CFA® Exam Level 1

Ethics & GIPS Sample Chapter

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Guided Notes for CFA® Level 1 – 2016

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Reproduced and republished from 2016 Learning Outcome Statements, Level III CFA® Program

Materials, CFA Institute Standards of Professional Conduct, and CFA Institute’s Global

Investment Performance Standards with permission from CFA Institute. All rights reserved.”

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Contents Ethics .......................................................................................................................................................... 3

Ethics Overview ...................................................................................................................................... 3

Basic Principles for Answering Ethics Questions ..................................................................................... 4

One Page Ethics Tear Sheet ................................................................................................................ 5

The Code of Ethics .................................................................................................................................. 6

Standard I: Professionalism ................................................................................................................. 6

Standard II: Integrity of Capital Markets ............................................................................................. 7

Standard III: Duties to Clients .............................................................................................................. 7

Standard IV: Duties to Employers ....................................................................................................... 8

Standard V: Investment Analysis, Recommendations, and Actions .................................................... 9

Standard VI: Conflicts of Interest ........................................................................................................ 9

Standard VII: Responsibilities of a CFA Institute Member or CFA Candidate .................................... 10

Global Investment Performance Standards (GIPS).................................................................................... 10

GIPS Mechanics ................................................................................................................................. 12

Requirements of composite construction ......................................................................................... 14

The 9 Major Sections of GIPS ............................................................................................................ 15

CFAI Research and Objectivity Standards ............................................................................................. 16

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Ethics Ethics is a major section of the CFA curriculum. It usually accounts for around 15% of the total

points. Furthermore, if your overall test score is close to the pass rate, it is your performance on

Ethics that will be the deciding factor.

Be warned, while the overall material in the Ethics section appears fairly straightforward, the

way it is tested is not. Many L1 Candidates make the mistake of treating this section lightly. Do

not be one of them.

Ethics is mostly deceptive because there is comparatively little to memorize but a great deal of

vagueness in how to answer the questions themselves.

For example, the CFA exam is not going to ask you to know what Standard I(a) is versus

Standard II(b) by those names. There will, however, be questions that ask you to choose which

standard is violated based on a passage and then list the different standards as the multiple

choice options.

The bottom line: Basic knowledge is assumed, and it is probably worth at least one re-read

through the Institute’s official ethics guide within a month or so of the exam, but for the most

part you are better off doing lots of practice problems to get a feel for how to answer these

questions. It doesn’t hurt that Ethics is tested the same way in L2 and L3 as well.

Because you should approach this section mostly by practicing problems we keep our overview

of Ethics very high level and in outline form. The remainder of our notes, while also concise, are

more thorough and presented in a different format.

Ethics Overview The CFA Institute (CFAI) is heavily concerned about promoting higher standards of conduct and

behavior to investment professionals. This isn’t just about meeting legal standards, rather it is

about increasing the public’s confidence in the profession. The CFAI believes that in today’s

global market people need to have confidence in the financial system in order for the capital

markets to avoid crises. It’s all about trust. That’s why in recent years the CFAI has begun to

really emphasize the responsibility of managers and CFA Candidates to be more proactive

about creating a culture of ethics in the workplace.

This general context is important to help frame your understanding of the six principles of the

code of ethics. This is the first thing in the entire CFA curriculum, and you need to memorize it.

Following the articulation of principles, the curriculum follows with the standards of practice.

These are a more in-depth set of guidelines with specific guidance on a variety of ethical

dilemmas that a financial professional could encounter. You should spend some time with the

examples given in the curriculum, but again, practice is what is most important here.

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Basic Principles for Answering Ethics Questions Ethics questions can often be ambiguous, with two answers that seem appropriate. When this

happens, knowing which questions to ask can help you sort through the different options. Here

are three key questions and two guidelines to help you arrive at the right answer:

1. If you were the client would you agree with the course of action?

2. Would a moral person, or leader, follow this course of action?

3. Does this action uphold the integrity of the investment profession?

4. When in doubt err towards the more strict guideline/regulation

5. There are differences between requirements as laid out in the Standards and the

recommended practice or guidance. This distinction is often tested.

Ethics boils down to the golden rule. How would you want your financial advisor to act? What

actions should they take with respect to you and your portfolio?

Chances are you’d want them to act in your interests and not those of someone else paying them.

You would want them to communicate what they’re doing and explain why, to be honest in

reporting results, and to do it frequently enough that you don’t worry about what’s going on.

Finally, an investment professional should also uphold the integrity of capital markets, (which

you can think of as the greater good), even at their own expense.1 There is a simple order of

priority that should guide your actions. They are as follows:

1) Preserve the integrity of the capital markets

2) Maintain loyalty to your clients

3) Stay loyal to your employer

4) Look after your own self-interests

Now that we’ve covered some of the principles for how you should approach Ethics, let’s dive

into more of the material itself (note we also give you a one page tear sheet for cramming closer

to the exam which is on the next page).

1 Think Spiderman, with great power (you CFA Charterholder) comes great responsibility.

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One Page Ethics Tear Sheet

Summarizing the Code of Ethics -PEJMAR2

Priority - Your client's interests always come first, then your employer, then yours

Encourage - Practice and encourage others to act professionally and ethically to reflect credit on yourself and the

profession

Judgment - Use reasonable care and judgment when performing all professional activities

Maintain - Keep your knowledge up to date and encourage other professionals to do the same

Actions - Employ integrity, competence, diligence, and respect in an ethical manner with everyone

Rules - Promote the integrity of capital markets by following the rules

Standards of Professional Conduct

1. Professionalism

a. Knowledge of the Law: Have to know them, comply with stricter of CFA, local, or home law

b. Independence and Objectivity: Reasonable care, compensation ??s/issuer paid research

c. Misrepresentation: Knowingly misrepresenting/omitting information, or committing plagiarism

d. Misconduct: Fraud or casting negative light on profession. Distinction btwn personal/professional

2. Integrity of Capital Markets

a. Material nonpublic information: Can’t trade on it or cause others too. MOSIAC theory

b. Market Manipulation: Artificially distorting price or volume with intent to deceive others

3. Duties to Clients

a. Loyalty, prudence, and care: Act for benefit of client above employer/you. Maintain fiduciary duty

b. Fair Dealing: Fair and objective. Disclose different levels of service (OK w/ no negative)

c. Suitability: Think if investment appropriate for specific client. Evaluate on portfolio level vs. risk

of just 1 security (prudent investor rule). Implicit requirement to disclose all significant info/risks.

d. Performance and Presentation: Fair, accurate, distinguish between fact vs. opinion.

Recommendation is to keep records for 7 years

e. Preservation of Confidentiality: Always for past/present clients unless illegal, required, or given

up for use in a CFA institute investigation

4. Duties to Employers

a. Loyalty: Employer > you. Questions around quitting and taking client info/models often get tested

b. Additional Compensation Arrangements: Disclose any arrangements first. Written consent from

all parties is required (email ok)

c. Responsibilities of Supervisors: Reasonable effort to detect/disclose violations. 2015+ has moved

to a slightly more proactive duty to educate those under you.

5. Investment Analysis, Recommendations, and Actions

a. Diligence and Reasonable Basis: Clear reasons for investing, thorough. Disagreeing on a group

recommendation is OK (i.e. you don’t have to disassociate) if it is well researched and fair.

b. Communications with clients/ prospective clients: Would you want to know something if you were

the client? If yes, then disclose it.

c. Record retention: Electronic OR paper OK. Recommendation: Keep records for 7 years

6. Conflicts of Interest

a. Disclosure of Conflicts: Disclose anything that would interfere with independence and objectivity

b. Priority of Transactions: Clients > Employers > You. Treat paying family the same as other

clients.

c. Referral Fees: Full disclosure so clients can judge potential biases. Often in SD3 context.

7. Responsibilities as a CFA Institute Member/Candidate

a. Conduct: Don’t cast negative light on profession or capital markets via your actions

2 From http://www.investopedia.com/exam-guide/cfa-level-1/ethics-standards/code-ethics.asp and http://quizlet.com/3424974/cfa-ethics-code-and-standards-flash-cards/ 3 Soft Dollar

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The Code of Ethics4 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 the 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. Analysts should not only act in an ethical manner,

but should promote ethical actions of others within the profession.

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.

Standard I: Professionalism 1. Knowledge of the Law

Keys: Know the rules. Comply with the more strict law, regulation, or CFA standard.

Disassociate from any violations.

a. You have to know, stay up-to-date and comply with the law. No excuses.

2. Independence and Objectivity

Keys: Reasonable Care and judgment, don’t accept compensation that can impact objectivity.

a. Maintain independence and objectivity in all professional activities

i. No gifts that can compromise even appearance of objectivity. Modest gifts

OK. Gifts from clients are more OK than those seeking influence.

ii. No invites to lavish entertainment/functions/tickets (often tests the

distinction between lavish and reasonable accommodation to go do

research on a company, especially where no commercial transport

available)

iii. No favors/job referrals/or participation in oversubscribed IPOs

iv. Potential pressure from sell-side to have buy side issue favorable reports

(Guidance: establish effective firewalls, restricted securities, limit gifts to

nominal amounts)

Note on Issuer Paid Research: Research must be thorough, unbiased, and independent. The

analyst must FULLY DISCLOSE conflicts and compensation structure. A flat fee that is

independent of the report’s conclusions is recommended but not required.

4 From CFA Institute Official Code of Ethics…

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3. Misrepresentation

a. Must not knowingly give false impression in written, oral, advertising, or

electronic communication. This includes omitting facts.

b. Must not misrepresent:

i. Credentials

ii. Services offered

iii. Performance record

iv. Investment characteristics (or guarantee a return)

v. Plagiarism

1. Cannot plagiarize. Can use common sources like US treasury

without attribution however (and this is commonly tested).

4. Misconduct

a. Don’t do it! Nothing dishonest, fraudulent, or with an adverse impact on

profession or professional reputation. Note the CFAI is very concerned with the

reputation of capital markets and its own self. Anything that makes them look bad

in a professional setting is probably a violation.

Standard II: Integrity of Capital Markets 1. Material Nonpublic Information

a. If you have material nonpublic information (info that could affect an investment’s

value) you CANNOT ACT OR CAUSE ANOTHER to act on that information

i. Material: Material if disclosure would impact security price or is

something a reasonable investor would want to know about the company

ii. Nonpublic until made available to entire marketplace (NOT just analysts)

iii. MOSIAC THEORY

1. Mosaic theory involves collecting public and non-public non-

material information about a company in order to piece together a

conclusion about its price. If disparate sources of acceptable

information lead to putting together the puzzle that’s fine. That’s

what analysts get paid to do after all.

iv. New emphasis on (1) social media and (2) the use of expert networks

2. Market Manipulation

a. Do not artificially distort price or volume with an intent to mislead market

participants including through releasing false information. Variations of this are

frequently tested.

Standard III: Duties to Clients 1. Loyalty, Prudence, and Care

1. Act with reasonable care and exercise prudent judgment

2. Act for benefit of client, place employer interests ahead of your own

3. Must comply with all fiduciary duties (voting proxies commonly asked about)

2. Fair Dealing

!! Often test

professional versus

personal misconduct

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1. Be fair and objective around analysis, recommendations, and professional activity

i. Service Levels: Different levels of service are OK but only if disclosed and

it does not disadvantage any clients, e.g. I can offer more research to a set

of clients that pay more, but I can’t release trade recommendations to

them earlier.

ii. Allow clients a fair chance to act on recommendations and notify them of

changes to recommendations before executing a client trade

iii. IPO subscription and allocation procedures are commonly tested (e.g. pro

rata allocation)

3. Suitability

1. Know client’s Risk and Return (think IPS constraints) and take action consistent

with those constraints. Suitability is from a PORTFOLIO perspective not that of

an individual security. Invest to the fund mandate if managing a fund.

4. Performance Presentation

1. Fair, accurate, and complete (will most likely be tested with GIPS not in Ethics)

i. Do not guarantee performance or misstate past performance

5. Preservation of Confidentiality

1. Keep Client (and former client) info confidential unless:

i. Illegal activities are suspected

ii. Disclosure is required by law

iii. Client or prospect allows disclosure

2. Providing information to CFA Institute for investigation is not a violation of this

standard

Standard IV: Duties to Employers 1. Loyalty

1. Act for the benefit of the employer

i. If also practicing independently then written permission from employer is

required

ii. When leaving employer

1. Act in their best interest until gone

2. Do not take records without permission (just knowing names and

contacting once gone is OK)

iii. Whistle blowing: OK if it protects client or capital markets not OK for

personal gain

2. Additional compensation

i. No gifts/compensation that interfere with duty to employer or creates

conflict of interest UNLESS written permission obtained from ALL

parties (email is acceptable)

3. Responsibilities of Supervisors

1. Must make reasonable efforts to detect and prevent violations

!! If conflict exists

between written

IPS and client

wishes, follow IPS

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Standard V: Investment Analysis, Recommendations, and Actions 1. Diligence and Reasonable Basis

a. Reasonable and adequate basis supported by research for analysis or

recommendation

i. Cover all relevant issues and document when making investment

recommendation

ii. Determine soundness of third-party research

iii. In groups, OK to disagree and not disassociate as long as basis is sound

2. Communication with Clients and Prospective Clients

Key: Would you want to know the information is the situation was reversed? If yes, then

disclose.

a. Disclose format and principals of investment processes & any changes to process

b. Include important factors for recommendations in communication (like basic

characteristics of the security)

c. Distinguish clearly between fact and opinion

d. Disclose any significant limitations and risks associated with the investment

process

3. Record Retention

a. Develop & maintain appropriate records with support for decisions (guidance is to

keep 7 years in either electronic or paper form). Records are firm property.

Standard VI: Conflicts of Interest 1. Disclosure of Conflicts

a. Must make full, fair disclosure to clients, prospects, and/or employer on any

matter that could reasonably be expected to interfere with independence or

objectivity. Disclosure is important to:

i. Allow clients to judge motives (e.g. relationship with broker, stock

ownership)

ii. So employers can judge any financial pressures that could influence your

decision as an advisor (non-financial compensation is often referenced, it

counts too)

2. Priority of Transactions

a. Clients first, then employers, then and only then your transactions (no front-

running)

i. Family member accounts with firm MUST be treated like any other

account. Giving worse treatment to family is a violation. They are a client

too.

3. Referral Fees

a. Disclose all fees so clients can evaluate full cost and potential biases

Guidance

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Standard VII: Responsibilities of a CFA Institute Member or CFA Candidate 1. Must not engage in any conduct that compromises reputation or integrity of CFA Institute

or the CFA designation or exams

a. Cheating on exam, disregarding policies, giving confidential info away, improper

use of CFA designation, misrepresenting the CFA program are all examples of

such conduct

2. Referring to the CFA Institute, Designation, or Program

a. Must not misrepresent or exaggerate the meaning or implications of membership

i. May reference participation but not a “partial designation”

ii. May say passed all 3 on first attempt, but NOT indicate superior

performance or ability because of this

iii. Chartered Financial Analyst and CFA marks always come after a charter

holder’s name or are used as adjectives not nouns

Global Investment Performance Standards (GIPS) Readings 3 and 4

This is a boring and dry section. But it is still important. For Level 1 you will only be tested on

the introduction and the fundamentals of compliance whereas L3 goes into more depth. The good

news is that means you can (and should) skip a significant section of optional reading in the

original curriculum. The bad news is that there’s still a fair amount of testable material here and

it requires memorization.

You should know cold the definition of the firm, the construction of composites, and the main

sections of the GIPS standards. As you prepare to memorize a few lists in this section it can help

to keep in mind the overall framework of GIPS—the why it exists, who it helps, and how it works.

Note that the material here is, in some respects at least, closely linked to Ethics in its philosophy

of standardization and client-friendly practices. This should help because even though some

questions can get very specific you can still leverage the guidelines for answering ethics

questions as a framework.

To recap: Always go with the stricter standard, think about the basic principles of what GIPS is

trying to accomplish to eliminate obviously wrong answers, and always remember anything

related to GIPS happens on a firm-wide basis!

The Global Investment Performance Standards, or GIPS, are a set of voluntary ethical and

professional standards for the evaluation and presentation of investment results. They seek to

establish a minimum set of performance presentation standards that will facilitate the comparison

of cross-manager performance. In that respect, they are laudable and quite important. The

standards discussed for the exam became effective January 1, 2011.

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The basic objectives of GIPS are to:

Establish global best practices for calculating and presenting performance

Facilitate accuracy and transparency

Facilitate comparison of historical performance

Encourage full disclosure and fair global competition

Encourage self-regulation

The key characteristics of GIPS include:

Voluntary, minimum standards

Mix of requirements and recommendations, must be adhered to with the goal of full disclosure and fair representation (which likely requires going beyond the minimum

GIPS requirements)

Only investment firms NOT individuals can claim compliance

Compliance must be on a firm-wide basis, NO partial compliance is allowed

Full disclosure is mandated (no cherry-picking performance)

Composites must include ALL fee-paying, discretionary portfolios

It covers all asset classes

Data integrity is paramount to the process

Provides standards where regulated industry standards are still lacking

The GIPS is constantly evolving

Before we go into more depth about the mechanics of the standards themselves let’s take a step

back and understand why the CFA Institute believes that there is even a need for global

standards.

Why GIPS Exists

The primary purpose of GIPS is to avoid misrepresentation of performance and standardize

reporting to facilitate global comparisons of investment results. Specifically, GIPS combats a

few specific reporting issues including:

1. Representative Accounts: The tendency for an investment firm to put their

performance in the best possible light by presenting only top performing accounts

2. Survivorship bias: Excluding dead or weak performing accounts (this is a particularly

common problem related to hedge fund performance reporting)

3. Manipulating time periods to only show performance for strong periods

Even without these explicit manipulations, comparing returns across managers can also get

complicated if each manager uses a different method and offers a different amount of

information.

The potential complexity introduced by this variation is compounded by the increasingly global

nature of investment markets.

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To address the problem GIPS looks to standardize calculation methods in order to help a client

understand and compare returns across managers. The standards also strive to help a client

understand how a manager achieved their return. With greater understanding of the methodology

and investment process of the manager a client can get a better picture of the level of risk taken

with their money.5 After all, a 10% return achieved by betting on biotech stocks is not the same

as a 10% return with a conservative basket of bonds and large cap Fortune 500 stocks.

Think about it from the perspective of a client investing money with multiple asset managers.

That client wants to be able to evaluate each manager and compare them to one another. But if

each manager presents different numbers, calculated in different ways, this becomes much harder

to do. We want an apples-to-apples comparison and not an apples-to-oranges one.

GIPS Mechanics GIPS standards are (1) applied on a firm-wide basis, (2) require discretionary portfolio returns

to be broken down by composite, and (3) must follow certain reporting principles in order to be

compliant. In this section we break down each of these topics in turn.

Definition of the firm

GIPS is mandated at a firm wide level and no partial compliance is allowed. Because of that it is

vital to understand how a firm is defined. Generally a firm is defined as “an investment firm,

subsidiary, or division held out to clients or potential clients as a distinct business entity."6

The term ‘business entity’ is defined here as a separate unit, division, or department that is

organizationally or functionally separate from other units AND which has autonomy and

discretion over the assets it manages. In other words it’s a single group that has full investment

decision making abilities—what to invest in, when, with how much money etc. In practice, this

definition means that a huge integrated financial services firm can have a single division claim

GIPS compliance as its own “firm,” without having to include the entire company.

Quick interruption: Here are the basic signs that a division can be considered its own firm. Note

this type of material is highly testable in a multiple choice question:

Signs a Division = a Firm

It represents itself as such to clients

It depends on its own personnel and administration

I has its own resources, control over its budget or P/L

It has a distinct investment process

Managers have discretion [read: autonomy] over the asset allocation process

It serves a distinct client base or market

5 Which is a laudable given the Financial crisis etc. 6 CFA Institute Volume 6, L3 2015.

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Defining a discretionary portfolio

If we go back to the definition of the firm under GIPS we see that it applies to the entire firm and

includes its total assets defined as assets over which it has discretion.

The concept of a portfolio discretionary is a core part of the definition of a firm. It is also these

discretionary fee-paying portfolios to which the reporting and calculation standards apply.

For that reason we need to know exactly what makes something “discretionary.”

GIPS defines discretionary to include any assets that are not so constrained by the client that a

manager can pursue their stated mandate. Note if a manager’s mandate is to choose other

advisors and they are free to do so then discretionary assets will also include assets managed by

those sub-advisors.

Signs that a portfolio is NOT discretionary include:

Client has veto power over trades

Client frequently withdraws large amounts of cash

Client relationship is “advisory” only

The manager cannot change asset allocations or modify risk exposure

To summarize: If a firm has control over what to do with the money then that portfolio is

discretionary. If they are just executing trades that a client tells them to make, however, that

portfolio is not considered discretionary.

Composites

So now we’ve defined the investment firm to which we are applying GIPS and we’ve identified

all of the portfolios that we have discretion over. How do we go about reporting returns in a meaningful way?

A natural place to start is by separating different investment strategies into different buckets or

composites. That should make sense. After all, you want to compare all domestic large cap

equity investors together while not say, lumping them in with the fixed income traders.

That’s why GIPS requires that each investment firm group every unique set of investment

strategies into a single composite. In fact, the CFAI’s official definition of a composite is that it

“is an aggregation of one or more portfolios that represent a similar investment strategy,

objective, or mandate.”

Put differently, a composite is the aggregation of all the discretionary portfolios that represent a

particular investment strategy or objective.

A final note: each investment category or composite, must be included when presenting

investment results. Remember, claiming to be GIPS compliant is an all or nothing

proposition applied on a firm wide basis. That means you can’t exclude anything you have

control over.

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Recap

Let’s recap all of this from the perspective of why a client wants GIPS / why the CFA Institute is

promoting it.

A manager might have great returns in one category, like foreign equities, but suck at investing

in another, like domestic bonds. As a client you want to know which fund you are putting money

into so that you can chose the right manager for each asset class.

To make sure we can evaluate each strategy separately we use composites.

You also want the fund manager to include all of their results when they tell you how they did.

You don’t want to only get a representative set of their best portfolios. That’s why every fee

paying discretionary portfolio must be included in at least one composite and why each

composite must be presented.

Requirements of composite construction Most of the definitions that follow should be common-sense when you think about them as rules

that try to create an accurate and comprehensive view of performance results. You should be

very familiar with this list.

1. Actual fee-paying discretionary portfolios need to be in at least one composite. You

can also include non-fee paying discretionary portfolios

2. Nondiscretionary accounts must NOT be included in a composite

3. Composites are defined based on investment strategy or objective, and a full

definition of how they were built must be available upon request

4. New discretionary accounts should be added to composites in a timely manner

5. Closed accounts should still be included in composite results up until the last

measurement period in which they were under management (this eliminates

survivorship bias)

6. Switching accounts from one composite to another can only happen if client

objectives have changed. When a portfolio is switched its historical record remains

with the old composite as well

7. Hybrid securities need consistent treatment within composites

8. Carve-outs (i.e. removing a single asset class from a larger managed account) are not

allowed after 2010 unless the assets are actually separately managed. Before 2010 it

had to be treated as if it had its own cash allocation.

9. Composites can only include assets actually managed by the firm

10. You cannot link model or simulated performance results to actual performance results

Verification Just as the GIPS standards are voluntary, verification of performance results by a third party is a

recommended (but not required) step to comply with GIPS.

Verification is performed by a third party, applies to the entire firm, and should cover a

minimum 1 year period.

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It has two main goals: (1) to determine that the firm has complied with all GIPS composite

construction requirements on a firm wide basis and (2) that all processes and procedures are

designed according to the calculation and data methodology required. Note, verification is not

about actually reviewing the calculations themselves.

Finally, a firm that has been verified should include this language in their report:

“[Name of Firm] has been verified for periods [dates] by [Name of Verifier]. A copy of the

verification report is available upon request.”

Basic Compliance Principals

In terms of the basics of compliance with GIPS reporting there are several key requirements (by

now you should see significant overlap with our earlier characteristics list):

Compliance must be firm wide…hence application to GIPS is on a firm-wide basis with the firm clearly defined as a ‘distinct business entity’

All applicable laws and regulations must be followed, but if there is a conflict disclose it

(just like ethics…again these are ethical standards)

No false or misleading data should be presented

Firms who are not GIPS compliant should not state that they are

Firms should not state that a specific return or portfolio is calculated according to GIPS

(it’s all or nothing!)

Firms need to produce a GIPS compliant report every 12 months and give it to prospective clients on demand

All fee-paying discretionary portfolios should be in composites created according to similar strategy and investment objective

Each composite that is included must have its own description which must be given to

clients when requested

A firm must present at least 5 years of GIPS compliant data (or since inception if <5 years old) and must then add annual performance each year up to 10 years minimum to

meet GIPS standards

o Firms may link years of noncompliant data but all post-2000 data must be

compliant

Firms must use the prescribed calculation and presentation methods including required disclosures

All policies must be documented to ensure existence and ownership of client assets

There are additional GIPS requirements for private equity and real estate which need to

be used when dealing with those asset classes

The 9 Major Sections of GIPS This is mostly a re-hash but it has its own LOS so we’ve included the list. This list should make

sense in terms of the process of implementing or reporting using GIPS. Being familiar with the

major sections is useful, but we don’t think this list will be directly tested.

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1. Fundamentals of Compliance

1. Definition of the firm and discretion, documentation of firm policies and

procedures, complying with GIPS updates, appropriately claiming compliance,

and third party verification.

2. Input data – Consistent use of data to create full, fair and comparable performance reports

3. Calculation methodology – Certain methods are required to maintain consistency

4. Creating Composites – Same investment strategy or objective

5. Disclosures – Some disclosures are mandatory, otherwise firm should disclose info about

the policies and procedures adopted by the firm

6. Presentation and reporting – Performance must be presented according to GIPS

7. Real estate – Since ’06 real estate has certain mandatory provisions

8. Private Equity – Since ’06 must be valued according to specific GIPS methods for the

asset class unless it is an open-ended or evergreen Fund.

9. Wrap/Fee or Separately Managed Accounts (SMAs) have their own set of requirements

that either supplement or replace those listed here

CFAI Research and Objectivity Standards This section has some basics on establishing standards for ‘good’ research but really it is all

about managing any potential conflicts of interest for an analyst conducting research on a given

security. The main focus is on two forms of conflict that can arise in issuing recommendations on

securities: (1) personal pressures and conflicts related to (personally) buying or selling a stock

you are researching and (2) pressures from other parts of your firm (i.e. the investment banking

arm or sell-side) usually trying to force you to issue favorable analysis on companies that they

want (or are) doing business with.

Objectives 1. Keep the client interests first when preparing research/recommendations or executing trades

2. Fully disclose all meaningful conflicts of interest

3. Promote effective policies and procedures to minimize conflicts related to objectivity

4. Support self-regulation by adhering to specific and measurable standards

Key Research Requirements Category Key Requirements Recommended Procedures

Research &

Objectivity

Policy

Have a formal written policy on research

independence and objectivity

Distribute policy to all

clients/prospects/employees

All research must have reasonable and

adequate basis

Issue research reports on a timely basis

Disclose all conflicts of interest

Compensation factors for

analysts

Written guidance for

reasonable/adequate basis

Offer supporting information

& disclose price

Issue reports at least quarterly

Supervisory &

Compliance

Have supervisory procedures in place to

ensure compliance

Have a senior officer of the company attest

to firm’s implementation

ID covered employees

Train regularly, attest to policy

annually

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Enforce policies, assess sanctions, monitor

effectiveness, maintain audit records

Public

Appearances

Disclose conflicts of interest when

discussing research and recommendations

in public

Ensure presentations have

enough info for audience to

make informed decision

Disclosure guidelines

Investment

Banking

Separate research analysts from investment

banking including separate supervisors

Do NOT let investment banking review,

revise, approve research

Do NOT let any investment banking

companies see research or

recommendations prior to release. Do NOT

promise specific rating

Prohibit analyst/investment

banking communication prior

to release

Investment bankers may

review for factual inaccuracies

Analysts do not participate in

marketing and roadshows for

IPOs

Personal

Trades

Do NOT front run client trades

Do NOT let families and employees trade

ahead of clients, contrary to firm

recommendations, or participate in IPOs of

companies covered by firm

Firms should have policies covering how to

manage these trades

Require approval ahead of

trading in industries an analyst

covers

Restricted periods 30 days

prior and 5 days post report

Permitted to sell contrary to

recommendation when in

extreme financial hardship

Covered employees provide

list of personal investments

Rating System Have a useful rating system for investors to

determine suitability

Should include

recommendation and rating

categories, time horizon

categories, and risk categories

Absolute or relative

recommendations OK

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