resaerch

and investigation, for any investment analysis, recommendation or action.

Guidance:

**this is a protective measure, imagine in case of client suing you for negligence

of your duties, how would you defend yourself?

**use of 3rd party info: adopt a policy for periodic review of the quality of

theird party research.

with you when you leave: trade secrets, conf. info, client list, existing model, research, etc. **Quantative research and model need to be stree stested under diff. situations

You can still use the skills and knowledge gain from previous employment for new employer **need to have procedures to review external advisors

ex. If you did a research for prev. firm, you cannot take the research

B. Communication with clients and prospective clients

again for the new employer, the resaerch is then can be used for the new - must disclose basic format and general principles of investment process used

to analyze investments, select securities, and construct portfolios.

-must disclose all factors to clients with changes that might materially affect those

processes

-use reasonable judgment in identifying which factors are important to their

investment analyses, recomm, actions etc. --> must disclose to all clients

-must distinguish between fact and opinion in presentation

Members must have consent from all parties involved on additional compensation agreements opion words: expect, likely, we believe etc.

**compensation that might hinder their independence, objectivity or firm interest. -info must disclose to all clients, not just research reports. But in all communications

-need to communicate potential gains.losses on investemnt in terms of total returns.

C. Record Retention

Must take resonable efforts to detect and prevent violaton of laws, rules, rugulations and -need to develop and maintain appropriate records to support investment analysis for

up to 7 years.

- members who changes firms must recreate the analysis documentation suporting

All firms must have an adequate compliance system that meets industry standards, regulatory recommendations using publicly available info or info obtained from new company

and must not rely on memory or materials created at her previous firm.

Supervisory have a role to improve inadequate compliance system and bring issue with

5) Investment Analysis, Recommendations, and Actions 6) Conflict of Interest

A. Disclosure of Conflict

- member must exercise diligence, independence, and thoroughness in analyzing -must disclose all matters that will impare their independence and objectivity

investment recommendations, and taking investment actions. to all client, and employer.

-always have reasonable and adequate basis, supported by appropriate resaerch - also need to update client/employer on the significant change in compensation

and investigation, for any investment analysis, recommendation or action. structure

**this is a protective measure, imagine in case of client suing you for negligence B. Priority Transaction

- clients transactions before company transactions before personal transactions

adopt a policy for periodic review of the quality of - need to be unbiased towards all clients

**Quantative research and model need to be stree stested under diff. situations C. Referral Fees

**need to have procedures to review external advisors Must disclose all referrals fees to employer, clients and prospective clients.

(compensation, consideration, benefit received or paid to others for the

recommendation of product/services)

- must disclose basic format and general principles of investment process used

to analyze investments, select securities, and construct portfolios.

-must disclose all factors to clients with changes that might materially affect those

-use reasonable judgment in identifying which factors are important to their

investment analyses, recomm, actions etc. --> must disclose to all clients

-must distinguish between fact and opinion in presentation

opion words: expect, likely, we believe etc.

-info must disclose to all clients, not just research reports. But in all communications

-need to communicate potential gains.losses on investemnt in terms of total returns.

-need to develop and maintain appropriate records to support investment analysis for

- members who changes firms must recreate the analysis documentation suporting

recommendations using publicly available info or info obtained from new company

and must not rely on memory or materials created at her previous firm.

7) Responsibilities as a CFA Member/Candidate

A. Conduct as Members and Candidate in the CFA Program

-must disclose all matters that will impare their independence and objectivity -always mind how your action will impact CFA reputation or integrity of

CFA insitute or the CFA designation.

- also need to update client/employer on the significant change in compensation - never cheat on exam or share info on the exam

B. Reference to CFA Institute, the CFA Designation and Program

-must not exaggerate or misrepresent

- clients transactions before company transactions before personal transactions -must not relate the CFA designation to "superior" performances

-must disclose all info accurately and truthfully

More-- read the book

Must disclose all referrals fees to employer, clients and prospective clients.

(compensation, consideration, benefit received or paid to others for the

7) Responsibilities as a CFA Member/Candidate

A. Conduct as Members and Candidate in the CFA Program

-always mind how your action will impact CFA reputation or integrity of

CFA insitute or the CFA designation.

- never cheat on exam or share info on the exam

B. Reference to CFA Institute, the CFA Designation and Program

-must not exaggerate or misrepresent

-must not relate the CFA designation to "superior" performances

-must disclose all info accurately and truthfully

Notes to answering Ethics Questions

1) Who am I?

Member of CFA

Firm doing financial business

2) What is my role?

Analyst - for recommendation to clients

- for researching and publishing reports to clients

-for making investment decisions for clients

-for managing a portfolio for clients

Supervisor/Director

Independent Practioner

Employee

3) Who is involved? Who do I owed my duty to?

Current Client

Past Client

Prospective Client

Current employer/employee

Former employer

3rd party: Bank, legal system, security issuer, other CFA members, family members

etc.

4) What has happened?

Which situation of the code applies

5) impact of my decision.

6) determine possible violation

8)what might the "virtuous" CFA do?

9)What should I do so that I am protected and sustains my reputation and the reputation of CFA.

3rd party: Bank, legal system, security issuer, other CFA members, family members

9)What should I do so that I am protected and sustains my reputation and the reputation of CFA.