Reading 2: Code of Ethics and Standards of Professional Conduct

Question 1

Describe the structure of the CFA Institute Professional Conduct Program and the process for the enforcement of the code and standards.

Answer 1

So you know that the CFA institute has a code of ethics. This code of ethics, has an importance to the investment profession.

This investment profession’s code of ethics is called:

• Simply “Code of Ethics”- this is in general for any investment professional:
• Standards of “Professional Conduct”- is specifically for any holder of the CFA charter.

Question 2

State the 6 components of the Code of Ethics and the 7 Standards of Professional Conduct.

Answer 2

So let’s look at the “Code of Ethics:”

Code of Ethics-
1.) Must act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, etc.

2. ) Always place the integrity of the investment profession and the interests of clients above their own personal interests.
3. ) Think independently before exercising any investment analysis under reasonable care and independent professional judgement.
4. ) Please inform and try to make others in the investment profession follow the code of ethics because it gives credit to you and your profession.
5. ) DO NOT work for self-interest, but work for the BENEFIT OF SOCIETY.

6.) Continually learn & improve on your PROFESSIONAL COMPETENCE.
- How well do you know the profession? A little, a lot? We
all need to know.
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Standards of Professional Conduct (CFA Charterholder and CFA Candidate):

1. ) Professionalism
2. ) Integrity of Capital Markets
3. ) Duties to Clients
4. ) Duties to Employers
5. ) Investment Analysis, Recommendations, and Actions
6. ) Conflicts of Interest
7. )Responsibilities as a CFA Institute Member or a CFA candidate

Question 3

Explain the ethical responsibilities required by the code and standards, including the sub-sections of each standard.

Answer 3

We have a total of 7 Standards of Professional Conduct:

1. ) Professionalism
   - Knowledge of the Law-
   * **you should follow all rules in the “Code of Ethics and Standard of Professional Conduct”

• Independence and Objectivity
• **never accept any bribes that will change the result or opinion of an investment professional. Members and candidates must not offer, solicit, or accept any gift, benefit, compensation, or considerations
• Misrepresentation
• **Please double check or triple check your work so that there are no investment/ financial analysis mistakes.
• 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.
• 2. ) Integrity of Capital Markets
• Material Nonpublic Information
• **if you have private information, please don’t act on that information causing your clients to not buy the stocks at the given price.
• Market Manipulation
  ***please do not use your position to manipulate or create distorted trading volumes to entice individuals to buy/sell stocks.
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  3.) Duties to Clients
• Loyalty, Prudence, and Care
  ***loyal to your clients and you must use your judgement
  in the right way.
• Fair Dealing
• ** so you must treat all clients fairly and objectively no matter how much money they bring to the table.

-Suitability
*** as an investment professional, you should:
-look into investment requirements of customers:
+ investment experience, risk and return that’s
demanded, and financial constraints

  - please make sure that ALL INVESTMENTS ARE   
    SUITABLE, based on the IPS.

  -JUDGE the suitability of the portfolio based on the   
   client's total portfolio.

-Performance Presentation- when communicating investment performance information, members or candidates must make sure that the information is fair, accurate, and complete!

• Preservation of Confidentiality
• **members and candidates must keep information about current, former, and prospective clients confidential UNLESS:

A.) Information concerns illegal activities on the part of the client or prospective client

B.) Disclosure is required by LAW

C.) The client and prospective client permits disclosure of the information

4. ) Duties to Employers-

A.) Loyalty- please act for the benefit of the employer and do NOT deprive their employer of their skills and abilities or divulge on confidential information.

B.) Additional Compensation Arrangements- please do NOT accept any gifts, benefits, compensation, or considerations that compete with or might reasonably be expected to create a conflict of interest with their employer’s interest unless written consent from all parties are involved.

5.) Investment Analysis, Recommendations, and Actions-

A.) Diligence and Reasonable Basis-
-members and candidates must exercise diligence, independence, make investment recommendations, and take investment actions, etc.

-have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis.

B.) Communication with Clients and Prospective Clients-
- disclose to clients and prospective clients the basic format and general principles of the investment process

• disclose to clients and prospective clients significant limitations and risks associated with the investment process.
• 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.
• distinguish between fact and opinion in the presentation of investment analysis and recommendations.

C.) Record Retention-
please keep records for all reasonings for your investment analysis.
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6.) Conflicts of Interest

A.) Disclosure of Conflicts- members and candidates must disclose any opportunity that causes an interference in the responsibilities to the client.

B.) Priority of Transactions- investment transactions for clients and employers must have priority over investment transactions

C.) Referral Fees- members and candidates must disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received by or paid to products or services.

7.) Responsibilities as a CFA Institute Member or CFA Candidate

A.) Conduct as Participants in CFA Institute Programs
-please do NOT get into any activities that compromise the reputation or integrity of the CFA Institute or the CFA Designation.

B.) Reference to CFA Institute, the CFA designation, and the CFA Program.

-PLEASE DO NOT over-exaggerate the meaning or implications of membership in the CFA institute, CFA institute designation, or candidacy in the CFA program.