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CFA® Ethics and Professional Standards - Soleadea Summary

This is a summary of CFA® Ethics and Professional Standards created by Soleadea (www.soleadea.com).
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Soleadea Team

on 3 January 2015

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Transcript of CFA® Ethics and Professional Standards - Soleadea Summary

Illustration of C&S application
perform your duties towards:
your clients
act with integrity and diligence
demonstrate professional competence in your activities
If you are a CFA member or candidate, you should not only develop your skills and extend your knowledge but also act in an appropriate manner.
You are obliged to follow the Code and Standards and to apply ethical conduct to every professional situation you will find yourself in.
Code of Ethics and
Standards of Professional Conduct
A set of rules specified by CFA Institute for CFA members and candidates to follow in their professional practice, as well as for any entity willing to obey the principles. The principles describe the professional conduct that is expected from those who work in finance and from CFA members and candidates in particular.
Code
Standards
Precise descriptions of proper and ethical conduct that should be applied to particular business situations, as well as to possible problems that the world of finance may be subject to.
Code and Standards (C&S) work in tandem.
Your workplace and work environment should promote strong culture of ethics.
Firms are generally encouraged to adopt the C&S and many firms and regulatory authorities actually do, either in part or in whole.
For your workplace to be an ethically oriented work environment, you are obliged to:
abide by:
Part I
the Law
CFA members and candidates are bound by Standard I (A) to observe all applicable laws and regulations. As a CFA member or candidate, you must become familiar with the relevant government regulations used both in your home country and in the foreign countries you trade securities in or provide investment services for and you should always follow the stricter of the laws and regulations.
the C&S
Standard I (A) also requires that CFA members and candidates follow the C&S in situations when there are no government regulations stricter than the C&S, i.e. in situations when there are no government regulations that would govern a particular case or government regulations are less strict than the C&S. Remember that as a CFA member or candidate you must always comply with the more restrictive rules!
Part II
According to the C&S, client interests always come first. Standard III outlines the responsibilities that CFA members and candidates have with respect to their clients. The responsibilities include:
loyalty, prudence and due care,
fair dealing,
suitability of actions when in advisory relationship,
performance presentation, and
confidentiality preservation.
When you perform your duties, you are obliged to stay loyal to your client at any time as long as no unlawful practices are involved.
When you give an investment recommendation or take any other investment action, you should make sure that information will be spread simultaneously to all your clients, i.e. no selective or discriminatory disclosure will take place.
In order to be able to perform your duties to clients thoroughly and effectively, you should create an investment policy statement (IPS) for every client.
IPS
IPS should include, among other things, the client’s financial situation, personal data such as age or occupation, risk tolerance, investment objectives and constraints. It should also state any formal obligations between the parties, namely their roles and responsibilities, as well as an obligation to review and evaluate the IPS at specified periods.
CFA members and candidates are encouraged to follow the GIPS standards in their performance presentation.
You are obliged to remain confidential with respect to all of your clients unless certain circumstances occur that require you otherwise, e.g. because information disclosure is required by law.
your employer
According to the C&S, your employer is the next in the professional duties hierarchy. First you owe your duty to the client, then to the employer. Standard IV describes proper conduct with respect to the employer, as well as the responsibilities of supervisors.
Generally speaking, you are obliged to act to the benefit of your employer and not to deprive your employer of skills or abilities you possess. Your conduct should do no harm to your employer, especially if you decide to take competitive action.
If you are a CFA member or candidate and you happen to be a supervisor, you are obliged to carry your supervisory responsibilities in accordance with the C&S and you should construct an effective compliance program that will prevent your employees from violating any relevant laws and regulations.
However, since it is the client and the integrity of the market that should be of the paramount importance to you, in situations when the intent is clearly aimed at protecting either the former or the latter and not your personal interest, it is possible to disobey the employer’s policies. This is called whistleblowing.
Part III
Since as a CFA member or candidate you are required to give prominence to your clients and to care about the market’s integrity, you must act in an honest manner and perform your duties thoroughly. To satisfy this professional requirement, you should neither misrepresent any information or manipulate any data nor take part in any fraudulent activity and dissociate from it if any such situation occurs. Detailed description of these issues are given in Standard I (C) and (D), as well as in Standard II (A) and (B).
Generally these Standards play a role of an umbrella rule that tells you not to become involved in any unethical conduct regarding investment activities and business situations. Also, to comply with Standard I (C), remember to cite and give reference to the sources you use for your work in order to avoid plagiarism.
Standard I (C) and (D)
Apart from being loyal to your clients and your employer, you must also stay loyal to the market. It means that you are obliged to care about its integrity and must not engage in any manipulations. It specifically includes not using any material nonpublic information.
Standard II (A) and (B)
Information is “material” if it may affect the price of a security, e.g. information about the merger of two companies or about the insolvency of a company. Information is “nonpublic” if it is not known to general public, i.e. it has not been officially communicated yet.
Material Nonpublic Information
Remember that you are allowed to use only public and nonmaterial nonpublic information in your work.
However, under mosaic theory, you are allowed to access information from different sources and to draw conclusions on the basis of this information even if chances are that your conclusions will be somehow material. Nonetheless, you must reach these conclusions on the basis of public and nonmaterial nonpublic information only!
Part IV
There is a number of qualities that CFA members and candidates should show in their professional practice.
According to:
Standard I (B) – as a CFA member and candidate, you should display independence and objectivity in your actions.
Standard V – when making investment analyses or recommendations or taking any other investment activity, you must act with diligence and have reasonable basis for your actions. You must be able to distinguish factors important for your actions and be able to tell facts and opinions apart and use only facts for your actions. Additionally, your investment actions must be properly documented and filed.
Standard VI – any possible conflict of interests should be always disclosed in an appropriate manner, namely the disclosure must be clear, understandable and effective. To avoid any potential conflict of interests, as well as to perform your professional duties well, the priority of transaction should be given to your clients and employer (not you). If you receive any referral fees (or any benefit) or pay any referral fees to some other person and it relates to the services you provide for the client, you are obliged to inform your client about this.
Standard VII
Remember that as a CFA member or candidate you have certain obligations with respect to CFA Institute and the CFA Program and designation as such.
Standard VII (A) requires you not to reveal any specific details of what was tested on the exam (both in particular and general sense) – the Standard says:

“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.”

Still, you are allowed to express your opinion about the CFA Program or CFA Institute. Nevertheless, when expressing your point of view always think twice and make sure that you do not disclose any forbidden information!
Standard VII (B) makes sure that CFA members and candidates do not overstate the value of participating in the CFA Program or possessing the CFA designation and that they refer to the CFA in a proper way. Thus, when mentioning the CFA do not exaggerate or misrepresent the facts. Rather choose words that will describe your status or benefits that you earned from taking part in the CFA Program clearly and unambiguously!
Example
Explanation
As a CFA charterholder, Julian is obliged to obey the C&S. We read that:
“She has a good reputation and she is considered to be very professional.”
,
which puts Julian in a favourable light. However, good reputation and professionalism do not necessarily mean that Julian is in compliance with all the Standards, even if violating the Standards is not her intention. Let’s analyse the example bit by bit:
Julian, a CFA charterholder, works as a portfolio manager for Integrity Crucial, Inc. She is responsible for accounts of ten clients. When meeting with her clients for the first time, she always creates an IPS and gives the client her business card to make the contact easier. Her business card reads at the top: Julian Wise, C.F.A. She has a good reputation and she is considered to be very professional. She always informs her clients of any referral fees related to her services and discloses to her employer any compensations she is offered for her work. One day a colleague of hers, also a CFA charterholder, told her: “I heard that one of the major companies in the clothing industry – you know which one, don’t you? – will announce its new acquisition at the beginning of the next month”. The colleague advised Julian to buy the stock of the clothing company as soon as possible. Julian:
A. decided to buy the shares for all of her clients, as well as for herself immediately after the conversation because she believed it to be an exceptionally good investment that should benefit everyone.
B. decided to check the information and on the basis of independent research she concluded that the colleague was probably right; she decided to see how the situation develops and to buy the shares as soon as the information becomes public first to those of her clients for whom the investment is suitable and then to herself.
1.
“When meeting with her clients for the first time, she always creates an IPS and gives the client her business card to make the contact easier. Her business card reads at the top: Julian Wise, C.F.A.”

Being a portfolio manager, Julian finds herself in an advisory relationship with her clients.
Thus, she is right to construct an investment policy statement when she starts working for a client. Standard III (C) binds her to do that. She needs to become familiar with the client’s investment profile and needs in order to be able to determine which actions are suitable for the client and which are not. She is also right to give clients her business card, as it may in fact facilitate contacting her and is a good practice. However, Standard VII (B) necessitates her to use the three letters by her name in an appropriate format, which is: “Julian Wise, CFA”, and not: “Julian Wise, C.F.A.” This is why Julian violated Standard VII (B). To comply with the Standard she should have her business card corrected.
2.
“She always informs her clients of any referral fees related to her services and discloses to her employer any compensations she is offered for her work.”

By acting in such a way, Julian remains in compliance with Standard VI (C) and Standard IV (B). The C&S impose the disclosure of both referral fees and additional compensation arrangements to clients and the employer respectively.
The C&S oblige CFA members and candidates to (i) preserve independence and objectivity in their actions (Standard I (B) ), (ii) act with diligence and have reasonable basis for their actions (Standard V (A) ), and (iii) base their actions only on public or nonmaterial nonpublic information (Standard II (A) ). If Julian takes decision A, she will violate all the Standards mentioned above because (i) she will let her colleague influence her actions, (ii) she will act without any investigation to the matter, and (iii) she will act upon receiving material nonpublic information. Additionally, she will violate Standard III (C) by buying the shares to all of her clients. In order to comply at least with this Standard, she should check the IPSs and portfolios of her clients and buy the shares only for those clients for whom the investment is suitable. Also not to violate Standard III (A) and Standard VI (B), she should first attend to her clients’ interests and only then buy the shares for herself.
In order not to breach the C&S, it would be good if Julian took decision B and:

B. “decided to check the information and on the basis of independent research she concluded that the colleague was probably right; she decided to see how the situation develops and to buy the shares as soon as the information becomes public first to those of her clients for whom the investment is suitable and then to herself.”

Only then will Julian remain in compliance with Standards: I (B), V (A) and II (A), as well as with Standards III (A), III (C) and VI (B).
3.
“One day a colleague of hers, also a CFA charterholder, told her: “I heard that one of the major companies in the clothing industry – you know which one, don’t you? – will announce its new acquisition at the beginning of the next month”. The colleague advised Julian to buy the stock of the clothing company as soon as possible. Julian:
A. decided to buy the shares for all of her clients, as well as for herself immediately after the conversation because she believed it to be an exceptionally good investment that should benefit everyone.”
Note! Mosaic theory allows CFA members and candidates to act on the basis of conclusions that they reach as a result of their own research even if they may prove material. However, in this situation, what Julian’s conclusions mean is that the colleague probably possessed material nonpublic information and, thus, she must not use this information before it is made public. What is more, the colleague indeed violated Standard II (A), at the very least, by advising Julian to take advantage of the information.
Note! Remember that even if Julian attends to her clients’ interests first and buys the shares only for those of the clients for whom the investment is suitable, she will still violate Standards: I (B), V (A) and II (A) if she decides to take decision A.
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CFA® Ethics
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