Reading 2 - Code of Ethics and Standards of Professional Conduct

Question 1

What is the Standards of Practice Handbook (The Handbook)?

Answer 1

The Handbook is the fundamental element of the ethics education effort of CFA Institute and the primary resource for guidance in interpreting and implementing the Code and Standards.

Question 2

Recite the CFA Institutes mission.

Answer 2

To lead the investment profession globally by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society.

Question 3

Who runs the CFA Institute Professional Conduct Program?

Answer 3

The CFA Institute Board of Governors maintains oversight and responsibility for the Professional Conduct Program (PCP), which, in conjunction with the Disciplinary Review Committee (DRC), is responsible for enforcement of the Code and Standards.

Question 4

Where do Professional Conduct inquiries come from?

Answer 4

1) First, members and candidates must self-disclose on the annual Professional Conduct Statement all matters that question their professional conduct, such as involvement in civil litigation or a criminal investigation or being the subject of a written complaint.
2) Second, written complaints received by Professional Conduct staff can bring about an investigation.
3) Third, CFA Institute staff may become aware of questionable conduct by a member or candidate through the media, regulatory notices, or another public source.
4) Fourth, candidate conduct is monitored by proctors who complete reports on candidates suspected to have violated testing rules on exam day.
5) Lastly, CFA Institute may also conduct analyses of scores and exam materials after the exam, as well as monitor online and social media to detect disclosure of confidential

Question 5

When an inquiry is initiated, the Professional Conduct staff does what?

Answer 5

Conducts an investigation that may include requesting a written explanation from the member or candidate; interviewing the member or candidate, complaining parties, and third parties; and collecting documents and records relevant to the investigation.

Question 6

Upon reviewing the material obtained during the investigation, the Professional Conduct staff may:

Answer 6

Conclude the inquiry with no disciplinary sanction, issue a cautionary letter, or continue proceedings to discipline the member or candidate.

Question 7

If the Professional Conduct staff believes a violation of the Code and Standards or testing policies has occurred:

Answer 7

The member or candidate has the opportunity to reject or accept any charges and the proposed sanctions.

Question 8

If the member or candidate does not accept the charges and proposed sanction:

Answer 8

The matter is referred to a panel composed of DRC members. Panels review materials and presentations from Professional Conduct staff and from the member or candidate. The panel’s task is to determine whether a violation of the Code and Standards or testing policies occurred and, if so, what sanction should be imposed.

Question 9

Sanctions imposed by CFA Institute may have significant consequences:

Answer 9

They include public censure, suspension of membership and use of the CFA designation, and revocation of the CFA charter. Candidates enrolled in the CFA Program who have violated the Code and Standards or testing policies may be suspended or prohibited from further participation in the CFA Program.

Question 10

What is the difference between the Asset Manager Code of Professional Conduct and the Code of Standards?

Answer 10

CFA Institute has also published the Asset Manager Code of Professional Conduct, which is designed, in part, to help asset managers comply with the regulations mandating codes of ethics for investment advisers. Whereas the Code and Standards are aimed at individual investment professionals who are members of CFA Institute or candidates in the CFA Program, the Asset Manager Code was drafted specifically for firms.

Question 11

The Asset Manager Code provides specific, practical guidelines for asset managers in six areas:

Answer 11

1) loyalty to clients
2) the investment process
3) trading
4) compliance
5) performance evaluation
6) disclosure

Question 12

The SPC continually evaluates the Code and Standards, as well as the guidance in the Handbook, to ensure that they are:

Answer 12

1) representative of high standards of professional conduct,
2) relevant to the changing nature of the investment profession,
3) globally applicable,
4) sufficiently comprehensive, practical, and specific,
5) enforceable, and
6) testable for the CFA Program.

Question 13

(CODE OF ETHICS) Members of CFA Institute (including CFA charterholders) and candidates for the CFA designation (“Members and Candidates”) must:

Answer 13

1) 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.
2) Place the integrity of the investment profession and the interests of clients above their own personal interests.
3) Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.
4) Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.
5) Promote the integrity and viability of the global capital markets for the ultimate benefit of society.
6) Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.

Question 14

What are the 7 sections of the Standards of Professional Conduct?

Answer 14

Professionalism

Integrity of Capital Markets

Duties to Clients

Duties to Employers

Investment Analysis, recommendations, and actions
Conflicts of interest

Responsibilities as a CFA Institute member or CFA candidate

Question 15

In the Standards of Professional Conduct, under the section of Professionalism, what are the subsections?

Answer 15

Knowledge of the Law
Independence and Objectivity
Misrepresentation
Misconduct

Question 16

In the Standards of Professional Conduct, under the section of Integrity of Capital Markets, what are the subsections?

Answer 16

Material Nonpublic Information

Market Manipulation

Question 17

Learning objectives for Reading 2?

Answer 17

The candidate should be able to:

(1) describe the structure of the CFA Institute Professional Conduct Program and the process for the enforcement of the Code and Standards;
(2) state the six components of the Code of Ethics and the seven Standards of Professional Conduct;
(3) explain the ethical responsibilities required by the Code and Standards, including the sub-sections of each Standard.

Question 18

In the Standards of Professional Conduct, under the section of Duties to Clients (3), what are the subsections?

Answer 18

Loyalty, Prudence, and Care

Fair Dealings

Suitability

Performance Presentation

Preservation of Confidentiality

Question 19

In the Standards of Professional Conduct, under the section of Duties to Employers (4), what are the subsections?

Answer 19

Loyalty
Additional Compensation Arrangements
Responsibilities of Supervisors

Question 20

In the Standards of Professional Conduct, under the section of Investment Analysis, Recommendations, and Actions (5), what are the subsections?

Answer 20

Diligence and Reasonable Basis
Communication with Clients and Prospective Clients
Record Retention

Question 21

In the Standards of Professional Conduct, under the section of Conflicts of Interest (6), what are the subsections?

Answer 21

Disclosure of Conflicts
Priority of Transactions
Referral Fees

Question 22

In the Standards of Professional Conduct, under the section of Responsibilities as a CFA Institute Member or CFA Candidate (7), what are the subsections?

Answer 22

Conduct as participants in CFA Institute Programs

Reference to CFA Institute, the CFA Designation, and the CFA Program

Question 23

Define Standards of Professional Conduct – Professionalism – Knowledge of the Law.

Answer 23

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.

Question 24

Define Standards of Professional Conduct – Professionalism – Independence and Objectivity.

Answer 24

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.

Question 25

Define Standards of Professional Conduct – Professionalism – Misrepresentation.

Answer 25

Members and Candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities.

Question 26

Define Standards of Professional Conduct – Professionalism – Misconduct.

Answer 26

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.

Question 27

Define Standards of Professional Conduct – Integrity of Capital Markets – Material Nonpublic Information.

Answer 27

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.

Question 28

Define Standards of Professional Conduct – Integrity of Capital Markets – Market Manipulation.

Answer 28

Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.

Question 29

Define Standards of Professional Conduct – Duties to Clients – Loyalty, Prudence, and Care.

Answer 29

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.

Question 30

Define Standards of Professional Conduct – Duties to Clients – Fair Dealing.

Answer 30

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.

Question 31

Define Standards of Professional Conduct – Duties to Clients – Suitability.

Answer 31

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.

Question 32

Define Standards of Professional Conduct – Duties to Clients – Performance Presentation.

Answer 32

When communicating investment performance information, Members and Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete.

Question 33

Define Standards of Professional Conduct – Duties to Clients – Preservation of Confidentiality.

Answer 33

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.

Question 34

Define Standards of Professional Conduct – Duties to Employers – Loyalty

Answer 34

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.

Question 35

Define Standards of Professional Conduct – Duties to Employers – Additional Compensation Arrangements

Answer 35

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.

Question 36

Define Standards of Professional Conduct – Duties to Employers – Responsibilities of Supervisors

Answer 36

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.

Question 37

Define Standards of Professional Conduct – Investment Analysis, Recommendations, and Actions – Diligence and Reasonable Basis.

Answer 37

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.

Question 38

Define Standards of Professional Conduct – Investment Analysis, Recommendations, and Actions – Communication with Clients and Prospective Clients

Answer 38

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 analysis and recommendations.

Question 39

Define Standards of Professional Conduct – Investment Analysis, Recommendations, and Actions – Record Retention

Answer 39

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.

Question 40

Define Standards of Professional Conduct – Conflicts of Interest – Disclosure of Conflicts.

Answer 40

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.

Question 41

Define Standards of Professional Conduct – Conflicts of Interest – Priority Transactions.

Answer 41

Investment transactions for clients and employers must have priority over investment transactions in which a Member or Candidate is the beneficial owner.

Question 42

Define Standards of Professional Conduct – Conflicts of Interest – Referral Fees.

Answer 42

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.

Question 43

Define Standards of Professional Conduct – Responsibilities as a CFA Institute Member or CFA Candidate – Conduct as Participants in CFA Institute Programs.

Answer 43

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.

Question 44

Define Standards of Professional Conduct – Responsibilities as a CFA Institute Member or CFA Candidate – Reference to CFA Institute, the CFA Designation, and the CFA Program

Answer 44

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.