Ethical and Professional Standards Flashcards
1
Q
What must all the Members of CFA Institute (including CFA charterholders) and candidates for the CFA designation do ?
A
- 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. - Place the integrity of the investment profession and the interests of
clients above their own personal interests. - Use reasonable care and exercise independent professional judgment
when conducting investment analysis, making investment
recommendations, taking investment actions, and engaging in other
professional activities. - Practice and encourage others to practice in a professional and ethical
manner that will reflect credit on themselves and the profession. - Promote the integrity and viability of the global capital markets for the
ultimate benefit of society. - Maintain and improve their professional competence and strive to
maintain and improve the competence of other investment professionals.
2
Q
What is the second Standard of professional conduct ?
A
II. INTEGRITY OF CAPITAL MARKETS :
A. Material Nonpublic Information
Members and Candidates who possess material nonpublic information
that could affect the value of an investment must not act or cause others
to act on the information.
B. Market Manipulation
Members and Candidates must not engage in practices that distort
prices or artificially inflate trading volume with the intent to mislead
market participants.
2
Q
Which of the following statements is most accurate? An optimal ethical decision-making framework:
A
culminates with decisions and actions.
B
considers situational influences in the initial phase.
C
allows individuals to move through the various phases of the decision-making process in a non-sequential manner.
A
C
3
Q
What is the first Standard of professional conduct ?
A
I. PROFESSIONALISM :
A. Knowledge of the Law
Members and Candidates must understand and comply with all
applicable laws, rules, and regulations (including the CFA Institute Code
of Ethics and Standards of Professional Conduct) of any government,
regulatory organization, licensing agency, or professional association
governing their professional activities. In the event of conflict, Members
and Candidates must comply with the more strict law, rule, or
regulation. Members and Candidates must not knowingly participate or
assist in and must dissociate from any violation of such laws, rules, or
regulations.
B. Independence and Objectivity
Members and Candidates must use reasonable care and judgment to
achieve and maintain independence and objectivity in their professional
activities. Members and Candidates must not offer, solicit, or accept any
gift, benefit, compensation, or consideration that reasonably could be
expected to compromise their own or another’s independence and
objectivity.
C. Misrepresentation
Members and Candidates must not knowingly make any
misrepresentations relating to investment analysis, recommendations,
actions, or other professional activities.
D. Misconduct
Members and Candidates must not engage in any professional conduct
involving dishonesty, fraud, or deceit or commit any act that reflects
adversely on their professional reputation, integrity, or competence.
E. Competence
Members and Candidates must act with and maintain the competence
necessary to fulfill their professional responsibilities.
4
Q
What is the third Standard of professional conduct ?
A
III. DUTIES TO CLIENTS :
A. Loyalty, Prudence, and Care
Members and Candidates have a duty of loyalty to their clients and must
act with reasonable care and exercise prudent judgment. Members and
Candidates must act for the benefit of their clients and place their
clients’ interests before their employer’s or their own interests.
B. Fair Dealing
Members and Candidates must deal fairly and objectively with all clients
when providing investment analysis, making investment
recommendations, taking investment action, or engaging in other
professional activities.
C. Suitability
1. When Members and Candidates are in an advisory relationship with a
client, they must:
a. Make a reasonable inquiry into a client’s or prospective client’s
investment experience, risk and return objectives, and
financial constraints prior to making any investment
recommendation or taking investment action and must
reassess and update this information regularly.
b. Determine that an investment is suitable to the client’s financial
situation and consistent with the client’s written objectives,
mandates, and constraints before making an investment
recommendation or taking investment action.
c. Judge the suitability of investments in the context of the client’s
total portfolio.
- When Members and Candidates are responsible for managing a
portfolio to a specific mandate, strategy, or style, they must make
only investment recommendations or take only investment actions
that are consistent with the stated objectives and constraints of
the portfolio.
D. Performance Presentation
When communicating investment performance information, Members
and Candidates must make reasonable efforts to ensure that it is fair,
accurate, and complete.
E. Preservation of Confidentiality
Members and Candidates must keep information about current, former,
and prospective clients confidential unless:
1. The information concerns illegal activities on the part of the
client or prospective client,
2. Disclosure is required by law, or
3. The client or prospective client permits disclosure of the
information.
5
Q
What is the fourth Standard of professional conduct ?
A
IV. DUTIES TO EMPLOYERS :
A. Loyalty
In matters related to their employment, Members and Candidates must
act for the benefit of their employer and not deprive their employer of the
advantage of their skills and abilities, divulge confidential information, or
otherwise cause harm to their employer.
B. Additional Compensation Arrangements
Members and Candidates must not accept gifts, benefits, compensation,
or consideration that competes with or might reasonably be expected to
create a conflict of interest with their employer’s interest unless they
obtain written consent from all parties involved.
C. Responsibilities of Supervisors
Members and Candidates must make reasonable efforts to ensure that
anyone subject to their supervision or authority complies with applicable
laws, rules, regulations, and the Code and Standards.
6
Q
What is the fith Standard of professional conduct ?
A
V. INVESTMENT ANALYSIS, RECOMMENDATIONS, AND ACTIONS :
A. Diligence and Reasonable Basis
Members and Candidates must:
1. Exercise diligence, independence, and thoroughness in
analyzing investments, making investment
recommendations, and taking investment actions.
2. Have a reasonable and adequate basis, supported by
appropriate research and investigation, for any investment
analysis, recommendation, or action.
B. Communication with Clients and Prospective Clients
Members and Candidates must:
1. Disclose to clients and prospective clients the nature of the
services provided, along with information about the costs to
the client associated with those services.
2. Disclose to clients and prospective clients the basic format and
general principles of the investment processes they use to
analyze investments, select securities, and construct
portfolios and must promptly disclose any changes that
might materially affect those processes.
3. Disclose to clients and prospective clients significant limitations
and risks associated with the investment process.
4. Use reasonable judgment in identifying which factors are
important to their investment analyses, recommendations, or
actions and include those factors in communications with
clients and prospective clients.
5. Distinguish between fact and opinion in the presentation of
investment analysis and recommendations.
C. Record Retention
Members and Candidates must develop and maintain appropriate
records to support their investment analyses, recommendations, actions,
and other investment-related communications with clients and
prospective clients.
7
Q
What is the sixth Standard of professional conduct ?
A
VI. CONFLICTS OF INTEREST :
A. Avoid or Disclose Conflicts
Members and Candidates must avoid or make full and fair disclosure of
all matters that could reasonably be expected to impair their
independence and objectivity and interfere with respective duties to their
clients, prospective clients, and employer. Members and Candidates
must ensure that such disclosures are prominent, are delivered in plain
language, and communicate the relevant information effectively.
B. Priority of Transactions
Investment transactions for clients and employers must have priority
over investment transactions in which a Member or Candidate is the
beneficial owner.
C. Referral Fees
Members and Candidates must disclose to their employer, clients, and
prospective clients, as appropriate, any compensation, consideration, or
benefit received from or paid to others for the recommendation of
products or services.
8
Q
What is the seventh Standard of professional conduct ?
A
VII. RESPONSIBILITIES AS A CFA INSTITUTE MEMBER OR CFA CANDIDATE :
A. Conduct as Participants in CFA Institute Programs
Members and Candidates must not engage in any conduct that
compromises the reputation or integrity of CFA Institute or the CFA
designation or the integrity, validity, or security of CFA Institute
programs.
B. Reference to CFA Institute, the CFA Designation, and the CFA
Program
When referring to CFA Institute, CFA Institute membership, the CFA
designation, or candidacy in the CFA Program, Members and Candidates
must not misrepresent or exaggerate the meaning or implications of
membership in CFA Institute, holding the CFA designation, or candidacy
in the CFA Program.
9
Q
What are the 6 codes of ethic ?
A
➀ Act with integrity, competence, diligence, and respect and in an ethical manner with:
the public
clients (current & prospective)
employers
employees
colleagues
➁ Place the integrity of the investment
profession and the interest of clients
above their own personal interests
➂ Use reasonable care and exercise
independent professional judgement when
conducting investment analysis, making
investment recommendations, taking investment
actions
➃ Practice, and encourage others to practice,
in a professional and ethical manner that
will reflect credit on themselves and the
profession
➄ Promote the integrity and viability of the
global capital markets for the ultimate
benefit of society
➅ Maintain and improve professional
competence and strive to maintain and
improve the competence of other
investment professionals
ONGOING EDUCATION
10
Q
How can we describe ethics ?
A
Ethics can be defined as a set of moral principles or rules of conduct that provide
guidance for our behavior when it affects others. Widely acknowledged fundamental ethical principles include honesty, fairness, diligence, and care and respect for others. Ethical conduct follows those principles and balances self-interest with both the direct and the indirect consequences of that behavior for other people.
11
Q
Laws and regulations often attempt to
guide people toward ethical behavior, but they do not cover all unethical behavior. Ethical behavior is often distinguished from legal conduct by describing legal behavior as what is required and ethical behavior as conduct that is morally correct. Ethical principles go beyond that which is legally sufficient and encompass what is the right thing to do.
A
12
Q
An ethical decision-making framework can come in many forms but should
provide investment professionals with a tool for following the principles of the
firm’s code of ethics. Through analyzing the particular circumstances of each
decision, investment professionals are able to determine the best course of action to fulfill their responsibilities in an ethical manner.
A
13
Q
All CFA Institute members (including holders of the Chartered Financial Analyst [CFA] designation) and CFA candidates have the personal responsibility to embrace and uphold the provisions of the Code and Standards and are encouraged to notify their employer of this responsibility.
A
14
Q
Standard I(A) Knowledge of the Law :
Members and Candidates must understand and comply with all applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct) of any government, regulatory organization, licensing agency, or professional association governing their professional activities. In the event of conflict, Members and Candidates must comply with the more strict law, rule, or regulation. Members and Candidates must not knowingly participate or assist in and must dissociate from any violation of such laws, rules, or regulations.
A
Standard I : PROFESSIONALISM
15
Q
Standard 1A (Knowledge of the Law):
This standard does not require members and candidates to become experts, however, in compliance. Additionally, members and candidates are not required to have detailed knowledge of or be experts on all the laws that could potentially govern their activities. During times of changing regulations, members and candidates must remain vigilant in maintaining their knowledge of the requirements for their professional activities.
A
Relationship between the Code and Standards and Applicable Law:
When applicable law and the Code and Standards require different conduct, members and candidates must follow the more strict of the applicable law or the Code and Standards. “Applicable law” is the law that governs the member’s or candidate’s conduct. The “more strict” law or regulation is the law or regulation that imposes greater restrictions on the action of the member or candidate or calls for the member or candidate to exert a greater degree of action that protects the interests of investors. In other words: Members and candidates must not engage in conduct that constitutes a violation of the Code and Standards, even though it may otherwise be legal.
!! Adhere if the law states: the law of the client’s home country governs !!!
16
Q
Dissociation practices will differ on the basis of the member’s or candidate’s
role in the investment industry. It may include removing one’s name from written reports or recommendations, asking for a different assignment, or refusing to accept a new client or continue to advise a current client. Inaction combined with
continuing association with those involved in illegal or unethical conduct may be
construed as participation or assistance in the illegal or unethical conduct.
A
CFA Institute strongly encourages members and candidates to report potential violations of the Code and Standards committed by fellow members and candidates. Although a failure to report is less likely to be construed as a violation than a failure to dissociate from unethical conduct, the impact of inactivity on the integrity of capital markets can be significant.
report violations of the Code and Standards by CFA Institute members or CFA candidates by submitting a complaint in writing to the CFA Institute Professional Conduct Program via e-mail or the CFA Institute Website.
17
Q
Members and candidates involved in creating or maintaining investment services or investment products or packages of securities and/or derivatives should be mindful of where these products or packages will be sold as well as their places of origination. (Take due diligence in order to protect the reputation of their firm and themselves.)
A
18
Q
Recommended Procedures for Compliance:
- Members and Candidates:
1- Stay informed: Provide memorandums distributed to employees in the organization. Also, participation in an internal or external continuing education program
2- Review procedures
3- Maintain current files: Accessible current reference copies of applicable statutes, rules, regulations, and important cases.
- Legal Counsel : When in doubt about the appropriate action to undertake, it is recommended that a member or candidate seek the advice of compliance
personnel or legal counsel concerning legal requirements. (Seek Advice also for violations) - Dissociation: Document the violation and urge their firms to attempt to persuade the perpetrator(s) to cease such conduct.
A
- Firms:
1- Develop and/or adopt a code of ethics: M/C should encourage management to adopt a code of ethics.
2- Provide information on applicable laws:
3- Establish procedures for reporting violations: written protocols for reporting suspected violations of laws, regulations, or company policies.
19
Q
Standard I(B) Independence and Objectivity :
Members and Candidates must use reasonable care and judgment to achieve
and maintain independence and objectivity in their professional activities. Members and Candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another’s independence and objectivity.
A
20
Q
Standard 1B ( Independence and Objectivity): Standard I(B) states the responsibility of CFA Institute members and candidates in the CFA Program to maintain independence and objectivity so that their clients will have the benefit of their work and opinions unaffected by any potential conflict of interest or other circumstance adversely affecting their judgment. Every member and candidate should endeavor to avoid situations that could cause or be perceived to cause a loss of independence or objectivity in recommending investments or taking investment action.
A
21
Q
In a client relationship, the client has already entered some type of compensation arrangement with the member, candidate, or his or her firm. A gift from a client could be considered supplementary compensation. The potential for obtaining influence to the detriment of other clients, although
present, is not as great as in situations where no compensation arrangement
exists.
A
When possible, prior to accepting “bonuses” or gifts from clients, members and candidates should disclose to their employers such benefits offered by clients. If notification is not possible prior to acceptance, members and candidates must disclose to their employer benefits previously accepted from clients.
22
Q
Recommendations must convey the member’s or candidate’s true opinions, free of bias from internal or external pressures, and be stated in clear and unambiguous language.
A
23
Q
Members and candidates also should be aware that some of their professional or social activities within CFA Institute or its member societies may subtly threaten their independence or objectivity.
A
The members or candidates responsible for the activities should evaluate both the actual effect of such solicitations on their independence and whether their objectivity might be perceived to be compromised in the eyes of their clients.
24
Portfolio managers have a responsibility to respect and foster the intellectual
honesty of sell-side research. Therefore, it is improper for portfolio managers to
threaten or engage in retaliatory practices, such as reporting sell-side analysts to
the covered company in order to instigate negative corporate reactions.
25
Members and candidates who are responsible for hiring and retaining outside managers and third-party custodians should not accepts
gifts, entertainment, or travel funding that may be perceived as impairing their decisions.
Primary and secondary fund managers,
as well as third-party custodians, often arrange educational and marketing events
to inform others about their business strategies, investment process, or custodial
services. Members and candidates must review the merits of each offer individually
in determining whether they may attend yet maintain their independence.
26
Having analysts work with investment bankers is appropriate only when
the conflicts are adequately and effectively managed and disclosed. Firm managers have a responsibility to provide an environment in which analysts are neither
coerced nor enticed into issuing research that does not reflect their true opinions.
Firms should require public disclosure of actual conflicts of interest to investors.
27
Firms should also regularly review their policies and procedures to determine whether analysts are adequately
safeguarded and to improve the transparency of disclosures relating to conflicts of interest. The highest level of transparency is achieved when disclosures are prominent and specific rather than marginalized and generic.
28
As performance analysts, their analyses may reveal instances where managers may appear to have strayed from their mandate. Additionally, the performance analyst may receive requests to alter the construction of composite indices owing to negative results for a selected account or fund.
29
Analysts may be pressured to issue favorable reports and recommendations by the companies they follow. Not every stock is a “buy,” and not every research
report is favorable.
Retaliatory practices include companies bringing legal action against analysts personally and/or their firms to seek monetary damages for the economic effects of negative reports and recommendations.
30
Members and candidates employed at rating agencies should ensure that procedures and processes at the agencies prevent undue influences from a
sponsoring company during the analysis. Members and candidates should abide
by their agencies’ and the industry’s standards of conduct regarding the analytical process and the distribution of their reports.
The work of credit rating agencies also raises concerns similar to those inherent in investment banking relationships. Analysts may face pressure to issue ratings at a specific level because of other services the agency offers companies— namely, advising on the development of structured products. The rating agencies need to develop the necessary firewalls and protections to allow the independent
operations of their different business lines.
31
Members and candidates may find themselves on either side of the manager
selection process. The responsibility of members and candidates to maintain their independence and objectivity extends to the hiring or firing of those who provide business services beyond investment management.
Requesting contributions to a favorite charity or political organization may also be perceived as an attempt to influence the
decision-making process.
32
At a minimum, issuer-paid research should include a thorough analysis of the company’s financial statements based on publicly disclosed information, benchmarking within a peer group, and industry analysis. Analysts must exercise diligence, independence, and thoroughness in conducting their research in an objective manner. Analysts must distinguish between fact and opinion in their reports. Conclusions must have a reasonable and adequate basis and must be supported by appropriate research.
33
Best practice is for independent analysts, prior to writing their reports, to negotiate only a flat fee for their work that is
not linked to their conclusions or recommendations.
Not accept recompensation for avoiding negative information in the report...
34
To avoid the appearance of compromising their independence and objectivity, best practice dictates that members and candidates always use commercial transportation at their expense or at the expense of their firm rather than accept paid travel arrangements from an outside company. Should commercial transportation be unavailable, members and candidates may accept modestly arranged travel to participate in appropriate information-gathering events, such as a property tour.
35
Recommended Procedures for Compliance:
- Protect the integrity of opinions: Members, candidates, and their firms should establish policies stating that every research report concerning the securities of a corporate client should reflect the unbiased opinion of the analyst.
- Create a restricted list: If the firm is unwilling to permit dissemination of
adverse opinions about a corporate client, members and candidates should encourage the firm to remove the controversial company from the research
universe and put it on a restricted list so that the firm disseminates only factual information about the company.
- Limit gifts: Firms should consider a strict value limit for acceptable gifts that is based on the local or regional customs and should address whether the limit is per gift or an aggregate annual value.
- Restrict investments: Members and candidates should encourage their investment firms to develop formal polices related to employee purchases of equity
or equity-related IPOs.
- Review procedures
- Independence policy : written policy
- Appointed officer: Firms should appoint a senior officer with oversight responsibilities for compliance with the firm’s code of ethics and all regulations
concerning its business.
36
Members and candidates may accept bonuses or gifts from clients as long as they disclose them to their employer because gifts in a client relationship are deemed less likely to affect a member’s or candidate’s objectivity and independence than gifts in other situations.
37
Standard I(C) Misrepresentation :
Members and Candidates must not knowingly make any misrepresentations
relating to investment analysis, recommendations, actions, or other professional activities.
38
Standard I(C) prohibits members and candidates from guaranteeing clients any specific return on volatile investments. Most investments contain some element of risk that makes their return inherently unpredictable. For such investments, guaranteeing either a particular rate of return or a guaranteed preservation of investment capital (e.g., “I can guarantee that you will earn 8% on equities this year” or “I can guarantee that you will not lose money on this investment”) is misleading to investors. Standard I(C) does not prohibit members and candidates from providing clients with information on investment products that have guarantees built into the structure of the products themselves or for which an institution has agreed to cover any losses.
39
A misrepresentation is any untrue statement or omission of a fact or any
statement that is otherwise false or misleading.
40
A member or candidate must not knowingly omit or misrepresent information or give a false impression of a
firm, organization, or security in the member’s or candidate’s oral representations, advertising (whether in the press or through brochures), electronic communications, or written materials (whether publicly disseminated or not).
Knowing or SHOULD HAVE KNOWN
41
Written materials include, but are not limited to, research reports, underwriting documents, company financial reports, market letters, newspaper columns,
and books.
Electronic communications include, but are not limited to, internet communications, webpages, mobile applications, and e-mails.
42
Members and candidates must disclose their intended use of external managers and must not represent those managers’ investment practices as their own.
43
Members and candidates may misrepresent the success of their performance record through presenting benchmarks that are not comparable to their strategies. Further, clients can be misled if the benchmark’s results are not reported on a basis comparable to that of the fund’s or client’s results. Best practice is selecting the most appropriate available benchmark from a universe of available options.
44
Furthermore, some investment strategies may use reference indices that do not reflect the opportunity set of the invested assets—for example, a hedge fund comparing its performance with a “cash plus” basis. When such a benchmark is used, members and candidates should make reasonable efforts to ensure that they disclose the reasons behind the use of this reference index to avoid misrepresentations of their performance.
45
Consistency in the reported information will improve the perception of the valuation process
46
Social Media :
When communicating through social media channels, members and candidates should provide only the same information they are allowed to distribute to clients and potential clients through other traditional forms of communication.
The perceived anonymity granted through these platforms may entice individuals to misrepresent their qualifications or abilities or those of their employer.
47
Omissions:
The omission of a fact or outcome can be misleading, especially given the growing
use of models and technical analysis processes.When inputs are knowingly omitted, the resulting outcomes may provide misleading information to those who rely on it for making investment decisions. Additionally, the outcomes from models shall not be presented as FACTS because they represent the expected results based on the inputs and analysis process incorporated.
The omission of any accounts appropriate for the defined composite may misrepresent to clients the success of the manager’s implementation of its strategy.
48
Plagiarism:
In the preparation of material for distribution to employers, associates, clients, prospects, or the general public, it is prohibited. . Plagiarism is defined as copying or using in substantially the same form materials prepared by others without acknowledging the source of the material or identifying the author and publisher of such material.
49
Other practices include (1) using excerpts from articles or reports prepared by others either verbatim or with only slight changes in wording without acknowledgment, (2) citing specific quotations as attributable to “leading analysts” and “investment experts” without naming the specific references, (3) presenting statistical estimates of forecasts prepared by others and identifying the sources but without including the qualifying statements or caveats that may have been used,
(4) using charts and graphs without stating their sources, and (5) copying proprietary computerized spreadsheets or algorithms without seeking the cooperation
or authorization of their creators
50
Standard I(C) also applies to plagiarism in oral communications, such as through group meetings; visits with associates, clients, and customers; use of audio/video media (which is rapidly increasing); and telecommunications, including electronic data transfer and the outright copying of electronic media.
51
Work Completed for Employer:
Members or candidates may use research conducted or models developed by others within the same firm without committing a violation. The most common example relates to the situation in which one (or more) of the original analysts is no longer with the firm. Research and models developed while employed by a firm are the property of the firm. The firm retains the right to continue using the work completed after a member or candidate has left the organization.
52
Recommended Procedures for Compliance :
1- Factual Presentations : Firms can also help prevent misrepresentation by specifically designating which employees are authorized to speak on behalf of the firm. Regardless of whether the firm provides guidance, members and candidates should make certain that they understand the services the firm can perform and its qualifications.
2- Qualification Summary : Each member and candidate should prepare a summary of his or her own qualifications and experience and a list of the services the member or candidate is capable of performing.
3- Verify Outside Information.
4- Maintain Webpage: Members and candidates should also ensure that all reasonable precautions have been taken to protect the site’s integrity, confidentiality, and security and that the
site does not misrepresent any information and provides full disclosure.
To avoid plagiarism :
1- Maintain copies: Keep copies of all research reports.
2- Attribute quotations: Attribute to their sources any direct quotations, including projections, tables, statistics, model/product ideas, and new methodologies prepared by persons other than recognized financial and statistical
reporting services or similar sources.
3- Attribute summaries: Attribute to their sources any paraphrases or summaries of material prepared by others.
53
Example (taking a model and making a few changes): Although Browning tested Jorrely’s model on his own and
even slightly modified it, he must still acknowledge the original source of
the idea. Browning can certainly take credit for the final, practical results;
he can also support his conclusions with his own test. The credit for the
innovative thinking, however, must be awarded to Jorrely.
54
Copying verbatim any material without acknowledgement, including plain-language descriptions of the P/E multiple and standard deviation, violates Standard I(C). Even though these concepts are general, best practice would be for Zubia to describe them in his own words or
cite the sources from which the descriptions are quoted.
55
Smith is in compliance with Standard I(C) by not investing in securities that she and her team cannot effectively understand. Because she is not able to describe the risk and return profile of the securities to
the pension fund beneficiaries and trustees, she appropriately limits the fund’s exposure to this sector.
56
Unless the returns of a single fund
reflect the performance of a firm as a whole, the use of a singular fund for
performance comparisons should be avoided.
57
Standard I(D) Misconduct :
Members and Candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence.
58
Standard I(D) :
In some cases, the absence of appropriate conduct or the lack of sufficient effort may be a violation of Standard I(D). The integrity of the investment profession is built on trust.
59
For example, abusing alcohol during business hours might constitute a violation of this standard because it could have a detrimental effect on the member’s or candidate’s ability to fulfill his or her
professional responsibilities.
Example : Sasserman’s excessive drinking at lunch and subsequent intoxication at work constitute a violation of Standard I(D) because this conduct has raised questions about his professionalism and competence.
His behavior reflects poorly on him, his employer, and the investment industry.
60
Recommended Procedures for Compliance :
1- Code of ethics: Develop and/or adopt a code of ethics to which every employee
must subscribe, and make clear that any personal behavior that reflects poorly
on the individual involved, the institution as a whole, or the investment industry will not be tolerated.
2- List of violations: Disseminate to all employees a list of potential violations and
associated disciplinary sanctions, up to and including dismissal from the firm.
3- Employee references: Check references of potential employees to ensure that
they are of good character and not ineligible to work in the investment industry because of past infractions of the law.
61
Generally, Standard I(D) is not meant to cover legal transgressions resulting from acts of civil disobedience in support of personal beliefs because such conduct does not reflect poorly on the member’s or
candidate’s professional reputation, integrity, or competence.
62
Should all internal communications within the firm not satisfy a m/c concerns, he/she should consider reporting the potential unethical activity to the appropriate regulator.
63
Standard II(A) Material Nonpublic Information :
Members and Candidates who possess material nonpublic information that could affect the value of an investment must not act or cause others to act on the information.
Standard II: INTEGRITY OF CAPITAL MARKETS
64
When the investing public avoids capital markets, the markets and capital allocation become less efficient and less supportive of strong and vibrant economies. Standard II(A) promotes and maintains a high level of confidence in market integrity, which is one of the foundations of the investment profession.
65
What Is “Material” Information?
Information is “material” if its disclosure would probably have an impact on the
price of a security or if reasonable investors would want to know the information
before making an investment decision.
66
For example, material information may include, but is not limited to, information on the following:
● earnings;
● mergers, acquisitions, tender offers, or joint ventures;
● changes in assets or asset quality;
● innovative products, processes, or discoveries (e.g., new product trials or
research efforts);
● new licenses, patents, registered trademarks, or regulatory approval/rejection
of a product;
● developments regarding customers or suppliers (e.g., the acquisition or loss of
a contract);
● changes in management;
● change in auditor notification or the fact that the issuer may no longer rely on
an auditor’s report or qualified opinion;
● events regarding the issuer’s securities (e.g., defaults on senior securities, calls
of securities for redemption, repurchase plans, stock splits, changes in dividends, changes to the rights of security holders, and public or private sales of
additional securities);
● bankruptcies;
● significant legal disputes;
● government reports of economic trends (employment, housing starts, currency information, etc.);
● orders for large trades before they are executed; and
● new or changing equity or debt ratings issued by a third party (e.g., sell-side
recommendations and credit ratings).
67
Subtilités : , information about trials of a new drug, product, or service under development from qualified personnel involved in the trials is likely to be material, whereas educated conjecture by subject experts not connected to the trials is unlikely to be material.
If it is unclear whether and to what extent the information will affect the price of a security, the information may not be considered material. The passage of time may also render information that was once important immaterial.
68
What Constitutes “Nonpublic” Information?
Information is “nonpublic” until it has been disseminated or is available to the marketplace in general (as opposed to a select group of investors). “Disseminated”
can be defined as “made known.”
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Analysts must be aware that a disclosure made to a room full of analysts does not necessarily make the disclosed information “public.” Analysts should also be alert to the possibility that they are selectively receiving material non-public information when a company provides them with guidance or interpretation of such publicly available information as financial statements or regulatory filings.
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A member or candidate may use insider information provided legitimately by
the source company for the specific purpose of conducting due diligence according to the business agreement between the parties for such activities as mergers, loan underwriting, credit ratings, and offering engagements.
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Mosaic theory :
The analyst may use significant conclusions derived from the analysis of public and nonmaterial nonpublic information as the basis for investment recommendations and decisions even if those conclusions would have been material inside information had they been communicated directly to the analyst by a company.
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In seeking to develop the most accurate and complete picture of a company, analysts should also reach beyond contacts with companies themselves and collect information from other sources, such as customers, contractors, suppliers, and the companies’ competitors.
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Social Media :
Members and candidates participating in groups with membership limitations should verify that material information obtained from these sources can also be accessed from a source that would be considered available to the public (e.g., company filings, webpages, and press releases).
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Using Industry Experts :
Networks offer investors the opportunity to reach beyond their usual business circles to speak with experts regarding economic conditions, industry trends, and technical issues relating to specific products and services. Members and candidates may provide compensation to individuals for their
insights without violating this standard.
However, members and candidates are
ultimately responsible for ensuring that they are not requesting or acting on confidential information received from external experts, which is in violation of security regulations and laws or duties to others.
For the good incentive, some people are ready to give insider information... So beware
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Recommended Procedures for Compliance :
1- Achieve Public Dissemination :
If public dissemination is not possible, the member or candidate must communicate the information only to the designated supervisory and compliance personnel within the member’s or candidate’s firm ( not take action or alter recommendations on the basis of the information). Moreover, members and candidates must not knowingly
engage in any conduct that may induce company insiders to privately disclose material nonpublic information.
2- Adopt Compliance Procedures :Areas as the review of employee and proprietary trading, the review of investment recommendations, documentation of firm procedures, and the supervision of interdepartmental communications in
multiservice firms.
3- Adopt Disclosure Procedures : Encourage their firms to develop and follow disclosure policies designed to ensure that information is disseminated to the marketplace in an equitable manner.
4- Issue Press Releases
5- Firewall Elements : The minimum elements of such a system include, but are not limited to, the following:
● substantial control of relevant interdepartmental communications, preferably through a clearance area within the firm in either the compliance or legal
department;
● review of employee trading through the maintenance of “watch,” “restricted,”
and “rumor” lists;
● documentation of the procedures designed to limit the flow of information
between departments and of the actions taken to enforce those procedures; and
● heightened review or restriction of proprietary trading while a firm is in possession of material nonpublic information.
6- Appropriate Interdepartmental Communications : Even at small firms, procedures concerning interdepartmental communication, the review of trading activity,
and the investigation of possible violations should be compiled and formalized.
7- Physical Separation of Departments
8- Prevention of Personnel Overlap : For a firewall to be effective in a multiservice firm, an employee should be on only one side of the firewall at any time. In short, the analyst cannot use any information learned in the course of the project for research purposes and cannot share that information with colleagues in the research department.
9- A Reporting System : If an employee behind a firewall believes that he or she needs to share confidential information with someone on the other side of the wall, the
employee should consult a designated compliance officer to determine whether
sharing the information is necessary and how much information should be shared. A single supervisor or compliance officer should have the specific authority and responsibility of deciding whether information is material and whether it is sufficiently public to be used as the basis for investment decisions.
10- Personal Trading Limitations : Securities
should be placed on a restricted list when a firm has or may have material non-public information.
11- Record Maintenance : Records of the communications between various departments.
12- Proprietary Trading Procedures : When a firm acts as a market maker, a prohibition on proprietary trading may be counterproductive to the goals of maintaining the confidentiality of information and market liquidity.
13- Communication to All Employees : Policies and guidelines should be used
in conjunction with training programs aimed at enabling employees to recognize
material nonpublic information.
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Example 2 (Controlling Nonpublic Information): Peter has violated Standard II(A) because he failed to prevent the transfer and misuse of material nonpublic information to others in his firm. Peter’s firm should have adopted information barriers to prevent the
communication of nonpublic information between departments of the firm.
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Example 10 (Materiality Determination): There are often rumors and whisper numbers before a release of any kind. The text message from the other trader would most likely be considered market noise. Unless Nadler knew that the trader had an
ongoing business relationship with the public firm, he had no reason to suspect he was receiving material nonpublic information that would prevent him from completing the trading request of the portfolio manager
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Standard II(B) Market Manipulation :
Members and Candidates must not engage in practices that distort prices or
artificially inflate trading volume with the intent to mislead market participants.
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Market manipulation includes (1) the dissemination of false or misleading
information and (2) transactions that deceive or would be likely to mislead market participants by distorting the price-setting mechanism of financial instruments.
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Information-Based Manipulation :
Information-based manipulation includes, but is not limited to, spreading false rumors to induce trading by others. For example, members and candidates must
refrain from “pumping up” the price of an investment by issuing misleading positive information or overly optimistic projections of a security’s worth only to later “dump” the investment (i.e., sell it)
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Transaction-Based Manipulation:
Transaction-based manipulation involves instances where a member or candidate
knew or should have known that his or her actions could affect the pricing of a
security.
This type of manipulation includes, but is not limited to, the following:
● transactions that artificially affect prices or volume to give the impression of
activity or price movement in a financial instrument
● securing a controlling, dominant position in a financial instrument to exploit
and manipulate the price of a related derivative and/or the underlying asset.
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Standard II(B) is not intended to preclude transactions undertaken on legitimate trading strategies based on perceived market inefficiencies. The intent of the
action is critical to determining whether it is a violation of this standard.
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Example 5 (“Pump-Priming” Strategy): Attempts to mislead participants about the actual liquidity of the market constitute
a violation of Standard II(B). In this example, investors have been intentionally misled to believe they chose the most liquid instrument for some specific purpose, but they could eventually see the actual liquidity of the contract significantly reduced after the term of the agreement expires. If the ACME Futures Exchange fully discloses its agreement with members to boost transactions over some initial launch period, it will not violate
Standard II(B). ACME’s intent is not to harm investors but, on the contrary, to give them a better service. For that purpose, it may engage in a liquidity-pumping strategy, but the strategy must be disclosed.
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Standard III(A) Loyalty, Prudence, and Care :
Members and Candidates have a duty of loyalty to their clients and must
act with reasonable care and exercise prudent judgment. Members and
Candidates must act for the benefit of their clients and place their clients’
interests before their employer’s or their own interests.
Standard III: DUTIES TO CLIENTS
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Investment actions must be carried out for the sole benefit of the
client and in a manner the member or candidate believes, given the known facts
and circumstances, to be in the best interest of the client. (Use the same prudence, judgment, and care as if the m/c own interests)
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This standard uphold these responsibilities as a requirement regardless of any legally imposed fiduciary duties.
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Standard III(A), however, is not a substitute for a member’s or candidate’s legal or regulatory obligations. As stated in Standard I(A), members and candidates must abide by the most strict requirements imposed on them by regulators or the Code and Standards, including any legally imposed fiduciary duty.
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Members and candidates are considered to have custody if they have any direct or
indirect access to client funds.
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Understanding the Application of Loyalty, Prudence, and Care :
The conduct of members and candidates may or may not rise to the level of being a fiduciary, depending on the type of client, whether the member or candidate is giving investment advice, and the many facts and circumstances surrounding a particular transaction or client relationship.
Although members and candidates must
comply with any legally imposed fiduciary duty, the Code and Standards neither
impose such a legal responsibility nor require all members or candidates to act as
fiduciaries. However, Standard III(A) requires members and candidates to work in the client’s best interest no matter what the job function.
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Members and candidates should place the client’s interests first by disregarding any firm or personal interest in motivating a recommended transaction.
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Identifying the Actual Investment Client :
When the manager is responsible for
the portfolios of pension plans or trusts, however, the client is not the person or
entity who hires the manager but, rather, the beneficiaries of the plan or trust. The
duty of loyalty is owed to the ultimate beneficiaries.
In some situations, an actual client or group of beneficiaries may not exist. Members and candidates managing a fund to an index or an expected mandate owe the duty of loyalty, prudence, and care to invest in a manner consistent with the stated mandate.
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M/c must look at their roles and responsibilities when making a determination of who their clients are. Sometimes the client is easily identifiable; such is the case in the relationship between a company executive and the firm’s public shareholders. At other times,
the client may be the investing public as a whole, in which case the goals of independence and objectivity of research surpass the goal of loyalty to a single organization.
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Developing the Client’s Portfolio :
Particular care must be taken to detect whether the goals of the investment
manager or the firm in conducting business, selling products, and executing security transactions potentially conflict with the best interests and objectives of the client. When members and candidates cannot avoid potential conflicts between
their firm and clients’ interests, they must provide clear and factual disclosures of
the circumstances to the clients.
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The m/c's duty is satisfied with respect to a particular investment if the individual
has thoroughly considered the investment’s place in the overall portfolio, the risk of loss and opportunity for gains, tax implications, and the diversification, liquidity, cash flow, and overall return requirements of the assets or the portion of the assets for which the manager is responsible.
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Soft Commission Policies :
Conflicts may arise when an investment manager uses client brokerage to purchase research services, a practice commonly called “soft dollars” or “soft
commissions.” A member or candidate who pays a higher brokerage commission
than he or she would normally pay to allow for the purchase of goods or services, without corresponding benefit to the client, violates the duty of loyalty to the client.
A m/c is obligated to seek “best price” and “best execution” and be assured by the client that the goods or services purchased from the brokerage will benefit the account beneficiaries.
M/c should disclose to the client that the client may not be getting best execution from the directed brokerage.
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Proxy Voting Policies :
Part of a member’s or candidate’s duty of loyalty includes voting proxies in an
informed and responsible manner (potential economoic benefit for the client). An investment manager who fails to vote, casts a vote without considering the impact of the question, or votes blindly with management on nonroutine governance issues (e.g., a change in company capitalization) may violate this standard.
However, voting all proxies may not benefit the client, so voting proxies may not be necessary in all instances. M/c should disclose to clients their proxy voting policies.
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Recommended Procedures for Compliance :
1- Regular Account Information: M/c with control of client assets (1) should submit to each client, at least quarterly, an itemized statement showing the funds and securities in the custody or possession of the member or candidate plus all debits, credits, and transactions that occurred during the period, (2) should disclose to the client where the assets are to be maintained, as well as where or when they are moved, and (3) should separate the client’s assets from any other party’s assets, including the member’s or candidate’s own assets.
2- Client Approval : In case of uncertainity to take action, the m/c should disclose the questionable matter in writing to the client
and obtain client approval.
3- Firm Policies :
● Follow all applicable rules and laws: Members and candidates must follow all
legal requirements and applicable provisions of the Code and Standards.
● Establish the investment objectives of the client: Make a reasonable inquiry
into a client’s investment experience, risk and return objectives, and financial
constraints prior to making investment recommendations or taking investment actions.
● Consider all the information when taking actions: When taking investment
actions, members and candidates must consider the appropriateness and suitability of the investment relative to (1) the client’s needs and circumstances,
(2) the investment’s basic characteristics, and (3) the basic characteristics of
the total portfolio.
● Diversify: Members and candidates should diversify investments to reduce the
risk of loss, unless diversification is not consistent with plan guidelines or is
contrary to the account objectives.
● Carry out regular reviews: Members and candidates should establish regular
review schedules to ensure that the investments held in the account adhere to
the terms of the governing documents.
● Deal fairly with all clients with respect to investment actions: Members and
candidates must not favor some clients over others and should establish policies for allocating trades and disseminating investment recommendations.
● Disclose conflicts of interest: Members and candidates must disclose all actual
and potential conflicts of interest so that clients can evaluate those conflicts.
● Disclose compensation arrangements: Members and candidates should make
their clients aware of all forms of manager compensation.
● Vote proxies: In most cases, members and candidates should determine who
is authorized to vote shares and vote proxies in the best interests of the clients
and ultimate beneficiaries.
Maintain confidentiality: Members and candidates must preserve the confidentiality of client information.
● Seek best execution: Unless directed by the client as ultimate beneficiary,
members and candidates must seek best execution for their clients. (Best execution is defined in the preceding text.)
● Place client interests first: Members and candidates must serve the best interests of clients.
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Brokerage Arrangements: Written statement from new clients saying
that the m/c is not to seek best price and execution and that they are aware
of the consequence for their accounts, is needed.
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Example 6 (Excessive Trading): Although the securities purchased and sold for the clients are appropriate and fall within the acceptable asset classes for the clients, the amount of trading for each account exceeds what is necessary to accomplish the client’s investment objectives.
--> Knauss has violated Standard III(A) because she is using the assets of her clients to benefit her firm and herself.
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Standard III(B) Fair Dealing ;
Members and Candidates must deal fairly and objectively with all clients
when providing investment analysis, making investment recommendations,
taking investment action, or engaging in other professional activities.
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The term “fairly” implies that the member or candidate must take care not to discriminate against any clients when disseminating investment recommendations or taking investment action. Standard III(B) does not state “equally” because members and candidates could not possibly reach all clients at exactly the same time.
In addition, members and candidates may provide more personal, specialized, or in-depth service to clients who are willing to pay for premium services through higher management fees or higher levels of brokerage (must not disadvantage or negatively affect clients).
The different service levels should be disclosed to clients and prospective clients and should be available to everyone (i.e., different service levels should not be offered selectively).
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Investment Recommendations :
The opinion may be disseminated to customers or clients through an initial detailed research report, through a brief update report, by addition to or deletion from a list of recommended securities, or simply by oral communication. A recommendation that is distributed to anyone outside the organization is considered a communication for general distribution under Standard III(B).
Each member or candidate is obligated to ensure that information is disseminated in such a manner that all clients have a fair opportunity to act on every recommendation.
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Material changes in a member’s or candidate’s prior investment recommendations because of subsequent research should be communicated to all
current clients; particular care should be taken that the information reaches those clients who the member or candidate knows have acted on or been affected by the earlier
advice.
If a client haven't seen the current recommendation, it is important to advise him before any order is accepted.
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Investment Action :
M/c should distribute the issues to all customers for whom the investments
are appropriate in a manner consistent with the policies of the firm for allocating
blocks of stock. If the issue is oversubscribed, then the issue should be prorated to all subscribers. This action should be taken on a round-lot basis to avoid odd-lot distributions. In addition, if the issue is oversubscribed, m/c should forgo any sales to themselves or their immediate families in order to free up additional shares for clients (unless de familiy member is .managed similarly to the accounts of other clients).
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Recommended Procedures for Compliance :
1- Develop Firm Policies : m/c should make management aware of possible violations of fair-dealing practices within the firm when they come to their attention. A common practice to assure fair dealing is to communicate recommendations simultaneously within the firm and to customers.
2- Disclose Trade Allocation Procedures :disclosure on how the selection of accounts to participate in an order and determination of the amount of securities each account will buy or sell.
3- Establish Systematic Account Review : Regular review made by m/c and/or supervisor, to ensure no preferential treatement and the suitability of the investements.
4- Disclose Levels of Service
m/c should consider the following points when establishing fair-dealing compliance procedures:
- Limit the number of people involved
- Shorten the time frame between decision and dissemination
- Publish guidelines for pre-dissemination behavior : Prohibit personnel who have prior knowledge of an investment recommendation from discussing or taking any action on the pending recommendation.
- Simultaneous dissemination
- Maintain a list of clients and their holdings
-Develop and document trade allocation procedures that ensure :
■ fairness to advisory clients, ( priority of execution of orders, allocation of the price obtained in execution of block orders or trades)
■ timeliness and efficiency in the execution of orders
■ accuracy of the member’s or candidate’s records as to trade orders and client account positions.
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Procedures for block trades and new issues:
● requiring orders and modifications or cancellations of orders to be documented and time stamped;
● processing and executing orders on a first-in, first-out basis with consideration of bundling orders for efficiency as appropriate for the asset class or the security;
● developing a policy to address such issues as calculating execution prices and “partial fills” when trades are grouped, or in a block, for efficiency;
● giving all client accounts participating in a block trade the same execution price and charging the same commission;
● when the full amount of the block order is not executed, allocating partially executed orders among the participating client accounts pro rata on the basis of order size while not going below an established minimum lot size for some securities (e.g., bonds); and
● when allocating trades for new issues, obtaining advance indications of interest, allocating securities by client (rather than portfolio manager), and providing a method for calculating allocations.
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Example 6 (Additional Services for Select Clients):
Jenpin Weng uses e-mail to issue a new recommendation to all his clients. He then
calls his three largest institutional clients to discuss the recommendation in detail.
Comment: Weng has not violated Standard III(B) because he widely disseminated the recommendation and provided the information to all his clients prior to discussing it with a select few. Weng’s largest clients received additional personal service because they presumably pay higher fees or because they have a large amount of assets under Weng’s management.
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Standard III(C) Suitability :
1. When Members and Candidates are in an advisory relationship with a client, they must:
a. Make a reasonable inquiry into a client’s or prospective client’s investment experience, risk and return objectives, and financial constraints prior to making any investment recommendation or taking
investment action and must reassess and update this information
regularly.
b. Determine that an investment is suitable to the client’s financial situation and consistent with the client’s written objectives, mandates, and constraints before making an investment recommendation or taking investment action.
c. Judge the suitability of investments in the context of the client’s total portfolio.
2. When Members and Candidates are responsible for managing a portfolio to a specific mandate, strategy, or style, they must make only investment recommendations or take only investment actions that are consistent with the stated objectives and constraints of the portfolio.
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In judging the suitability of a potential investment, the m/c should review many aspects of the client’s knowledge, experience related to investing, and financial situation ( risk profile, constraints , the impact on the diversity of the portfolio, means or net worth to assume the associated risk.)
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Developing an Investment Policy :
Gather client information at the inception of the relationship (client’s financial circumstances, personal data (such as age and occupation) that are relevant to investment decisions, attitudes toward risk, and objectives in investing).
IPS : client’s risk tolerance, return requirements, and all investment constraints (including time horizon, liquidity needs, tax concerns, legal and regulatory factors, and unique circumstances).
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Updating an Investment Policy :
Updating the IPS should be repeated at least annually and also prior to material
changes to any specific investment recommendations or decisions on behalf of the client.
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The Need for Diversification :
Some reasonable amount of diversification is thus the norm for many portfolios, especially those managed by individuals or institutions that have some degree of legal fiduciary responsibility.
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Addressing Unsolicited Trading Requests :
These transaction requests may be based on the client’s individual biases or professional experience. Members and candidates will need to make reasonable efforts to balance their clients’ trading requests with their responsibilities to follow the agreed-on investment policy statement.
In discussing the trade, the m/c should focus on educating the investor on how the request deviates from the current policy statement. Following the discussion, the member or candidate may follow his or her firm’s policies regarding the necessary client approval for executing unsuitable trades.
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M/c may have some clients who decline to modify their policy statements while insisting an unsolicited trade be made. In such instances, m/c will need to evaluate the effectiveness of their services to the client. Some firms may allow for the trade to be
executed in a new unmanaged account. If alternative options are not available, m/c ultimately will need to determine whether they should continue the advisory arrangement with the client.
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Managing to an Index or Mandate :
M/c who manage pooled assets to a specific mandate are not responsible for determining the suitability of the fund as an investment
for investors who may be purchasing shares in the fund ( no advisory relationship with clients).
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Recommended Procedures for Compliance :
1- Investment Policy Statement
2- Regular Updates: M/c should document attempts to carry out such a review if circumstances prevent it.
3- Suitability Test Policies - The test procedures should require the investment professional to look beyond the potential return of the investment and include the following:
● an analysis of the impact on the portfolio’s diversification,
● a comparison of the investment risks with the client’s assessed risk tolerance
● the fit of the investment with the required investment strategy.
In formulating an investment policy for
the client, the member or candidate should take the following into consideration:
● client identification—(1) type and nature of client, (2) the existence of separate beneficiaries, and (3) approximate portion of total client assets that the member or candidate is managing;
● investor objectives—(1) return objectives (income, growth in principal, maintenance of purchasing power) and (2) risk tolerance (suitability, stability of values);
● investor constraints—(1) liquidity needs, (2) expected cash flows (patterns of additions and/or withdrawals), (3) investable funds (assets and liabilities or other commitments), (4) time horizon, (5) tax considerations, (6) regulatory and legal circumstances, (7) investor preferences, prohibitions, circumstances, and unique needs, and (8) proxy voting responsibilities and guidance;
● performance measurement benchmarks.
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Standard III(D) Performance Presentation :
When communicating investment performance information, Members and
Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete.
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M/c must give a fair and complete presentation of performance information whenever communicating data with respect to the performance history of individual accounts, composites or groups of accounts, or composites of an analyst’s or firm’s performance results. Furthermore, m/c should not state or imply that clients will obtain or benefit from a rate of return that was generated in the past.
Best practice dictates that brief presentations include a reference to the limited nature of the information provided.
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Example 1 (Performance Calculation and Length of Time)
Comment: Taylor’s brochure is in violation of Standard III(D). Taylor should have disclosed that the 25% growth occurred only in one year. Additionally, Taylor did not include client accounts other than those in the firm’s common trust fund. A general claim of firm performance should take into account the performance of all categories of accounts. Finally, by stating that clients can expect a steady 25% annual compound growth rate
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As a general matter, this standard does
not prohibit showing past performance of funds managed at a prior firm as part of a performance track record as long as showing that record is accompanied by appropriate disclosures about where the performance took place and the person’s specific role in achieving that performance.
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Use of simulated results should be accompanied by full disclosure as to the
source of the performance data, including the period of the results and if the model was applied retroactively to that time period.
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Example 7 (Performance Calculation Methodology Disclosure): Company’s new system automatically calculates both time-weighted and money-weighted returns. Singh is told not to label the return value so that the firm may show whichever value is greatest for the period.
Comment: Following these instructions would lead to Singh violating Standard III(D). In reporting inconsistent return values, Singh would not be providing complete information to the firm’s clients. Full information is provided when clients have sufficient information to judge the performance generated by the firm.
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Standard III(E) Preservation of Confidentiality :
Members and Candidates must keep information about current, former, and
prospective clients confidential unless:
1. The information concerns illegal activities on the part of the client;
2. Disclosure is required by law; or
3. The client or prospective client permits disclosure of the information.
This standard is applicable when:
(1) the member or candidate receives information because of his or her special ability to conduct a portion of the client’s business or personal affairs
(2) the member or candidate receives
information that arises from or is relevant to that portion of the client’s business
that is the subject of the special or confidential relationship.
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Status of Client :
M/c must continue to maintain the confidentiality of client records even
after the client relationship has ended.
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Compliance with Laws :
If applicable law requires m/c to maintain confidentiality, even if the information concerns illegal activities on the part of the client, m/c should not disclose such information.
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Electronic Information and Security :
In recent years, regulatory authorities have imposed stricter data security laws applying to the use of mobile remote digital communication, including the use of social media, that must be considered.
Understand the policies of their employer.
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Professional Conduct Investigations by CFA Institute :
When permissible under applicable law, members and candidates shall consider the PCP an extension of themselves when requested to provide information about a client in support of a PCP investigation into their own conduct.
Members and candidates will not be considered in violation of this standard by forwarding confidential information to the PCP.
M/c are encouraged to cooperate with investigations into the conduct of others.
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Recommended Procedures for Compliance :
- Avoid disclosing any information received from a client except to authorized
fellow employees who are also working for the client.
- Communicating with Clients : Diligence in discussing with clients the appropriate methods for providing confidential information. It is important to convey to clients that not all firm-sponsored resources may be appropriate for such communications.
Before making a disclosure, a m/c should ask the following:
● In what context was the information disclosed? If disclosed in a discussion of
work being performed for the client, is the information relevant to the work?
● Is the information background material that, if disclosed, will enable the
member or candidate to improve service to the client?
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Example 2 (Disclosing Confidential Information):
Lynn Moody has a client that wants to give US$50,000 to charity. Moody is also treasurer of the Home for Indigent Widows (HIW). Moody recommends that HIW’s vice president for corporate gifts call on her customer and ask for a donation in the US$50,000 range.
Comment: Even though the attempt to help the Home for Indigent Widows was well intended, Moody violated Standard III(E) by revealing confidential information about her client.
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Example 4 (Disclosing Possible Illegal Activity): David Bradford manages money for a family-owned corporation and also individual portfolios of several of the family members and officers of the corporation, including the chief financial officer (CFO). He thinks the CFO might be embezzling money from the corporation.
Comment: Bradford should check with his firm’s compliance department or appropriate legal counsel to determine whether applicable securities regulations require reporting the CFO’s financial records.
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Accidental Disclosure of Confidential Information : Moody has taken reasonable steps for protecting the confidentiality of client information while using the social media platform. She provided instructions clarifying that all information posted to the site would be publically viewable to all group members and warned against
using this method for communicating confidential information. The accidental disclosure of confidential information by a client is not under Moody’s control. Her actions to remove the information promptly once she became aware further align with Standard III(E).
In understanding the potential sensitivity clients express surrounding the confidentiality of personal information, this event highlights a need for further training. Moody might advocate for additional warnings or controls for clients when they consider using social media platforms for
two-way communications.
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Standard IV(A) Loyalty :
In matters related to their employment, Members and Candidates must
act for the benefit of their employer and not deprive their employer of the
advantage of their skills and abilities, divulge confidential information, or
otherwise cause harm to their employer.
Standard IV: Duties to Employers
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M/c should enter into a dialogue with their employer about balancing personal and employment obligations when personal matters may interfere with their work on a regular or significant basis.
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Employer Responsibilities :
Employers are not obligated to adhere to the Code and Standards. In expecting to retain competent employees who are members and candidates, however, they
should not develop conflicting policies and procedures. Senior management has the additional responsibility to devise compensation structures and incentive arrangements that do not encourage unethical behavior.
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Independent Practice :
M/c abstain from independent competitive activity that could conflict with the interests of their employer. They also must notify their employer and describe the types of services they will render to prospective independent clients, the expected duration of the services, and the compensation for the services (and must wait until consent from their employer before rendering the service).
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Leaving an Employer :
When members and candidates are planning to leave their current employer,
they must continue to act in the employer’s best interest.
Activities that might constitute a violation,
especially in combination, include the following:
● misappropriation of trade secrets,
● misuse of confidential information,
● solicitation of the employer’s clients prior to cessation of employment,
● self-dealing (appropriating for one’s own property a business opportunity or
information belonging to one’s employer), and
● misappropriation of clients or client lists.
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A departing employee is generally free to make arrangements or preparations to go into a competitive business before terminating the relationship with his or her
employer as long as such preparations do not breach the employee’s duty of loyalty.
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Once an employee has left the firm, the skills and experience that an employee
obtained while employed are not “confidential” or “privileged” information.
Similarly, simple knowledge of the names and existence of former clients is generally not confidential information unless deemed such by an agreement or by law.
Standard IV(A) does not prohibit experience or knowledge gained at one employer
from being used at another employer.
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Firm records should be erased or returned to the employer unless the firm gives permission to keep those records after employment ends.
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The standard does not prohibit former employees from contacting clients of
their previous firm as long as the contact information does not come from the
records of the former employer or violate an applicable “noncompete agreement.”
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Use of Social Media :
Specific accounts and user profiles of members and candidates may be created for solely professional reasons, including firm-approved accounts for client engagements.These accounts would be considered part of the firm’s assets, thus requiring members and candidates to transfer or delete the accounts as directed by their firm’s policies and procedures.
Best practice for members and candidates is to maintain separate accounts for their personal and professional social media activities.
Disclose with employer how profiles should be treated.
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Whistleblowing :
A m/c's personal interests, as well as the interests of his or her employer, are secondary to protecting the integrity of capital markets and the interests of clients.
Activities that would normally violate a member’s or candidate’s duty to his or her employer (such as contradicting employer instructions, violating certain policies and procedures, or preserving a record by copying employer records) may be justified. Such action would be permitted only if the intent is clearly aimed at protecting clients or the integrity of the market, not for personal gain.
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Nature of Employment :
A m/c's duties within an independent contractor relationship are governed by the oral or written agreement between the m/c and the client.
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Recommended Procedures for Compliance :
1- Competition Policy : understand any restrictions placed by the employer
on offering similar services outside the firm while employed by the firm.
2- Termination Policy : Establish clear procedures regarding the resignation process, including addressing how the termination will be disclosed to clients and staff and whether updates posted through social media platforms will be allowed. Also, adress the removal specific client-related information and procedures for transferring ongoing research and account management responsibilities.
3- Incident-Reporting Procedures
4- Employee Classification : Standardized classification structure (e.g., part time, full time, outside contractor) for their employees and indicate how each of the firm’s policies applies to each employee class.
145
Addressing Rumors: Rumors of TAM selling Winston's department to another firm, ans TAM management deny the rumors, while Winston thinks on making a buy-out to keep his job.
Comment: An employee-led buyout of TAM’s equity asset management business would be consistent with Standard IV(A) because it would rest on the permission of the employer and, ultimately, the clients. In this case, however, in which employees suspect the senior managers or principals are not truthful or forthcoming, Winston should consult legal counsel to determine appropriate action.
146
Starting a New Firm: Allen’s preparation for the new business by registering with the
regulatory authorities does not conflict with the work for her employer if the preparations have been done on Allen’s own time outside the office and if Allen will not be soliciting clients for the business or otherwise operating the new company until she has left her current employer.
147
Notification of Code and Standards: Smith’s review of the company policies and procedures for reporting violations allows her to be prepared to report through the
appropriate whistleblower process if she decides that the CDO development process involves unethical actions by others. Smith’s actions comply with the Code and Standards principles of placing the client’s interests first and being loyal to her employer. In providing her supervisor with a copy of the Code and Standards, Smith is highlighting the high level of ethical conduct she is required to adhere to in her professional activities.
148
Leaving an Employer: Prior to her departure, Webb should have discussed any client information contained in her social media networks. By updating
her LinkedIn profile after RSI notified clients and after her employment ended, she has appropriately placed her employer’s interests ahead of her own personal interests. In addition, she has not violated the non-solicitation agreement.
149
Standard IV(B) Additional Compensation Arrangements :
Members and Candidates must not accept gifts, benefits, compensation, or consideration that competes with or might reasonably be expected to create a conflict of interest with their employer’s interest unless they obtain written
consent from all parties involved.
150
Standard IV(B) requires members and candidates to obtain permission from their
employer before accepting compensation or other benefits from third parties for the
services rendered to the employer or for any services that might create a conflict with their employer’s interest.
Direct compensation by the client and any indirect compensation or other benefits received from third parties.
151
“Written consent” includes any form of communication that can be documented
(for example, communication via e-mail that can be retrieved and documented).
152
Recommended Procedures for Compliance :
Members and candidates should make an immediate written report to their supervisor and compliance officer specifying any compensation they propose to receive for services in addition to the compensation or benefits received from their employer.
Written report with the “terms”; include the nature of the compensation, the approximate amount of compensation, and the duration of the agreement.
153
Prior Approval for Outside Compensation:
Hollis’s actions did not violate Standard IV(B). Through gaining approval before accepting the meeting and declining the offered travel arrangements, Hollis sought to avoid any potential conflicts of interest
between his company and ABC Oil. Because the location of the dinner was not available prior to arrival and Hollis notified his company of the dinner upon his return, accepting the dinner should not impair his objectivity. By disclosing the dinner, Hollis has enabled Specialty Investment Management to assess whether it has any impact on future reports and recommendations by Hollis related to ABC Oil.
154
Standard IV(C) Responsibilities of Supervisors :
Members and Candidates must make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws,
rules, regulations, and the Code and Standards.
155
A m/c's responsibilities under Standard IV(C) include instructing those subordinates to whom supervision is delegated about methods to promote
compliance, including preventing and detecting violations of laws, rules, regulations, firm policies, and the Code and Standards.
prevent and detect violations by ensuring the establishment of effective compliance systems.
156
A m/c with supervisory responsibility should bring an inadequate compliance system to the attention of the firm’s senior managers and recommend corrective action. If the m/c clearly cannot discharge
supervisory responsibilities because of the absence of a compliance system or because of an inadequate compliance system, the m/c should decline in writing to accept supervisory responsibility until the firm adopts reasonable procedures to allow adequate exercise of supervisory responsibility.
157
System for Supervision :
Reporting the misconduct up the chain of command and warning the employee to cease the activity are also not enough. Pending the outcome of the investigation, a supervisor should take steps to ensure that the violation will not be repeated, such as placing limits on the employee’s activities or increasing the monitoring of the employee’s activities.
Although compliance procedures cannot be designed to anticipate every potential violation, they should be designed to anticipate the activities most likely to result in misconduct.
158
Supervision Includes Detection :
If a member or candidate has adopted reasonable procedures and taken steps to institute an effective compliance program, then the member or candidate may not be in violation of Standard IV(C) if he or she does not detect violations that occur despite these efforts.
The fact that violations do occur may indicate, however, that the compliance procedures are inadequate.
Violation of Standard IV(C) if a m/c knows or should know that the procedures are not being followed.
159
Recommended Procedures for Compliance :
1- Codes of Ethics or Compliance Procedures : Stand-alone codes of ethics should be written in plain language and should address general fiduciary concepts.
3- Implementation of Compliance Education and Training : Remember that No amount of ethics education and awareness will deter someone determined to commit fraud for personal enrichment. A strong culture of compliance signals to clients and potential clients that the firm has truly embraced ethical conduct as fundamental to the firm’s mission to serve its clients.
4- Establish an Appropriate Incentive Structure : Supervisors and firms must look closely at their incentive structure to determine whether the structure encourages profits and returns at the expense of ethically appropriate conduct.
2- Adequate Compliance Procedures :
● be contained in a clearly written and accessible manual that is tailored to the
firm’s operations,
● be drafted so that the procedures are easy to understand,
● designate a compliance officer whose authority and responsibility are clearly
defined and who has the necessary resources and authority to implement the
firm’s compliance procedures,
● describe the hierarchy of supervision and assign duties among supervisors,
● implement a system of checks and balances,
● outline the scope of the procedures,
● outline procedures to document the monitoring and testing of compliance
procedures,
● outline permissible conduct, and
● delineate procedures for reporting violations and sanctions.
Once a compliance program is in place, a supervisor should
● disseminate the contents of the program to appropriate personnel,
● periodically update procedures to ensure that the measures are adequate
under the law,
● continually educate personnel regarding the compliance procedures,
● issue periodic reminders of the procedures to appropriate personnel,
● incorporate a professional conduct evaluation as part of an employee’s performance review,
● review the actions of employees to ensure compliance and identify violators, and
● take the necessary steps to enforce the procedures once a violation has occurred.
Once a violation is discovered, a supervisor should
● respond promptly,
● conduct a thorough investigation of the activities to determine the scope of
the wrongdoing,
● increase supervision or place appropriate limitations on the wrongdoer pending the outcome of the investigation, and
● review procedures for potential changes necessary to prevent future violations from occurring.
160
Only when compensation and incentives are firmly tied to client interests and "how" outcomes are achieved, rather than "how much" is generated for the firm, will employees work to achieve a culture of integrity.
161
Standard V(A) Diligence and Reasonable Basis Members and Candidates must:
1. Exercise diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment
actions.
2. Have a reasonable and adequate basis, supported by appropriate research
and investigation, for any investment analysis, recommendation, or action.
Standard V: Investment Analysis, Recommendations, and Actions
162
Defining Diligence and Reasonable Basis :
The following list provides some, but definitely not all, examples of attributes
to consider while forming the basis for a recommendation:
● global, regional, and country macroeconomic conditions,
● a company’s operating and financial history,
● the industry’s and sector’s current conditions and the stage of the business cycle,
● a mutual fund’s fee structure and management history,
● the output and potential limitations of quantitative models,
● the quality of the assets included in a securitization, and
● the appropriateness of selected peer-group comparisons.
Clients turn to members and candidates for advice and expect these advisers to have more information and knowledge than they do.
163
Using Secondary or Third-Party Research :
Must make reasonable and diligent efforts to determine whether such research is sound. Information and data taken from internet sources, such as personal blogs, independent research aggregation websites, or social media websites, likely require a greater level of review than
information from more established research organizations.
Secondary research is defined as research conducted by someone else in the m/c’s firm. Third-party research is research conducted by entities outside the m/c’s firm, such as a brokerage firm, bank, or research firm.
164
Criteria that a member or candidate can use in forming an opinion on whether
research is sound include the following:
● assumptions used,
● rigor of the analysis performed,
● date/timeliness of the research, and
● evaluation of the objectivity and independence of the recommendations.
165
Using Quantitatively Oriented Research ;
M/c's need to have an understanding of the parameters used in models and quantitative research that are incorporated into their investment recommendations.
understand the assumptions and limitations inherent in any model and how the results were used in the decision-making process.
166
Developing Quantitatively Oriented Techniques :
Individuals who create new quantitative models and services must exhibit a higher
level of diligence in reviewing new products than the individuals who ultimately use the analytical output.
167
Selecting External Advisers and Subadvisers :
Standard V(A) applies to the level of review necessary in selecting an external adviser or subadviser to manage a specifically mandated allocation (review individual funds and securities).
Firms must have standardized criteria for reviewing :
● reviewing the adviser’s established code of ethics,
● understanding the adviser’s compliance and internal control procedures,
● assessing the quality of the published return information, and
● reviewing the adviser’s investment process and adherence to its stated strategy.
168
Group Research and Decision Making:
The conclusions or recommendations of the group report represent the consensus of the group and are not necessarily the views of the m/c, even though the name of
the member or candidate is included on the report.
M/c does not need to dissociate from the report even if it does not reflect his or her opinion, unless the consensus opinion does not a reasonable and adequate basis
and is independent and objective,
169
Recommended Procedures for Compliance :
- Develop detailed, written guidance for analysts (research, investment, or
credit), supervisory analysts, and review committees that establishes the due
diligence procedures for judging whether a particular recommendation has a
reasonable and adequate basis.
- Develop measurable criteria for assessing the quality of research, the reasonableness and adequacy of the basis for any recommendation or rating, and the
accuracy of recommendations over time.
- Minimum levels of scenario testing of all computer-based models used in developing, rating, and evaluating financial instruments (accuracy of the output over time, and the analysis of cash flow sensitivity to inputs).
170
Selecting a Service Provider: She did not determine whether the “black box” attribution process aligns with the investment practices of the firm, including its investments in different countries and currencies. Smith must review and understand the process of any software or system before recommending its use as the firm’s attribution system.
171
Members and candidates should also make reasonable enquiries into the source and accuracy of all data used in completing their investment analysis and recommendations.
Beware of data with errors in them
172
Standard V(B) Communication with Clients and Prospective Clients:
Members and Candidates must:
1. Disclose to clients and prospective clients the basic format and general
principles of the investment processes they use to analyze investments, select securities, and construct portfolios and must promptly disclose any changes that might materially affect those processes.
2. Disclose to clients and prospective clients significant limitations and risks associated with the investment process.
3. Use reasonable judgment in identifying which factors are important to
their investment analyses, recommendations, or actions and include
those factors in communications with clients and prospective clients.
4. Distinguish between fact and opinion in the presentation of investment analyses and recommendations.
173
Informing Clients of the Investment Process :
The m/c must keep clients and other interested parties informed on an ongoing basis about changes to the investment
process, especially newly identified significant risks and limitations.
174
Different Forms of Communication :
Includes: in-person recommendation or description, telephone conversation, media broadcast, or transmission by computer (e.g., on the internet).
Providing information to clients through new technologies, m/c should take reasonable steps to ensure that such delivery would treat all clients fairly and, if necessary, be considered publicly disseminated
175
Identifying Risks and Limitations:
Outline to clients and prospective clients significant risks and limitations of the analysis contained in their investment products or recommendations (Ex: Leverage).
Other types of risks that members and candidates may consider disclosing include, but are not limited to, counterparty risk, country risk, sector or industry risk, security-specific risk, and credit risk.
176
Report to clients and prospective clients the existence of limitations significant to
the decision-making process. Examples of such factors and attributes include, but
are not limited to, investment liquidity and capacity.
Liquidity is the ability to liquidate an investment on a timely basis at a reasonable cost.
Capacity is the investment amount beyond which returns will be negatively affected by new investments.
177
The appropriateness of risk disclosure should be assessed on the basis of what
was known at the time the investment action was taken (often called an ex ante
basis).
178
Report Presentation :
A report writer who has done adequate investigation may emphasize certain areas, touch briefly on others, and omit certain aspects deemed unimportant.
Investment advice based on quantitative research and analysis must be supported by readily available reference material and should be applied in a manner consistent with previously applied methodology. If changes in methodology are made, they should be highlighted.
179
Distinction between Facts and Opinions in Reports :
Often occur when reports fail to separate the past from the future by not indicating that earnings estimates, changes in the outlook for dividends, or future market price information are opinions subject to future circumstances.
180
Recommended Procedures for Compliance :
Encourage their firms to have a rigorous
methodology for reviewing research that is created for publication and dissemination to clients.
Depends heavily on case-by-case review
rather than a specific checklist.
181
Standard V(C) Record Retention :
Members and Candidates must develop and maintain appropriate records to support their investment analyses, recommendations, actions, and other
investment-related communications with clients and prospective clients.
182
New Media Records :
Examples of non-print media formats that should be retained include, but are not limited to:
● e-mails,
● text messages,
● blog posts, and
● Twitter posts.
183
Records Are Property of the Firm :
The m/c cannot use historical recommendations or research reports created at the previous firm because the supporting documentation is unavailable. For future use, the member or candidate must re-create the supporting records at the new firm with information gathered through public sources or directly from the covered company and not from memory or sources obtained at the previous employer.
184
Local Requirements :
Firms may also implement policies detailing the applicable time frame for retaining research and client communication records.
In the absence of regulatory guidance or firm policies, CFA Institute recommends maintaining records for at least SEVEN (7) years.
185
Recommended Procedures for Compliance :
The responsibility to maintain records that support investment action generally falls with the firm rather than individuals. M/c must, however, archive research notes and other documents, either electronically or in hard copy, that support their current investment-related communications.
186
Records as Firm, Not Employee, Property:
The records created by Blank supporting the research model he developed at GPIM are the records of GPIM. Taking the documents with him to his new employer without GPIM’s permission violates
Standard V(C). To use the model in the future, Blank must re-create the records supporting his model at the new firm.
187
Standard VI(A) Disclosure of Conflicts :
Members and Candidates must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and employer. Members and Candidates must ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively.
Standard VI: Conflicts of Interest
188
Disclosure of Conflicts to Employers :
Reportable situations include conflicts that would interfere with rendering unbiased investment advice and conflicts that would cause a member or candidate to act not in the employer’s best interest.
Ownership of stocks analyzed or recommended, participation on outside boards, and financial or other pressures that could influence a decision are to be promptly reported to the employer so that their impact can be assessed and a decision on how to resolve the conflict can be made.
189
Disclosure to Clients :
M/c must maintain their objectivity when rendering investment advice or taking investment action.
The most obvious conflicts of interest, which should always be disclosed, are relationships between an issuer and the member, the candidate, or his or her firm (such as a directorship or consultancy by a member; investment banking, underwriting, and financial relationships; broker/dealer market-making activities; and material beneficial ownership of stock).
190
M/c beneficially own securities or other investments if they have a direct or indirect pecuniary interest in the securities, have the power to vote or direct the voting of the shares of the securities or investments, or have the
power to dispose or direct the disposition of the security or investment.
191
Cross-Departmental Conflicts :
Ex: The buy-side analyst is likely to be faced with similar conflicts as banks exercise their underwriting and security dealing powers. The marketing division may ask an analyst to recommend the
stock of a certain company in order to obtain business from that company.
192
Conflicts with Stock Ownership :
Sell-side members and candidates should disclose any materially beneficial ownership interest in a security or other investment that the member or candidate is recommending. Buy-side members and candidates should disclose their procedures for reporting requirements for personal transactions.
193
Conflicts as a Director :
First, a conflict may exist between the duties owed to clients and the duties owed to shareholders of the company. Second, investment personnel who serve as directors may receive the securities or options to purchase securities of the company as compensation for serving on the board, which could raise questions about trading actions that might increase the value of those securities. Third, board service creates the opportunity to receive material nonpublic information involving the company.
When m/c providing investment services also serve as directors, they should be isolated from those making investment decisions by the use of firewalls or similar restrictions.
194
Recommended Procedures for Compliance :
M/c should 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. If the firm does not permit such disclosure, the m/c should document the request and may consider dissociating from the activity.
195
Standard VI(B) Priority of Transactions :
Investment transactions for clients and employers must have priority over
investment transactions in which a Member or Candidate is the beneficial
owner.
196
Avoiding Potential Conflicts :
Nothing is inherently unethical about individual managers, advisers, or mutual fund employees making 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, and (3) the investment professional complies with applicable regulatory requirements.
If the M/c must sell an investement for personnal resons (Ex : paying college) and the sale may be contrary to the long-term advice the member or candidate is currently providing to clients, the same three criteria should be applied in the transaction so as to not violate Standard VI(B).
197
Personal Trading Secondary to Trading for Clients :
M/c having the same investment positions or being co-invested with clients does not always create a conflict. Some clients in certain investment situations require members or candidates to have aligned interests. Personal investment positions or transactions of members or candidates or their firm should never, however, adversely affect client investments.
198
Standards for Nonpublic Information :
M/c who have knowledge of pending transactions that may be made on behalf of their clients or employers, who have access to nonpublic information during the normal preparation of research recommendations, or who take investment actions. M/c are prohibited from conveying nonpublic information to any person whose relationship to the m/c makes the m/c a beneficial owner of the person’s securities.
199
Impact on All Accounts with Beneficial Ownership :
Personal transactions include those made for the m/c’s own account, for family (including spouse, children, and other immediate family members) accounts, and for accounts in which the m/c has a direct or indirect pecuniary interest, such as a trust or retirement account. Family accounts that are client accounts should be treated like any other firm account and should neither be given special treatment nor be disadvantaged because of the family relationship.
may be subject to preclearance or reporting requirements of the employer or applicable law.
200
Recommended Procedures for Compliance :
1- Limited participation in equity IPOs : First, participation in an IPO may have the appearance of taking away an attractive investment opportunity from clients for personal gain—a clear breach of the duty of loyalty to clients. Second, personal purchases in IPOs may have the appearance that the investment opportunity is being bestowed as an incentive to make future investment decisions for the benefit of the party providing the opportunity.
2- Restrictions on private placements: Appropriate supervisory and review procedures should be established to prevent noncompliance.
3- Establish blackout/restricted periods: Establish blackout periods prior to trades for clients so that managers cannot take advantage of their knowledge of client activity by “front-running” client trades (trading for one’s personal account before trading for client accounts).
4- Reporting requirements: Supervisors should establish reporting procedures
for investment personnel, including disclosure of personal holdings/beneficial ownerships, providing duplicate confirmations of trades to the firm ( (1) The requirement sends a message that there is independent verification, which reduces the likelihood of unethical behavior, and (2) it enables verification of the accounting of the flow of personal investments that cannot be determined from merely looking at holdings.) and the employee, and preclearance procedures (Examine all
planned personal trades to identify possible conflicts prior to the execution of the trades.).
5- Disclosure of policies: m/c's should fully disclose to investors their firm’s policies regarding personal investing (calm the public’s legitimate concerns about the conflicts of interest.). Should not be simply boilerplate language, such as “investment personnel are subject to policies and procedures regarding their personal trading.”
Policies and procedures designed to prevent potential conflicts of interest, and even the appearance of a conflict of interest, with respect to personal transactions are critical to establishing investor confidence in the securities industry.
201
Standard VI(C) Referral Fees :
Members and Candidates must disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services.
202
Allow clients or employers to evaluate (1) any partiality shown in any recomendation of services and (2) the full cost of the services.
203
Standard VII(A) Conduct as Participants in CFA Institute Programs :
Members and Candidates must not engage in any conduct that compromises the reputation or integrity of CFA Institute or the CFA designation or the integrity, validity, or security of CFA Institute programs.
Standard VII: Responsibilities as a CFA Institute Member or CFA Candidate
204
Must disclose the nature of the consideration or benefit—for example, flat fee or percentage basis, one-time or continuing benefit, based on performance, benefit in the form of provision of research or other noncash benefit—together with the estimated dollar value. Consideration includes all fees, whether paid in cash, in soft dollars, or in kind.
205
Prohibits any conduct that undermines the
public’s confidence that the CFA charter represents a level of achievement based
on merit and ethical conduct.
206
Conduct covered includes but
is not limited to :
● giving or receiving assistance (cheating) on any CFA Institute examinations;
● violating the rules, regulations, and testing policies of CFA Institute programs;
● providing confidential program or exam information to candidates or the public;
● disregarding or attempting to circumvent security measures established for
any CFA Institute examinations;
● improperly using an association with CFA Institute to further personal or
professional goals; and
● misrepresenting information on the Professional Conduct Statement or in the
CFA Institute Continuing Education Program.
207
Confidential Program Information :
CFA Institute program rules, regulations, and policies prohibit candidates from disclosing confidential material gained during the exam process.
Examples of information that cannot be disclosed by candidates sitting for an
exam include but are not limited to :
● specific details of questions appearing on the exam and
● broad topical areas and formulas tested or not tested on the exam.
CFA Institute actively polices blogs, forums, and related social networking groups for information considered confidential. The organization works with both individual candidates and the sponsors of online or offline services to promptly remove any and all violations.
208
Additional CFA Program Restrictions :
Standard VII(A) prohibits members from disclosing and/or soliciting confidential material gained prior to or during the exam and grading processes with those outside the CFA exam development process.
Examples of information that cannot be shared by members involved in developing, administering, or grading the exams include but are not limited to :
● questions appearing on the exam or under consideration,
● deliberation related to the exam process, and
● information related to the scoring of questions.
209
Expressing an Opinion :
Standard VII(A) does not cover expressing opinions regarding CFA Institute, the
CFA Program, or other CFA Institute programs. Members and candidates are free to disagree and express their disagreement with CFA Institute on its policies, its procedures, or any advocacy positions taken by the organization. When expressing a personal opinion, a candidate is prohibited from disclosing content-specific information, including any actual exam question and the information as to subject matter covered or not covered in the exam.
210
Standard VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program :
When referring to CFA Institute, CFA Institute membership, the CFA designation, or candidacy in the CFA Program, Members and Candidates must not misrepresent or exaggerate the meaning or implications of membership in
CFA Institute, holding the CFA designation, or candidacy in the CFA Program.
211
Statements referring to CFA Institute, the CFA designation, or the CFA Program that overstate the competency of an individual or imply, either directly or indirectly, that superior performance can be expected from someone with the CFA designation are not allowed under the standard.
Statements that highlight or emphasize the commitment of CFA Institute members, CFA charterholders, and CFA candidates to ethical and professional conduct or mention the thoroughness and rigor of the CFA Program are appropriate.
212
Standard VII(B) applies to any form of communication, including but not limited to communications made in electronic or written form (such as on firm letterhead, business cards, professional biographies, directory listings, printed advertising, firm brochures, or personal resumes) and oral statements made to the public, clients, or prospects.
213
CFA Institute Membership :
The term “CFA Institute member” refers to “regular” and “affiliate” members of
CFA Institute who have met the membership requirements as defined in the CFA Institute Bylaws.
following requirements to maintain his or her status:
● remit annually to CFA Institute a completed Professional Conduct Statement, which renews the commitment to abide by the requirements of the Code and Standards and the CFA Institute Professional Conduct Program, and
● pay applicable CFA Institute membership dues on an annual basis.
If a m/c fails to meet any of the requirements, he is no longer consider as an active member and can no longer identify as such. They may state, however, that they were CFA Institute members in the past or refer to the years when their membership was active.
214
Statements that do not express opinions have to be supported by facts.
215
Using the CFA Designation :
May use the trademarks or registered marks “Chartered Financial Analyst” or
“CFA” and are encouraged to do so but only in a manner that does not misrepresent or exaggerate the meaning or implications of the designation.
If a CFA charterholder fails to meet any of the membership requirements, he or she forfeits the right to use the CFA designation. Until membership is reactivated, individuals must not present themselves to others as CFA charterholders.
216
Referring to Candidacy in the CFA Program :
A person is a candidate in the CFA Program if :
● the person’s application for registration in the CFA Program has been accepted by CFA Institute, as evidenced by issuance of a notice of acceptance, and the person is enrolled to sit for a specified examination or
● the registered person has sat for a specified examination but exam results
have not yet been received.
CFA candidates must never state or imply that they have a partial designation as a result of passing one or more levels or cite an expected completion date of any level of the CFA Program. Final award of the charter is subject to meeting the CFA Program requirements and approval by the CFA Institute Board of Governors.
217
The Chartered Financial Analyst and CFA marks must always be used either
after a charterholder’s name or as adjectives (never as nouns) in written documents or oral conversations. For example, to refer to oneself as “a CFA” or “a Chartered Financial Analyst” is improper.
218
Principles :
1- No periods. Always capitalize the letters
“CFA”.
2- Do not alter the designation to create
new words or phrases.
3- The designation must not be used as part of the name of a firm.
4- The CFA designation should not be given more prominence (e.g., larger or bold font) than the charterholder’s name.
5- Candidates in the CFA Program must not cite the expected date of exam completion and award of charter.
6- No designation exists for someone who
has passed Level I, Level II, or Level III
of the exam. The CFA designation should
not be referred to as a degree.
7- A candidate who has passed Level III but has not yet received his or
her charter cannot use the CFA or Chartered Financial Analyst designation.
8- In citing the designation in a
resume, a charterholder should use the date that he or she received the
designation and should cite CFA Institute as the conferring body.
9- Charterholders should not attach the
CFA designation to anonymous or fictitious names meant to conceal their identity
219
The only appropriate use of the CFA logo is
on the business card or letterhead of each individual CFA charterholder.
220
Order of Professional and Academic Designations :The order of designations cited on such items as resumes and business cards is a matter of personal preference. Prittima is free to cite the CFA designation either before or after citing her PhD.
221
Soft dollar accounts should be used only to purchase research services that directly assist the investment manager in the investment decision-making process
