Ethical and Professional Standards Flashcards
CFA Institute Professional Conduct Program: Disciplinary Review Committee
- Part of the Board of Governors
- Responsible for the **Professional Conduct Program **
- Enforces the Codes and Standards
CFA Institute Professional Conduct Program: Designated Officer
- Member of the Professional Conduct Staff
- Conducts Inquiries related to professional conduct
- May decide:
- no disciplinary sanctions appropriate,
- to issue cautionary letter, or
- to discipline member or candidate.
- Sanctions like condemnation by member’s peers or suspension of participation in CFA program
CFA Institute Professional Conduct Program: Inquiries
Inquiries prompted by:
- Self-disclosure
- Written complaints
- Evidence of misconduct
- Reports from CFA exam proctor
Code of Ethics (6)
- Act with integrity, competence, diligence, respect, and in an ethical manner with public, clients, prospects, employers, employees, or colleagues.
- Integrity of investment profession and client interests above personal interests
- Exercise reasonable care, independent judgement when making recommendations, conducting analyses, taking investment actions, and in other professional activities.
- Practice and encourage others to practice in a professional, ethical manner, which reflects credit on themselves and the profession.
- Promote integrity; uphold rules governing capital markets.
- Maintain, improve professional competence and strive to do the same for other investment professionals.
Standards of Professional Conduct (7)
- Professionalism
- Integrity of Capital Markets
- Duties to Clients
- Duties to Employers
- Investment Analysis, Recommendations, and Acts
- Conflicts of Interest
- Responsibilities as a CFA Inst Member or Candidate
I) Professionalism: Tenets (4)
- Knowledge of the Law
- Independence and Objectivity
- Misrepresentation
- Misconduct
I) Professionalism: (A) Knowledge of the Law: Standard (3)
- Understand and comply with all laws, rules, and regulations (including Codes and Standards of any gov’t, regulatory agency, or association governing prof activities
- Comply with most strict, law, rules, or regulation.
- Can’t knowingly assist in violation, without dissociation
I) Professionalism: (A) Knowledge of the Law: Guidance (6)
- Most strict
- First, notify supervisor or compliance
- May confront wrongdoer directly
- Dissociate if necessary
- Inaction may be construed as participation
- No requirement to report violations to government authorities, except in appropriate cases.
I) Professionalism: (A) Knowledge of the Law: Recommended Procedures (6)
- Keep informed, regularly reviewed written compliance procedures, maintain files
- Seek compliance/legal advice as needed
- Encourage firms to adopt code of ethics
- Distribute information internally on application laws and regulations.
- Have written procedure for reporting suspected violations
- Members strongly encouraged to report violations by other members
I) Professionalism: (B) Independence and Objectivity: Standard (2)
(1) Use reasonable care, judgment to achieve and maintain independence in professional activities.
(2) Do not offer, solicit, or accept compensation that could compromise independence or objectivity.
I) Professionalism: (B) Independence and Objectivity: Guidance (9)
- Modest Gifts okay
- Distinguish between gifts from clients and gift from entities trying to influence a member’s behavior
- May accept gifts from clients, but disclose to employer; get permission if the gift is for future performance.
- Members responsible for hiring managers should not accept travel, gifts, or entertainment that could impair objectivity.
- Investment banking relationships- do not bow to pressure to issue favorable research
- For issuer-paid research, flat-rate fee preferred; disclose.
- Members working for credit rating firms should avoid influence by issuing firms
- Users of credit ratings should be aware of this potential conflict.
- Best practice for analysts to pay for their own commercial travel to firms being analyzed or firm events.
I) Professionalism: (B) Independence and Objectivity: Recommended Procedures (5)
- Protect integrity of opinions-reports should reflect unbiased opinions
- Create a restricted list
- Restrict special cost arrangements
- Limit gifts; clear value limits by firms
- Be careful with IPO share allocations
I) Professionalism: (C) Misrepresentation: Standard (2)
Do not make misrepresentations related to investment analyses, recommendations, actions, or other professional activities.
I) Professionalism: (C) Misrepresentation: Guidance (4)
- Standards covers oral, written, and electronic communications
- Do not misrepresent qualifications, services of self or firm, or performance record, characteristics of an investment
- Do not guarantee a certain return
- No plagiarism- written, oral, or electronic communication.
I) Professionalism: **(C) **Misrepresentation: Recommended Procedures
- Firm can assist employees by providing a written list of firm’s available services and a description of the firm’s qualifications.
- Maintain records of materials used to prepare research reports, and quote sources, except for recognized “financial and statistical reporting services”
- Models and analysis of others at the firm may be used without attribution
- Should encourage firm to establish procedures for verifying marketing claims or third parties recommended to clients.
I) Professionalism: (D) Misconduct: Standard
- Do not engage in any professional conduct involving fraud, deceit, or dishonesty, or
- Commit any act that reflects adversely on professional reputation, integrity, or competence.
I) Professionalism: (D) Misconduct: Guidance
The Standard covers conduct that may not be illegal, but could adversely affect member’s ability to perform duties.
I) Professionalism: (D) Misconduct: Recommended Procedures
(1) Adopt a code of ethics to which every employee must adhere
(2) Disseminate a list of potential violations and associated disciplinary sanctions
(3) Conduct background checks on potential employees- look for good character and eligibility to work in investment industry.
II) Integrity of Capital Markets: Tenets
(A) Material Nonpublic Information: Members in possession of nonpublic information that could affect an investment’s value must not act or cause someone else to act on the information
(B) Market Manipulation: Do not engage in practices that could distort prices, or artificially inflate tradings volumes with intent to mislead market participants
II) Integrity of Capital Markets: (A) Material Nonpublic Information: Guidance (8)
- Material: if disclosure of information would affect a security’s price or if an investor would want to know before making an investment decision
- If price effect is ambiguous, information may not be considered material
- Extends to info like upcoming rating change, or upcoming influential analysis.
- Info is nonpublic until available to the marketplace
- Information available to analysts considered nonpublic until it is made available to general investors.
- “Acts” include related swaps and options, and mutual funds with the security.
- If you possess material non-public information, act as if you did not know.
(8) Mosaic theory: no violation when an analyst combines non-material non-public information with public information to reach conclusion.
II) Integrity of Capital Markets: **(A) **Material Nonpublic Information: Recommended Procedures (4)
- Information barrier or “firewall” is recommended to control interdepartmental communications
- Information barrier includes use of a **restricted list **
- Review employee trades
- Review/ restrict proprietary trading while firm is in possession of material non-public information
II)Integrity of Capital Markets: **(B) **Market Manipulation: Guidance (2)
- Do not engage in transaction based manipulation- give false impression of activity/price movement; gain dominant position in an asset to manipulate price of the asset or related derivative.
- Do not distribute false, misleading information
III) Duties to Clients and Prospective Clients: Tenets
- (a) Loyalty, Prudence, and Care
- (b) Fair Dealing
- (c) Suitability
- (d) Performance Presentation
- (e) Preservation of Confidentiality
III) Duties to Clients: **(A) **Loyalty, Prudence, and Care: Standard (3)
- Duty of loyalty to client- act with reasonable care and exercise prudent judgment
- Act for benefit of client and place their interest before employer’s or own interests
- Determine and comply with any applicable fiduciary duty
III) Duties to Clients: (A) Loyalty, Prudence, and Care: Guidance (8)
- Take investment actions in client’s best interest
- Exercise prudence, care, skill, and diligence that a person familiar with such matters would use
- Follow applicable fiduciary duty
- “Client” may be investing public
- Manage pools of clients assets according to terms of governing documents
- Make investment decisions in context of total portfolio
- Vote proxies responsibly and disclose proxy voting policies to clients
- “Soft dollars” must benefit clients
III) Duties to Clients: **(A) **Loyalty, Prudence, and Care: Recommended Procedures (9)
- Follow rules and laws
- Establish client investment objectives
- Diversity
- Deal fairly with clients- investment actions
- Disclose all possible conflicts
- Vote proxies in best interest of clients and ultimate beneficiaries.
- Keep client information confidential
- Seek best trading execution for clients
- Place client interests first
III) Duties to Clients: **(B) **Fair Dealing: Standard (4)
Deal fairly with clients when:
- Providing investment analysis
- Making investment recommendations
- Taking investment action
- Engaging in other professional activity
III) Duties to Clients: **(B) **Fair Dealing: Guidance (5)
- No discrimination against clients when disseminating investment recommendations or taking investment actions
- Fair does not mean equal
- Different levels of service are okay as long as disclosed and do not disadvantage any clients.
- Investment recommendations:
- —- All clients must have fair chance to act on every recommendation
- —- If client is unaware of recommendation change, advise before accepting trade order.
- Investment actions
- —- Treat all clients fairly- consider investment objectives and circumstances
- —- disclose written allocation procedures
- —- do not disadvantage any clients when distributing “hot” issues
III) Duties to Clients: **(B) **Fair Dealing: Recommended Procedures
- Limit number of people aware of upcoming changes
- Shorten time frame between decision and dissemination
- Have pre-dissemination guidelines
- Simultaneous dissemination
- Maintain list of clients and their holdings
- Disclose trade allocation procedures
- Review accounts regularly to ensure fair client treatment
- If firm offers different levels of service, disclose this fact to clients
- Deviation from strict pro rata allocation of IPO is sometimes okay (e.g. minimum block sizes)
III) Duties to Clients: **(C) **Suitability: Standard (5)
When in advisory relationship with a client:
- Make reasonable inquiry into client’s investment experience, risk/return objectives, and financial constraints prior to making any recommendation, or taking investment action
- Update information regularly
- Ensure investment is suitable to the client’ situation and consistent with written objectives before recommending an investment or taking investment action
- Look at suitability in portfolio context
- When responsible for managing a portfolio to a specific mandate, strategy, or style, make investment recommendations or take investment actions that are consistent with the stated objectives and constraints of the portfolio.
III) Duties to Clients: **(C) **Suitability: Guidance
- When in an advisory relationship, gather client information at the outset and prepare Investment Policy Statement (IPS)
- Update IPS at least annually
- Consider whether leverage (derivatives) is suitable for clients
- If managing a fund to an index or other mandate, invest according to the mandate
III) Duties to Clients: **(C) **Suitability: Recommended Procedures
When formulating IPS for client, know the clients:
- Return objectives,
- Risk tolerance
- Determine the clients constraints:
- (a) liquidity needs
- (b) expected cash flows, investable funds
- (c) time horizon,
- (d) tax considerations.
- (e) regulatory/legal constraints
- (f) unique circumstances/needs
III) Duties to Clients: **(D) **Performance Presentation: Standard
- When communicating investment performance information, make reasonable efforts to ensure that it is fair, accurate, and complete
- Can make brief presentation, note limited nature, and make detailed information available upon request.
III) Duties to Clients: **(D) **Performance Presentation: Guidance
- Do not misstate or mislead about investment performance
- Do not misrepresent past performance
- Provide fair and complete performance information
- Do not share or imply ability to achieve returns similar to those achieved in the past
III) Duties to Clients: **(D) **Performance Presentation: Recommended Procedures
- Consider audience sophistication when presenting performance
- Use performance of weighted composite of similar portfolios
- Use terminated accounts as part of **historical performance **
- Make all disclosures and maintain records
III) Duties to Clients: (E) Preservation of Confidentiality: Standard
- Keep current and prospect client information confidential, unless:
- Illegal activities are suspected
- Disclosure is required by law
- Client or prospect allows disclosure of the information
III) Duties to Clients: **(E) **Preservation of Confidentiality: Guidance
- In some cases it may be required by law to report activities to relevant authorities
- The standard extends to former clients
- Exception: May provide confidential information to the CFA institute for an investigation under Professional conduct program
III) Duties to Clients: **(E) **Preservation of Confidentiality: Recommended Procedures
- Avoid discussing any information received by a client except to colleagues working on the same project
- Follow firm’s electronic data storage procedures; recommend adoption of procedures if none exist