L1 flash cards ethics (ss1)

What is the CFA Institute
Professional Conduct Program?
 All CFA Members and Candidates are required to comply with
the Code of Ethics and Standards of Professional Conduct (the
“Code” and “Standards”).
 The CFA Institute maintains responsibility for the Professional
Conduct Program.
Study Session 1, Reading 1

Enforcement of the CFA Institute
Professional Conduct Program
 The Disciplinary Review Committee of the CFA Institute Board
of Governors has overall responsibility for the Professional
Conduct Program and enforcement of the Code and
Standards.

Enforcement of the CFA Institute
Professional Conduct Program
The Rules of Procedure for Proceedings Related to Professional
Conduct are based on 2 principles:
1) fair process to the member and candidate
2) confidentiality of proceedings

Initiation of Inquiry
 Enquires may arise because of:
1) members must self disclose on the annual Professional Conduct
Statement all matters that question their professional conduct
2) written complaints about a member
3) CFA Institute staff may become aware of questionable conduct
through the media or other sources.

After Initiation of Inquiry
 The CFA Institute may:
1) request a written statement from the member/candidate
2) interview the member/candidate, complaining parties, or 3rd
parties
3) collect documents supporting evidence

After Collecting Evidence
 After collecting evidence, the Designated Officer may
1) conclude the enquiry with no disciplinary sanction
2) continue proceedings to discipline the
member/candidate

Disciplinary Sanctions
 Sanctions imposed by CFA Institute for a breach may
include:
 Members: public censure, suspension of
membership/designation, or revocation of CFA charter.
 Candidates: suspended from further participation in the
program.

Code of Ethics
 The Code is a set of principles that define the
professional conduct that CFA Institute expects from
its members and candidates in the CFA Program.

Six Mandatory Principles in the
Code of Ethics
1. All members must act with integrity, competence,
diligence, respect, and in an ethical manner with the
public, clients, prospective clients, employers,
employees, colleagues in the investment profession,
and other participants in global capital markets.

Code of Ethics
2. All members must place the integrity of the
investment profession and the interests of clients
above their own personal interests.

Code of Ethics
3. All members must use reasonable care and exercise
independent professional judgment when
conducting investment analysis, making investment
recommendations, taking investment actions, and
engaging in other professional activities.

Code of Ethics
4. All members must practice and encourage others to practice
in a professional and ethical manner that will reflect credit
on themselves and the profession.
5. All members must promote the integrity of and uphold the
rules governing capital markets.

Code of Ethics
6. All members must maintain and improve their professional
competence and strive to maintain and improve the
competence of other investment professionals.

Standards of Professional Conduct
 The standards of professional conduct outline fair and ethical
business practices.
 While Code defines the conduct, Standards outline it in more
details
 Violations may result in disciplinary sanctions

Seven Standards of
Professional Conduct
1. Professionalism
A. Knowledge of the Law
B. Independence and Objectivity
C. Misrepresentation
D. Misconduct

Seven Standards of
2. Integrity of capital markets
A. Material non public information
B. Market manipulation

Seven Standards of
3. Duties to clients
A. Loyalty, prudence and care
B. Fair dealing
C. Suitability
D. Performance presentation
E. Preservation of confidentiality

Seven Standards of
4. Duties to employers
A. Loyalty
B. Additional compensation arrangements
C. Responsibility of supervisors

Seven Standards of
5. Investment analysis, recommendations and actions
A. Diligence and reasonable basis
B. Communication with clients and prospective clients
C. Record Retention

Seven Standards of
6. Conflicts of Interest
A. Disclosure of conflicts
B. Priority of transactions
C. Referral fees

Seven Standards of
7. Responsibilities of a CFA institute member or CFA
candidate
A. Conduct as members and candidates in the CFA program
B. Reference to the CFA institute, the CFA designation and the
CFA program

Ethics and CFA Institute
 Through adherence to the codes and standards, each member
does his part in maintaining the integrity of the profession
 The code outlines the high level of ethical conduct expected
from candidates
 The standards are interwoven with the code forming a
tapestry of ethical requirements

Conduct that Conforms and
Violates Standards
Standard 1 Professionalism (A. Knowledge of the Law)
 When applicable law and the Code and Standards contradict,
members and candidates must follow the stricter of the
applicable law or the Code and Standards.

Violates Standards
Ex. Applicable law may not require disclosure of referral fees for
the recommendation of investment products or services.
Because the Code and Standards impose this obligation,
however, members and candidates must disclose the existence
of such fees.

Violates Standards
 A member or candidate must dissociate, or separate, from any
form of unethical or illegal activity

Violates Standards
Standard 1 Professionalism (B. Independence and Objectivity)
 Gifts should not be accepted if it leads to a conflict of interest.
 Participating in IPOs or private ownership/participation of
companies that the analyst himself is covering is unacceptable.

Violates Standards
Standard 1 Professionalism (C. Misrepresentation)
 A misrepresentation is any untrue statement or omission of a
fact or any statement that is otherwise false or misleading.
Ex. Omitting negative scenarios from financial models/Orally
exaggerating your expertise or capabilities

Violates Standards
 Misrepresentation through plagiarism in investment
management can take various forms.
Ex. Taking a research report/study of another firm or person,
change the names, and release the material as one's own
original analysis

Violates Standards
Standard 1 Professionalism (D. Misconduct)
 Otherwise legal actions are often construed as misconduct.
Example.
Excessive alcohol consumption during business hours – it
could have a detrimental effect on the member's/candidate's
ability to fulfil his or her professional responsibilities

Violates Standards
Standard 2 Integrity of Capital Markets
(A. Material Non Public Information)
 Material information can have a bearing on the stock prices.
For information to be material it has to be from a reliable
source. Analysts must be wary of receiving information from
corporate insiders.

Violates Standards
 Information given to a select group of analysts is not public
information and acting upon such information is a violation of
the standard.

Violates Standards
(B. Market Manipulation)
1) dissemination of false or misleading information
2) transactions that deceive or would be likely to mislead
mar-ket participants by distorting the price-setting
mechanism of financial instru-ments.

Violates Standards
Standard 3 Duties to Clients (A. Loyalty, Prudence and Care)
 Duties to client exist beyond managing assets. The brokerage
commissions or soft dollars are the assets of the client and
must be used for their benefit.
 Proxy voting is an economic benefit of the client. Voting
irresponsibly violates the duties towards the clients.

Violates Standards
 Violation: Excessive trading (which benefits brokers) within a
portfolio of client securities, even if the securities themselves
are appropriately bought and sold.

Violates Standards
Standard 3 Duties to Clients (B. Fair Dealing)
 Members/candidates should treat all clients fairly in light of
their investment objectives and circumstances.
Example. When making investments in new offerings or in
secondary financings, members and candidates should
distribute the issues to all customers for whom the
investments are appropriate.

Violates Standards
 Members and candidates should not take advantage of their
position in the industry to the detriment of clients.
 For instance, in the context of IPOs, members and candidates
must make bona fide public distributions of "hot issue"
securities.

Violates Standards
Standard 3 Duties to Clients (C. Suitability)
 While deciding the suitability of a security for a client, the
overall affect of the transaction of the risk return profile of the
portfolio should be considered.
 Violation: Evaluating a security in isolation/Recommending a
single transaction for all the clients

Violates Standards
Standard 3 Duties to Clients (D. Performance Presentation):
 Violation: Not including terminated accounts as part of
performance history with a clear indication of when the
accounts were terminated
 Past performance can be highlighted for marketing but must
be clearly mentioned that the performance was achieved at
another fund.

Violates Standards
Standard 3 Duties to Clients (E. Preservation of Confidentiality):
 Confidentiality must be preserved, even if the person is no
longer a client.
 However client confidentiality does not mean that potentially
illegal activities are not to be revealed to the respective
authorities.

Violates Standards
Standard 4 Duties to Employers (A. Loyalty):
 Violation:
 rendering independent services until they receive consent from
their employer to all of the terms of the arrangement
 Keeping a record of client details and intellectual property of
previous employer, once they have decided to leave the
company, unless with consent from the previous employer

Violates Standards
Standard 4 Duties to Employers (A. Loyalty):
 Violation: Taking work done for the previous employer to the
new employer, even if the member has worked on it entirely
on his own.
Example. A member cannot give software developed for GIPS
compliance for a previous employer to the new employer who
is seeking GIPS compliance, even though candidate has done
the entire work to develop the software.

Violates Standards
Standard 4 Duties to Employers
(B. Additional Compensation Arrangement):
 Candidate must obtain the consent of his employer to accept a
supplemental benefit. Supplemental benefit can be a vacation
trip paid by the client for good performance. Not disclosing
such arrangement would be a violation of the standard.

Violates Standards
(C. Responsibilities of Supervisors):
 A member or candidate must adopt reasonable procedures
and taken steps to implement an effective compliance
program
 Violation: Knowledge that the procedures designed to detect
and prevent violations are not being followed

Violates Standards
Standard 5 Investment Analysis, Recommendations and Actions
(A. Diligence and Reasonable Basis)
 Violation: Drawing conclusions from non-reliable secondary or
third party research.
 Financial models must be rigorously tested for the
assumptions made.
 Violation: Not updating a research report when new
information is received

Violates Standards
(B. Communication with Clients and Prospective Clients)
 Violation: Failure to identify the limits of statistically developed
projections
 In communication with Clients, facts and opinions must be clearly
distinguished. Violation: Treating estimates as actual numbers
 Violation: Report fails to describe properly the basic characteristics
of the actual and implied risks of the investment strategy.

Violates Standards
(C. Record Retention)
 Violation: Failure to keep a document and copies of all the
information that goes into his reports, including the secondary
or third-party research of other analysts.

Violates Standards
Standard 6 Conflicts of Interest (A. Disclosure of Conflict)
 Disclosure does not relieve the investment advisor or analyst
of their obligation of impartiality. It is an additional
requirement.

Violates Standards
 Cases where Disclosure is required:
 providing banking services on a company the candidate reports
 involvement in an IPO for a company the candidate report
 additional compensation arrangements or bonus schemes that
may cause the candidate to favour one client above another

Violates Standards
Standard 6 Conflicts of Interest (B. Priority of Transactions)
 Individual managers, advisers, or mutual fund employees can
make money from personal investments as long as:
1) the client is not disadvantaged by the trade
2) the investment professional does not benefit personally from
trades undertaken for clients
3) the investment professional complies with applicable
regulatory requirements

Violates Standards
Standard 6 Conflicts of Interest (C. Referral Fees)
 Non disclosure of any kind of referral fee can be a violation of
the standard. Even inter departmental referral fees should be
disclosed.
 A Quid pro quo relationship with another investment or
brokerage firm should be disclosed, even if the relationship
benefits the client.

Violates Standards
Standard 7 Responsibilities as a CFA Institute Member and CFA
Candidate (A. Conduct as Members and Candidates in the CFA
Program)
 Violation:
 Breaking exam rules
 Compromising the exam integrity by divulging details of an exam
 Misrepresentation of any information to the CFA institute.

Violates Standards
Candidate (B. Reference to CFA Institute, the CFA Designation,
and the CFA Program)
 Violation: Exaggerating the meaning or implications of
membership in CFA Institute. For example passing three exams
in consecutive years may be a statement of fact, but it cannot
be used to claim superior abilities as an investment analyst.

Practices Designed to Prevent
Code Violations
Standard 1 Professionalism (A. Knowledge of the law):
 Reporting potential violations of the Code and Standards
committed by fellow members and candidates.
 Undertaking the necessary due diligence when transacting
cross-border business to understand the multiple applicable
laws and regulations
 Providing written protocols for reporting suspected violations
and provide information on applicable laws

Code Violations
Standard 1 Professionalism (B. Independence and Objectivity)
 When possible, prior to accepting "bonuses" or gifts from
clients, members and candidates should disclose to their
employers such benefits offered by clients.
 Establishment of a formal written policy on the independence
and objectivity of research.

Code Violations
 Provide guidance for employees who make written or oral
presentations to reduce the likelihood of misrepresentation.
 Members and candidates should encourage their employers to
develop procedures for verifying information of third-party
firms.

Code Violations
Standard 1 Professionalism (D. Misconduct)
 Development and/or adoption of a code of ethics
 Dissemination of a list of potential violations and associated
disciplinary sanctions
 Checking references of potential employees to ensure that
they are of good character

Code Violations
 Public dissemination of the information that is material
 If material non public information is disclosed for the first time
in an analyst meeting or call, the analyst should encourage the
company to promptly issue a press release or otherwise make
the information publicly available.

Code Violations
 Procedures concerning interdepartmental communication, the
review of trading activity, and the investigation of possible
violations should be compiled and formalized.

Code Violations
(B. Market Manipulation)
 Any action that is likely to affect price and volume artificially
(even with good intentions) must be full disclosed
 Members should encourage their firms to have well drafted
policies regarding responsibilities to clients.

Code Violations
 Information should be disseminated in such a manner that all clients
have a fair opportunity to act.
 Design an equitable system to prevent selective or discriminatory
disclosure.
 Limit the amount of time that elapses between the decision to make
an investment recommendation and the time the actual
recommendation is disseminated.

Code Violations
Standard 3 Duties to Clients (C. Suitability)
 A member or candidate should put the needs and
circumstances of each client and the client's investment
objectives into a written investment policy statement.
 The investor's objectives and constraints should be maintained
and reviewed periodically to reflect any changes in the client's
circumstances.

Code Violations
Standard 3 Duties to Clients (D. Performance Presentation)
 Include disclosures that fully explain the performance results
being reported.
 Maintain the data and records used to calculate the
performance being presented.
 Present the performance of the weighted composite of similar
portfolios rather than using a single representative account.

Code Violations
Standard 3 Duties to Clients (E. Preservation of Confidentiality)
 Avoid disclosing any information received from a client except
to the authorized fellow employees who are also working for
the client.
 Uand follow their firm's electronic information storage
procedures.

Code Violations
Standard 4 Duties to Employers (A. Loyalty)
 Understand any restrictions placed by the employer on
offering similar services outside the firm.
 Understand the termination policies of an employer.

Code Violations
(B. Additional Compensation Arrangement)
 Members and candidates should make an immediate written
report to their employer specifying any compensation they
propose to receive for services in addition to the
compensation or benefits received from their employer.

Code Violations
(C. Responsibilities of Supervisors)
 Understand what constitutes an adequate compliance system
and appropriate compliance procedures should be
established, documented and communicated.
 Members and candidates are encouraged to recommend that
their employers adopt a code of ethics.

Code Violations
 Cover all pertinent issues when arriving at a recommendation.
 Understand the parameters used in the model or quantitative
research.

Code Violations
 Adopt a standardized set of criteria for evaluating the
adequacy of external advisers.
 Due diligence of a portfolio manager must be applied more
deeply than a review of a single security. It includes a review
of outside managers and investment funds.

Code Violations
(B. Communication with Clients and Prospective Clients)
 Describe to clients the manner in which the member or candidate
conducts the investment decision-making process.
 Outline known limitations of the analysis and conclusions contained
in their investment advice.
 Maintain records to assist in the after-the-fact review of a report.

Code Violations
(C. Record Retention)
 Archive research notes and other documents that support
their current investment-related communications

Code Violations
 When conflicts cannot be reasonably avoided, clear and complete
disclosure of their existence is necessary.
 Disclose special compensation arrangements with the employer that
might conflict with client interests, such as bonuses based on short-
term performance criteria, commissions, incentive fees,
performance fees, and referral fees.

Code Violations
Standard 6 Conflicts of Interest (B. Priority of Transactions)
 Individual firms must decide who within the firm should be
required to comply with the trading restrictions.
 Supervisors should establish reporting procedures for
investment personnel, including disclosure of personal
holdings/beneficial ownerships, confirmations of trades, and
preclearance procedures.

Code Violations
Standard 6 Conflicts of Interest (C. Referral Fees)
 Inform their employer, clients, and prospective clients of any benefit
received for referrals of customers and clients. Such disclosures
allow clients or employers to evaluate 1) the partiality shown in any
recommendation of services and 2) the full cost of the services.
 Disclose payment of a fee or compensation to others for referrals

Code Violations
Candidate (A. Conduct as Members and Candidates in the CFA
Program)
 Do not disclose details relating to the content of the exam.
 Do not use the membership or CFA designation to further business
interests.

Code Violations
Candidate (B. Reference to CFA Institute, the CFA Designation,
and the CFA Program)
 CFA institute has well defined rules for using the designations
like charter holder, member or candidate. The rules must be
strictly followed.

Why Were The GIPS Created?
 GIPS were created to enable a valid comparison of investment
performance between different funds.
 The GIPS standards ensure fair representation and full
disclosure of investment performance.

Who GIPS Apply To?
 Only investment management firms that actually manage
assets can claim voluntary compliance with the Standards.
 Plan sponsors, software vendors and consultants cannot make
a claim of compliance.
 Compliance can only be claimed on a firm-wide basis.

Who GIPS Serve?
 The GIPS standards benefit two main groups: investment
management firms and prospective clients.
 Investors have a greater level of confidence in the integrity of
performance presentations of a GIPS-compliant firm and can
more easily compare performance presentations from
different investment management firms.

What is a Composite?
 A composite is an aggregation of portfolios managed according
to a specific mandate
 All the portfolios which are managed by a specific mandate
have to be included

Portfolios in a Composite
 The determination of which portfolios to include in the
composite must be made according to pre-established criteria.
Example. A firm cannot subjectively select which Global Equity
portfolios will be included in or excluded from the calculation
and presentation of the Global Equity Composite.

Responsibility for
Claim of Compliance
 Firms self-regulate their claim of compliance.
 Firms may voluntarily hire an independent third party to
perform verification in order to increase confidence in the
firm's claim of compliance. However, independent verification
is not a requirement.

Firm Wide Basis
 Verification is performed with respect to an entire firm, not on
specific composites.
 Verification tests whether the investment firm has complied
with all the composite construction requirements of the GIPS
standards on a firm-wide basis.

Features of GIPS
 The GIPS standards require firms to include all actual,
discretionary, fee-paying portfolios in at least one composite
defined by an investment mandate
 The accuracy of input data is critical to the accuracy of the
performance presentation.
 Calculation of performance should be done according to the
methodologies prescribed in the GIPS

Fundamentals of Compliance
 Firms should ensure that all requirements are met before
claiming GIPS compliance
 Internal compliance checks and third party verification are
encouraged

Definition of an Investment Firm
 The definition of the firm is the foundation for firm-wide
compliance and creates defined boundaries whereby total firm
assets can be assessed. Firm definition should be broad and
meaningful

Definition of an Investment Firm
 The scope of this definition should include all geo-graphical
(country, regional, etc.) offices operating under the same
brand name regardless of the actual name of the individual
invest-ment management company.

Historical Performance Record
 Changes in a firm's organization must not lead to alteration of
historical composite performance. Requirements of the
historical performance record is to ensure a lack of bias

 A firm is required to initially present, at a minimum, five years
of annual investment performance that is compliant with the
GIPS standards. If it has been in existence <5 yrs, the firm must
present performance since the firm's inception or the
composite inception date.

 The firm must present an additional year of performance each
year, building up to a minimum of 10 years of GIPS-compliant
performance.

Conflict Between GIPS and
Other Regulations
 If conflict does not exist, follow both GIPS and local laws
 Compliance with applicable law and/or regulation does not
necessarily lead to compliance with the GIPS standards.
 If conflict exists, follow local laws and disclose the source of
conflict

9 Major Sections of GIPS Standards
 Fundamentals of Compliance
 Input Data
 Calculation Methodology
 Composite Construction
 Disclosure
 Presentation and Reporting
 Real Estate
 Private Equity
 Wrap Fee/Separately Managed Account (SMA) Portfolios

Requirements and
Recommendations
 The provisions for each section are categorized into
requirements and recommendations.
 Firms must meet all the requirements to claim compliance
with the GIPS standards. Firms are encouraged to implement
as many of the recommendations as possible.

L1 flash cards ethics (ss1)

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