Part 3: Guidance for Standards I-VII

Question 1

Standard I: Professionalism
Standard I(a) Knowledge of the Law

Answer 1

• Do not violate any laws applied to your professional activities, this includes Code and Standards.
• A member may be governed by different rules and regulations among Standards, the country member resides, and is doing business.
• If you are aware violations are occurring, the CFA Institute encourage members to report, by approaching your supervisor, or compliance department.
• If reporting violation cannot be accomplished, you may have to resign to be in compliance with this standard.

Question 2

Standard I: Professionalism
Standard I(a) Knowledge of the Law
Recommendations for Members

Answer 2

• Establish procedures to keep employees informed of changes in relevant laws, rules and regulations.
• Review the firm’s written compliance procedures on regular basis.
• Maintain copies of current laws, rules and regulations.
• When in doubt about legality, consult supervisor, compliance personnel or lawyer.
• Dissociating from violations keep records documenting the violations, encourage employer to bring an end to it.
• No requirement in Standrads to report wrongdoers, but local law may require it so are strongly encourages to report to the CFA Institute Professional Conduct program.

Question 3

Standard I: Professionalism
Standard I(a) Knowledge of the Law
Recommendations for Firms

Answer 3

• Have a code of ethics
• Provide employees with information on law, rules, and regulations governing professional activities.
• Have procedures for reporting suspected violations.

Question 4

Standard I: Professionalism

Standard, I(b) Independence and Objectivity

Answer 4

• Analysts may face pressure or receive inducements to give security a specific rating, select certain outside managers or vendors, to produces favourable/unfavourable research and conclusions, this is a violation to use reasonable care and maintain independence and objectivity in professional activities.
• Normal business entertainment is permitted.
• Members who accept, solicit, or offer things of value could be expected to influence members or others independence/objectivity violating the Standard.
• Gifts from clients are considered less likely to compromise independence and objectivity than gifts from other parties.
• Client gifts must be disclosed to members employer prior to acceptance, if possible but after acceptance if not.
• Members preparing reports paid by the subject firm if compensation is a flat rate not tied to conclusions of report (research is issuer-paid is disclosed), then accepting this is dependent on conclusions, recommendations, or market impact of report, and failure to disclose that research is issuer-paid are violations of Standard.

Question 5

Standard I: Professionalism
Standard, I(b) Independence and Objectivity
Recommendations for Members

Answer 5

• Members/firms should pay for their own travel to company events or tours when practicable and limit use of corporate aircraft to trips which commercial travel is not an alternative.

Question 6

Standard I: Professionalism
Standard, I(b) Independence and Objectivity
Recommendations for Firms

Answer 6

• Restrict employee participation in IPOs and private placements, requiring pre-approval for participation.
• Appoint compliance officer, have written policies on independence and objectivity, and clear procedures for reporting violations.
• Limit gifts other than from clients as token gifts only.

Question 7

Standard I: Professionalism

Standard, I(c) Misrepresentation

Answer 7

• Knowingly misleading investors, omitting relevant information, presenting selective data to mislead investors and plagiarism.

Actions of violation:

1. Presenting third-party research as own, no mention of the source.
2. Guaranteeing specific returns on securities that have no specific guarantee from governing body/institution.
3. Selecting a valuation service puts the highest value on untraded security holdings.
4. Selecting performance benchmark not comparable to investment strategy employed.
5. Presenting performance data/attribution analysis omits accounts or relevant variables.
6. Offering false/ misleading info about analyst/firms capabilities, expertise, or experience.
7. Using marketing materials from 3rd party (outside advisor) that are misleading.

Question 8

Standard I: Professionalism
Standard, I(c) Misrepresentation
Recommendations for Members

Answer 8

• Prepare a summary of experience, qualifications, and services a member is able to perform.
• Encourage employers to develop procedures for verifying marketing materials by 3rd parties concerning capabilities, products, and services.
• Cite the source of any summaries of the material provided by others.
• Keep copies of reports, articles, or other materials used in the preparation of research reports.
• Provide a list in writing of firms’ available services and qualifications.
• Periodically review documents and communications of members for any misrepresentation of employee/firms qualifications and capabilities.

Question 9

Standard I: Professionalism

Standard, I(c) Misconduct

Answer 9

• No dishonesty, fraud, or deceit.
• All conduct by members reflects adversely on professional reputation, integrity, or competence.
• Members must not try to use enforcement of Standard against another member to settle personal, political or other disputes not related to professional ethics or competence.

Question 10

Standard I: Professionalism
Standard, I(c) Misconduct
Recommendations for Firms

Answer 10

• Develop/adopt a code of ethics and make clear unethical behaviour will not be tolerated.
• Give employees a list of potential violations and sanctions including dismissal.
• Check references of potential employees.

Question 11

Standard II: Integrity of Capital Markets
Standard II(A): Material Nonpublic Information

Answer 11

• Info is material if its disclosure would affect the price of a security or if a reasonable investor would want info before making an investment decision.
• Info that is ambiguous as likely effect on price may not be considered material.
• Info is non-public until made available in the marketplace, i.e analyst conference call, selective disclosure of info creates the potential for insider trading.
• Prohibition against acting on material non-public info extends to mutual funds containing subject securities, related swaps, and options contracts, it’s a member’s responsibility to determine if info received has been publically disseminated prior to acting or causing others to act on it.
• Members may be involved in transactions during which provided with material non-public information by firms, so may use info for the intended purpose unless becomes public information.
• Mosaic theory = reaching an investment conclusion through perceptive analysis of public info combined with non-material public info is not a violation of the Standard.

Question 12

Standard II: Integrity of Capital Markets
Standard II(A): Material Nonpublic Information
Recommendations for Members

Answer 12

• Make reasonable efforts to achieve public dissemination by the firm of info they possess.
• Encourage firms to adopt procedures to prevent misuse of material non-public info.

Question 13

Standard II: Integrity of Capital Markets
Standard II(A): Material Nonpublic Information
Recommendations for Firms

Answer 13

Use of firewall within firm, containing:

1. Exercise substantial control of relevant interdepartmental communications through clearance area, e.g. compliance or legal department.
2. Review employee trades.
3. Maintain watch, restricted and rumor lists.
   - Monitor and restrict proprietary trading while firm is in possession of material nonpublic info.
   - But prohibiting all proprietary trading while firm is in possession of material nonpublic info may be inappropriate as send signals to market.
   - In this case, firms should take opposite side of unsolicited customer trades.

Question 14

Standard II: Integrity of Capital Markets
Standard II(B): Market Manipulation

Answer 14

• Actions affect security values and trading volumes without violating the Standard.
• If intent to mislead, then Standard is violated.
• Spreading false information to affect prices/volume is a violation of standard as making trades to mislead market participants.

Question 15

Standard III: Duties to Clients
Standard III(a): Loyalty, Prudence, and Care

Answer 15

• Clients’ interests always come first, although not imposing fiduciary duty, but a requirement to act in the client’s best interests, and recommend products suitable given clients investment objectives and risk tolerance.

Members/candidates must:

1. Exercise prudence, care, skill and diligence under circumstances that person acting in a like capacity and familiar with such matters would use.
2. Manage pools of clients assets in accordance with terms of governing documents, i.e, trust documents, investment management agreements.
3. Investment decisions made in context of total portfolio.
4. Inform clients of any limitations in advisory relationship (advisor recommending only her own products).
5. Vote proxies in informed, responsible way, may not be necessary to vote all proxies due to cost-benefit analysis.
6. Client brokerage must be used to benefit the client.
7. Client may be investing public as a whole than a specific entity, or person.

Question 16

Standard III: Duties to Clients
Standard III(a): Loyalty, Prudence, and Care
Recommendations for Members

Answer 16

• Submit to clients quarterly with itemised statements showing all securities in custody, and all debits, credits, and transactions.
• Encourage firms to address these topics when drafting policies, and procedures regarding fiduciary duty by:

1. Following applicable rules/laws.
2. Establishing investment objectives for clients.
3. Considering suitability of portfolio relative to clients needs and circumstances, investment basic characteristics and basic characteristics of the total portfolio.
4. Diversify.
5. Deal fairly to clients in regard to investment transactions.
6. Disclose conflicts.
7. Disclose compensation arrangements.
8. Vote proxies in the best interest of clients and ultimate beneficiaries.
9. Maintain confidentiality.
10. Seek the best execution.

Question 17

Standard III: Duties to Clients
Standard III(b): Fair Dealing

Answer 17

• Do not discriminate against clients when disseminating recommendations, or taking investment action.
• Fairly does not mean equally.
• Different service levels are acceptable, but should not negatively affect or disadvantage clients.
• Disclose different service level to all clients and prospects, making premium level of service available to all willing to pay for them.
• Give all clients a fair opportunity to act on every recommendation, and those unaware of change of recommendation for a security should be advised of change before order of security is accepted.
• Treat clients fairly in investment objectives and circumstances, treating clients in a fair and impartial manner.
• Members/candidates should not take advantage of position in industry to disadvantage clients (e.g. taking shares of an oversubscribed IPO).

Question 18

Standard III: Duties to Clients
Standard III(b): Fair Dealing
Recommendations for Members

Answer 18

• Encourage firms to establish compliance procedures requiring proper dissemination of investment recommendations.
• Maintain list of clients and holdings to ensure all holders are treated fairly.

Question 19

Standard III: Duties to Clients
Standard III(b): Fair Dealing
Recommendations for Firms

Answer 19

• Limit the number of people who are aware that change in recommendation will be made.
• Shorten time frame between decision and dissemination.
• Publish personnel guidelines for pre-dissemination have place guidelines prohibiting personnel who have prior knowledge of recommendation from discussing or taking action on pending recommendation.
• Disseminate new or changed recommendations simultaneously to all clients who have expressed an interest or whom investment is suitable.
• Develop written trade allocation procedure to ensure fairness to clients, timely and efficient order execution and accuracy of client positions.
• Disclose trade allocation procedures.
• Establish systematic account review, to ensure no client is given preferred treatment and investment actions are consistent with account objectives.
• Disclose available levels of service.

Question 20

Standard III: Duties to Clients
Standard III(c): Suitability

Answer 20

Members/candidates in advisory relationship with client they must:

1. Make a reasonable inquiry into clients investment experience, risk and return objectives and financial constraints prior to investment recommendations or action and reassess and update information regularly.
2. Determine if investment is suitable to clients financial situation, written objectives, mandates and constraints before recommendations/actions.
3. Judge suitability of investments in context of clients total portfolio.

• Members are responsible for managing portfolio to a specific mandate, strategy or style, where they must make only investment recommendations/actions consistent with stated objectives and constraints of portfolio.
• Advisory relationships mean members should gather client info at the beginning in the form of an investment policy statement (IPS), considering clients needs and circumstances, thus risk tolerance, considering whether use of leverage is suitable for client.
• If member responsible for managing fund index/other stated mandate, they must select only investments consistent with stated mandate.

Question 21

Standard III: Duties to Clients
Standard III(c): Suitability
Unsolicited Trade Requests

Answer 21

• Investment manager may receive a client request to purchase a security manager knows is unsuitable given IPS, even if trade may/may not take material effect on risk characteristics of total portfolio, the requirements are different for each case.
• In either case, the manager should not make trade until he has discussed with client reasons based on IPS trade is unsuitable for client account.
• If effect on risk/return profile of clients total portfolio is minimal, discussing with client how trade does not fit IPS goals and constraints may follow firms policy to unsuitable trades. Regardless, the firm policy, the client must acknowledge discussion and understanding of why trade is unsuitable.
• If trade has material impact on risk/return profile of clients total portfolio, an option to update IPS so client accepts changed risk profile will permit trade.
• If client not accept change IPS, the manager may follow firm policy which may allow trade to be made in separate client direct account.
• Absence of other option, the manager may need to reevaluate maintaining relationship with client.

Question 22

Standard III: Duties to Clients
Standard III(c): Suitability
Recommendations for Members

Answer 22

• Each client must place needs, circumstance and investment objectives in a written IPS.
• Type of client is considered, and if separate beneficiaries, investors objectives (risk and return), investor constraints (liquidity needs, expected cash flows, time, tax, regulatory and legal circumstances), and performance measurement benchmarks.
• Review investors objectives and constraints periodically to reflect changes in client circumstances.

Question 23

Standard III: Duties to Clients
Standard III(d): Performance Presentation

Answer 23

• When communicating investment performance information, memebrs must make efforts to ensure its fair, accurate and complete.
• Members must not misstate performance or mislead clients/prospects about their/firms investment performance.
• Members not misrepresent past/reasonable expected performance, and must not state/imply ability to achieve rate of return similar to achieved in past.
• Brief presentations means members make detailed info available on request and indicate presentation has offered only limited info.

Question 24

Standard III: Duties to Clients
Standard III(c): Performance Presentation

Answer 24

• Encourage firms adhere to GIPS.
• Consider sophistication of audience to whom performance presentation is addressed.
• Present performance of weighted composite of similar portfolios than of a single account.
• Include terminated accounts part of historical performance and clearly stated when they are terminated.
• Include all appropriate disclosures to fully explain results (model results, gross/net fees etc).
• Maintain data and records used to calculate performance presented.

Question 25

Standard III: Duties to Clients
Standard III(e): Preservation of Confidentiality

Answer 25

Members must keep info about current, former and prospective clients confidential unless:

1. Info concerns illegal activities on part of client
2. Disclosure required by law
3. Client/prospect permits disclosure of the info.

• If illegal activities are involved, there is an obligation to report activities to authorities.
• Confidentality standards extends to former clients too.
• Requirements of this standard are not intended to prevent members from cooperating with CFA PCP (Professional Conduct Program) investigation.

Question 26

Standard III: Duties to Clients
Standard III(e): Preservation of Confidentiality
Recommendations for Members

Answer 26

• Members should avoid disclosing info received from client except to authorised coworkers also working for client.
• Members should follow firm procedures for storage of electronic data, and recommend adoption of such procedures if not in place.

Question 27

Standard IV: Duties to Employers
Standard IV(a): Loyalty

Answer 27

• Matter related to employment, members must act for the benefit of employer and not deprive their employer of the advantage of their skill and abilities, divludge confidential info or cause harm.
• This Standard is applicable to employees, if members are independent contractors, they have a duty to abide by terms of their agreements.
• Members must not engage in activities that would injure the firm, and deprive it of profit/advantage of employees skills and abilities.
• Members shoudl always place clients interests above interest of employer, considering effects of their actions on firms integrity and sustainability.
• There is no requirement the employee puts employer interest ahead of family and other personal obligations, its expected employers/employees will discuss matters and balance these obligations with work obligations.
• Isolated cases where duty to ones employer may be violated to protect clients or integrity of market when actions are not a personal gain.
• Independent practoce for compenstaion is allowed if notification is provided to employer fully describing all aspects of service including compensation, duration, nature of activities and employer consents to all terms of proposed independent practice before it begins.
• When leaving an employer, members should continue to act in employers best interest until resignation is effective, a violation is:

1. Misappropriation of trade secrets.
2. Misuse of confidential info.
3. Soliciting employers client prior to leaving.
4. Self-dealing.
5. Misappropriation of client lists.

• Employers records on any medium (home computer, tablet, cell phone) are property of the firm.
• If employer has left, knowledge of names and former clients not confidential, with no prohibition on use of experience/knowledge gained with former employer.
• If agreement exists among employers (i.e US Protocol for Broker Recruiting), permitting brokers to take certain client info when leaving, a member may act within terms of agreement without violating the Standard.
• Members must adhere to employers policies concerning social media, when planning to leave employer, members must ensure social media use complies with employers policies for notifying clients about employee separations.

Question 28

Standard IV: Duties to Employers
Standard IV(a): Loyalty
Recommendations for Members

Answer 28

• Members encouraged to give employer a copy of Code of Standards.
• Best practice to use separate social media accounts for personal and professional reasons.

Question 29

Standard IV: Duties to Employers
Standard IV(a): Loyalty
Recommendations for Firms

Answer 29

• Employers should not have incentive and compensation systems that encourage unethical behavior.

Question 30

Standard IV: Duties to Employers
Standard IV(b): Additional Compensation Arrangements

Answer 30

• Members may not accept gifts, benefits, compensation, or consideration that competes with or is expected to create a conflict of interest with employer interest unless they obtain written consent from all parties involved.
• Compensation is direct and indirect from a client and other benefits received from third parties.
• Written consent from the employer includes via email.
• Understand the difference between additional compensation arrangement and gift from a client:
• Offering a bonus depends on the future performance of her account, an additional compensation arrangement requires written consent in advance.
• Client offer a bonus to reward a member for her accounts past performance, a gift that requires disclosure to members employer to comply with Standrad I(B) Independence and Objectivity.

Question 31

Standard IV: Duties to Employers
Standard IV(b): Additional Compensation Arrangements
Recommendations for Members

Answer 31

• Make an immediate written report to the employer detailing any proposed compensation and services if additional provided by the employer.
• Members who are hired to work part-time should discuss any arrangements that may compete with employers’ interests at the time they are hired and abide by any limitation their employer identifies.

Question 32

Standard IV: Duties to Employers
Standard IV(b): Additional Compensation Arrangements
Recommendations for Firms

Answer 32

• Details of additional compensation including any performance incentives should be verified by the offering party.

Question 33

Standard IV: Duties to Employers
Standard IV(c): Responsibilities of Supervisors

Answer 33

• Members make reasonable efforts to prevent employees from violating laws, rules, regulations, or Codes and Standards, as well as make reasonable efforts to detect violations.
• Adequate compliance system meets industry standards. regulatory requirements and requirements of Code and Standards.
• Members with supervisory responsibilities have an obligation to bring an inadequate compliance system to the attention of firms management and recommend corrective action.
• Member faced with no compliance procedures or with he believes are inadequate must decline supervisory responsibility in writing until adequate procedures are adopted by the firm.
• There is a violation response promptly, conduct thorough investigation while increasing supervision/ placing limitation on wrongdoers activities.

Question 34

Standard IV: Duties to Employers
Standard IV(c): Responsibilities of Supervisors
Recommendations for Members

Answer 34

• Members recommend employers adopt a code of ethics and encourage employers to provide their codes of ethics to clients.
• Once compliance program is instituted, the supervisor should:

1. Distribute the proper personnel.
2. Update it as needed.
3. Continually educate staff regarding procedures.
4. Issue reminders as necessary.
5. Require professional conduct evaluations.
6. Review employee actions to monitor compliance and identify violations.

Question 35

Standard IV: Duties to Employers
Standard IV(c): Responsibilities of Supervisors
Recommendations for Firms

Answer 35

• Employers should not commingle compliance procedures with firms’ code of ethics, which can dilute the goal of reinforcing one’s ethical obligations.
• Investigating a possible breach of compliance procedures, it’s appropriate to limit suspected employees activities.

Adequate compliance procedures should:

1. Be clearly written.
2. Be easy to understand.
3. Designate compliance officer with authority clearly defined.
4. System of checks and balances.
5. Outline scope of procedures.
6. Outline what conduct is permitted.
7. Contain procedures for reporting violations and sanctions.
8. Structure incentives so unethical behaviour is not rewarded.

Question 36

Standard VI: Conflicts of Interest
Standard VI(a): Disclosure of Conflicts

Answer 36

• Members must take full/fair disclosure of all matters which could reasonably be expected to impair their independence, and objectivity/ interfere with duties to clients, and employers.
• Members must ensure such disclosures are prominent, delivered in plain language, and communicate relevant info effectively.
• Members must fully disclose to clients, prospects, and employers all actual/potential conflicts of interests to protect investors and employers, disclosures being clearly stated.
• Its required all potential areas of conflict be disclosed allows clients to judge motives and potential biases, includes broker-dealer marketing activities, and board service.
• Most common conflict is actual ownership of stock in companies that member recommends/ client holds.
• Another common conflict is members’ compensation/bonus structure, which creates incentives to take action to produce immediate gains for members with little/no concern for longer-term returns for clients.
• Conflicts must be disclosed when members are in an advisory capacity, and must be updated in case of significant change in compensation structure.
• Members must give employers enough info to judge the impact of conflict, take reasonable steps to avoid conflict, and report prompt;y if occurs.

Question 37

Standard VI: Conflicts of Interest
Standard VI(a): Disclosure of Conflicts
Recommendations for Members

Answer 37

• Any special compensation arrangements, bonus programs, commissions, and incentives should be disclosed.

Question 38

Standard VI: Conflicts of Interest
Standard VI(b): Priority of Transactions

Answer 38

• Investment transactions for clients/employers has priority over those in which member is a beneficial owner.
• Personal transactions must be undertaken only after client and members employer have an adequate opportunity to act on recommendation.
• Family member accounts that are client accounts should be treated like any client account, not disadvantaged.
• Members should not act on info about pending trades for personal gain, the overriding considerations with respect to personal trades are they do not disadvantage any clients.
• When requested members must fully disclose to investors their firms personal trading policies.

Question 39

Standard VI: Conflicts of Interest
Standard VI(b): Priority of Transactions
Recommendations for Members

Answer 39

• Members should avoid conflicts arising with IPOs by not participating in them.

Question 40

Standard VI: Conflicts of Interest
Standard VI(b): Priority of Transactions
Recommendations for Firms

Answer 40

• All firms should have basic procedures in place addressing conflict created by personal investing, includes:
  1. Est. limitations on employee participation in equity IPOs.
  2. Est. restrictions on participation in private placements. Strict limits placed on employee acquisition of securities and proper supervisory procedures be in place. Participation in investments creates conflict issues similar to IPOs.
  3. Est. blackout/restricted periods, with employees involved in investment decision making should have blackout periods prior to trading for clients - no front running.
  4. Est. reporting procedures including duplicate trade confirmations, disclosure of personal holdings, and beneficial ownership positions, and preclearance procedures.

Question 41

Standard VI: Conflicts of Interest
Standard VI(c): Referral Fees

Answer 41

• Members must disclose employer, clients as appropriate any compensation, consideration, or benefit paid for a recommendation of products or services.
• Members must inform parties of any benefit received for referral of clients, allowing evaluation of the full cost of service, and potential partiality.
• All types of consideration must be disclosed.

Question 42

Standard VI: Conflicts of Interest
Standard VI(c): Referral Fees
Recommendation for Members

Answer 42

• Members should encourage firms to adopt clear procedures regarding compensation referrals.
• Members should provide employers with updates at least quarterly.

Question 43

Standard VI: Conflicts of Interest
Standard VI(c): Referral Fees
Recommendation for Firms

Answer 43

• Firms that do not prohibit referral fees should have clear procedures for approval and policies regarding the nature and value of referral compensation received.

Question 44

Standard VII: Responsibilities as CFA Institute Members/Candidate
Standard VII(a): Conduct as Participants in CFA Institute Programs

Answer 44

• Members must not engage in any conduct compromising the reputation/integrity of CFA Institute/designation, or the integrity, validity or security of its programs.
• Integrity demonstrates:

1. Not cheating on any exams.
2. Not revealing any broad or specific topics tested, content of exam, questions or formulas required or not in the exam.
3. Following rules and policies of CFA program
4. Not giving confidential info on the program to candidates/public.
5. Not improperly using the designation to further personal/professional goals.
6. Misrepresenting info on Professional Conduct Statement (PCS) or CFA Development Program.

• Members are not precluded from expressing opinions regarding exam program, or CFA Institute, but must not reveal confidential info about program.
• Candidates should not violate exam policies (e.g. calculator, personal belongings, Candidate pledge) have violated Standard VII(A).
• Members who volunteer in CFA program may not solicit/reveal info about questions considered for/included on CFA exam about grading process, or scoring of questions.

Question 45

Standard VII: Responsibilities as CFA Institute Members/Candidate
Standard VII(b): Reference to CFA Institue, the CFA Designation and the CFA Program

Answer 45

• In reference to CFA Institute, membership, designation, or candidacy of program, members must not misrepresent/exaggerate the meaning/implications of membership in program.
• Members must not make promotional promises/guarantees tied to CFA designation such as over-promising individual competence/over-promising investment results in the future (i.e. higher performance, less risk etc.)
• Members must satisfy requirements to maintain membership;
  1. Sign PCS annually.
  2. Pay CFA institute membership dues annually.
• Failure to do so, means they are no longer active members.
• Do not misrepresent/exaggerate the meaning of CFA designation.
• There is no partial CFA designation - acceptable to state that candidate successfully completed program in 3 years if they did, but claiming superior ability because of this is not permitted.