CFA 1_Ethics Flashcards
CFAI Designated Officer
Conducts inquiries related to professional conduct through the Professional Conduct staff
Circumstances that may prompt inquiry
- Self-disclosure
- Written complaint
- Public evidence
- Report by CFA exam proctor
Code of Ethics
- Act with integrity, competence, diligence, respect, and in ethical manner
- Place profession and clients above self
- Use reasonable care and independent judgment
- Practice in professional and ethical manner
- Promote rules and integrity of capital markets
- Maintain and improve competence
Standards of Professional Conduct
- Professionalism
- Integrity of Capital Markets
- Duties to Clients
- Duties to Employers
- Investment Analysis, Recommendations, and Actions
- Conflicts of Interest
- Responsibilities as a CFA Institute Member or CFA Candidate
PIDDICR
Standards of Professional Conduct—1. Professionalism
A. Knowledge of the Law: comply with stricter law in event of conflict. No requirement to report violations to Govt, but may be advisable. Approach supervisor or compliance dept first when client or employee is doing illegal stuff.
B. Independence and Objectivity: no bribes. modest gifts are permitted, but must be disclosed. significant gift is permitted from client if not based on performance going forward and is disclosed to employer, and doesn’t give client advantage. ensure communication firewalls exist. pay for own travel and hotel, unless it is modest and required. create restricted list of clients for sales force.
C. Misrepresentation: no misrepresenting analysis. no plagiarism or use of another’s data or analysis without giving credit (unless it is factual data from a recognised financial or statistical reporting service, eg US Treasury). No guarantees or assurances regarding an investment.
D. Misconduct: too much drinking at lunch is bad. doesn’t cover breaking the law due to civil disobedience in support of personal beliefs (ie not all illegal acts constitute misconduct). dishonesty in personal dealings is bad. neglecting to perform due diligence is misconduct.
Standards of Professional Conduct—2. Integrity of Capital Markets
A. Material Nonpublic Information: no insider trading. Mosaic theory: analysis of public information together with nonmaterial nonpublic information is OK. Best practice is to establish physical and informational firewalls (there should be no exchange of information whatsoever). The sharing of inside info itself is a violation, as is acting on it.
B. Market Manipulation: no distortive practices. It is okay to boost liquidity at initial launch if this is disclosed and to give clients better serivces, but can’t do so to mislead market participants. Can boost transactions over an initial launch period if this is fully disclosed. Includes manipulating market inputs by entering only positive data.
Standards of Professional Conduct—3. Duties to Clients
A. Loyalty, Prudence, and Care: put client’s interests first. Duty is to the ultimate beneficiary. If a broker doesn’t offer best price but fund manager chooses it for other reasons, this must be disclosed to clients and they must provide written statement that they understand this. Duty of loyalty is to beneficiaries if managing pension fund. Put clients before other people (ie newsletters) who use your recommendations (release to clients first).
Soft commission policies: Covers soft dollars or soft commissions. Client brokerage commissions should be used to benefit client, and be commensurate with value of the brokerage services received. They should not be used to pay for investment manager’s expenses. Soft dollar accounts should only be used to purchase research services that directly assist investment manager to make decisions (and not to assist in further education). Standard III (A) Loyalty, Prudence and Care stipulates that the client owns the brokerage. Therefore members and candidates are required to only use client brokerage to the benefit of the clients (soft commissions policy).
B. Fair Dealing: deal fairly with all clients. Different service levels are okay, but disclose them and make premium service available to all those willing to pay. Disseminate information to all clients simultaneously. Do not use position to disadvantage clients (eg in IPOs, by giving shares to management). Minimize time between decision and dissemination of a recommendation. Don’t inform all people in firm in advance that a recommendation is to be disseminated, that could leak.
C. Suitability: inquire about and judge suitability of investments for client. Focus on characteristics of entire portfolio, rather than issue by issue basis. Most important aspects of investment are those that will impact entire portfolio. Don’t do anything in violation of Investment Policy Statement, even if its really profitable. Suitability is a concern for advisor who recommends funds, but not for manager of funds (he is only responsible for compliance with fund’s mandate).
D. Performance Presentation: represent investment performance info accurately. Present weighted composite of all categories of portfolios, rather than single account. Disclose where past performance comes from (ie prior firm) and role in achieving that. Include terminated accounts in past performance history. Maintain compliance with firm’s stated investment policies. Don’t represent firm’s performance as that of your own.
E. Preservation of Confidentiality: keep client info confidential unless (1) illegal (and then only to the appropriate authorities), (2) required by law, or (3) permitted by client. That’s pretty much any client info (eg desire to donate to charity even). If illegal, report it to supervisor, and consult with lawyer to determine if must disclose to Govt. Sharing confidential client info with the Professional Conduct Program (PCP) as part of an investigation is NOT a violation either.
Standards of Professional Conduct—4. Duties to Employers
A. Loyalty: be good employee. Soliciting clients of your current firm is strictly prohibited. Okay to solicit prior clients after moving to new firm, but only if done with publicly available info (can’t use prior firm’s client lists, and can’t do if an NDA exists). Can’t take any records from prior firm even if developed by yourself (but can use knowledge you gained to recreate it). Can take another unrelated job without asking employer’s permission; but MUST get employer’s permission if you want to do independent practice for compensation that could compete with employer. If you disagree with your firm’s research, DON’T publish a contradictory report, it would harm them.
B. Additional Compensation Arrangements: Must disclose any additional compensation arrangements to employer, and must get written consent from all parties involved. It is okay to have a client agree to give you extra compensation in future if you meet some expectations, you just have to get it approved by employer.
C. Responsibilities of Supervisors: try to detect and prevent violations of code by subordinates. should not commingle compliance procedures with firm’s code of ethics, this can dilute ethical goal. ensure procedures in place to prevent coworkers from acting on unpublished information. Ensure subordinates have reasonable basis for their conclusions and that they are not relying on material nonpublic information. Should decline supervisory responsibility if adequate procedures are not being followed until such point they are.
Standard IV(C) Responsibilities of Supervisors does not include any reference to industry standards. Standard IV(C) requires supervisors to instruct those subordinate to whom supervision is delegated about detection methods to prevent violations of laws, rules, regulations, firm policies and the CFA Institute Code and Standards.
Standards of Professional Conduct—5. Investment Analysis, Recommendations, and Actions
A. Diligence and Reasonable Basis: for recommendations. Review quality of third-party research (and must consider performance, not just fee costs, when determining third-party to use). Inadequate research due to time constraints is a violation (should only take on what you can handle). Same facts may result in different opinions; no violation as long as reasonably supportable still. Can’t just overhear another analyst say something different and then go and change your own recommendation.
Standard V (A) Diligence and Reasonable Basis applies to the level of review necessary in selecting an external adviser or subadviser and would at minimum include reviewing the adviser’s adherence to its stated strategy.
B. Communication with Clients and Prospective Clients: disclose relevant stuff to clients, distinguish between fact and opinion. Must disclose basic process and logic used when making recommendations, if not describing system in detail. Also must disclose basic strategy of proposal, and what can happen in both good and bad cases (TRICKY). Should disclose changes in investment style or process to all clients immediately, not just prospective.
C. Record Retention: maintain appropriate records. CFAI suggests 7 years if no other regulatory standards.
Standards of Professional Conduct—6. Conflicts of Interest
A. Disclosure of Conflicts: disclose any matters that could impair independence to everyone. Disclose business relationships of other parts of firm (eg IB) with research clients. Disclose personal ownership of any recommended stocks.
B. Priority of Transactions: Investment transactions for clients and employers must have priority over those benefiting self. Must give clients adequate time to assimilate and act on new information before trading for firm’s account. Must give all clients equal treatment (ie don’t put your parents last just bc you want to avoid looking like competing interest). Also, recommends limit participation in IPOs, and put restrictions on private placements. Also restrict front running.
C. Referral Fees: must disclose referral fees to everyone. Don’t have to disclose bonuses by employers for generating new business, that is obvious to potential client, unless it is for assets to be invested in proprietary products which would benefit portfolio manager.
Standards of Professional Conduct—7. Responsibilities as a CFA Institute Member or CFA Candidate
A. Conduct as Members and Candidates in the CFA Program: don’t engage in compromising conduct. Don’t disclose any broad or specific topics that were in the CFA exam, at ALL. Don’t use position in CFAI to take advantage of anything.
B. Reference to CFA Institute, the CFA Designation, and the CFA Program: don’t misrepresent or exaggerate meaning or implications. must sign PCS (Professional Conduct Statement) annually and pay dues annually, otherwise can’t use CFA title. Can’t put CFA on company letterhead, only on material of individual. CFA must not be used as a noun, only as adjective or after name. Implying that CFAs have better investment results is violation. Cannot refer to “highest possible score” because that information is not reported. Exam is graded only pass and fail.
9 Major sections of GIPS
- Fundamentals of compliance
- Input data
- Calculation methodology
- Composite construction
- Disclosures
- Presentation and reporting
- Real estate
- Private equity
- Wrap fee/Separately Managed Account (SMA) portfolios
