Study Notes for CFA Level I - Code of Ethics and Standards of Professional Conduct

Code of Ethics and Standards of Professional Conduct

All CFA Institute members and candidates enrolled in the CFA Program are required to comply with the Code and Standards.



The CFA Institute Professional Conduct Program is enforced by the Disciplinary Review Committee of the CFA Institute and is covered by the Bylaws and the Rules of Procedure for Proceedings Related to Professional Conduct.



The Rules of Procedure are based on two primary principles:



1)&nbsp;&nbsp;&nbsp; Fair process to the member and candidate and



2)&nbsp;&nbsp;&nbsp; Confidentiality of proceedings.



The CFA Institute Designated Officer, along with the Professional Conduct staff, conducts enquiries related to professional conduct.



These inquiries mat be prompted in many ways:



<ol><li>Self-disclosure by members or candidates. All members and candidates are required to self-disclose all matters related to their professional conduct on annual Professional Conduct Statement. This includes any civil litigation, professional investigation, or written complaint.</li><li>Written complaints about a member or candidate's professional conduct.</li><li>Evidence of misconduct by a member or candidate through media or any other public source.</li><li>A violation report by a CFA exam proctor</li></ol>



When an enquiry is initiated, the Professional Conduct staff will conduct an investigation. Upon review, the Designated Officer will conclude the enquiry in one of the following ways:



<ol><li>No disciplinary sanctions are appropriate</li><li>Issue a cautionary letter</li><li>To discipline the member or candidate sanctions may include condemnation by member’s peers or charter suspension</li></ol>

CFA Institute Professional Conduct Program

The code of ethics must be followed by both the members of CFA Institute and the candidates seeking the CFA designation.



<ol><li>Act with integrity and in an ethical manner</li><li>Place the profession and interest of clients over personal interest.</li><li>Conduct all professional activities (such as investment analysis, recommendations, etc) with reasonable care and independent judgement.</li><li>Work in a professional manner and encourage others to do so.</li><li>Promote the integrity of capital markets and support the rules governing the markets</li><li>Maintain and improve professional competence</li></ol>

Six Components of the Code of Ethics

The CFA members and candidates are expected to know and adhere by the following standards of professional conduct:



I. Professionalism



<ol><li>Knowledge of the law</li><li>Independence &amp; objectivity</li><li>Misrepresentation</li><li>Misconduct</li></ol>



II. Integrity of capital market



<ol><li>Material nonpublic information</li><li>Market manipulation</li></ol>



III. Duties to clients



<ol><li>Loyalty, prudence &amp; care</li><li>Fair dealing</li><li>Suitability</li><li>Performance presentation</li><li>Preservation of confidentiality</li></ol>



IV. Duties to employers



<ol><li>Loyality</li><li>Additional compensation arrangement</li><li>Responsibilities of supervisors</li></ol>



V. Investment analysis, recommendations &amp; actions



<ol><li>Diligence &amp; reasonable basis</li><li>Communication with clients &amp; prospective clients</li><li>Record retention</li></ol>



VI. Conflicts of interest



<ol><li>Disclosure of conflicts</li><li>Priority of transaction</li><li>Referral fees</li></ol>



VII. Responsibilities as a CFA Institute member or CFA candidate



<ol><li>Conduct as member &amp; candidate in the CFA program</li><li>Reference to CFA I, the CFA Designation &amp; the CFA Program</li></ol>

Seven Standards of Professional Conduct

The first standard, professionalism, has four sub-parts:



A. Knowledge of the Law The members and candidates must know, understand, and comply with any law, or regulation governing their professional activities. In case of a conflict the member/candidate must comply with the stricter law. They should not knowingly participate in any activity that is in violation of the law.



B. Independence and objectivity The members and candidates must act with independence and objectivity while performing their professional activities. They should not take any gifts or benefits of any kind that could hamper their independence and objectivity in performing their duties.



C. Misrepresentation Members and Candidates must not knowingly misrepresent any information relating to investment analysis, recommendations, actions, or other professional activities.



D. Misconduct The CFA members and candidates should not engage in any kind of misconduct, such as fraud, dishonesty or deceit, or any such act that adversely reflects upon their professional competence.

Standard I - Professionalism (Standards of Professional Conduct)

The second standard, integrity, has two sub-parts:



A. Material Non-public Information



The 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.



B. Market Manipulation



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

Standard II – Integrity of Capital Markets

This standard has 5 parts:



A. Loyalty, prudence, and Care



Members 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’ interest before their employer’s or their own interest.



B. Fair Dealing



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.



C. Suitability



<ol><li>Before making an investment recommendation or action, the members must reasonably enquire into the client’s investment experience, his risk/return objectives, and any limitations.</li><li>Before making an investment recommendation or action, the members must determine that the investment being advised is suitable for the client in terms of the client’s objectives, financial goals, and limitations.</li><li>The member must also ascertain whether the investment being recommended is suitable in context of the client’s overall portfolio.</li></ol>



D. Performance Presentation



The members must ensure that the investment performance being communicated to the clients is fair, accurate, and complete.



E. Preservation of Confidentiality&nbsp;



The members must maintain the confidentiality of all their clients’ information (pas, current, or prospective), unless there is some illegal activity, a requirement from the law, or the client itself permits disclosure.

Standard III – Duties of Clients

This standard has three parts:



A. Loyalty



This standard states that the members must always act in favor of their employer, and works towards benefiting their employers. They should not indulge in activity that could harm their employer.



B. Additional Compensation Arrangements



This standard states that the members must not accept any gift, benefits or compensation in any form that creates a conflict of interest with their own employers, unless they obtain written consent from all parties involved.



C. Responsibilities of Supervisors



This standard states that if the members have any supervisory responsibilities, they should fulfill them and make reasonable effort to prevent any violation of laws, rules and standards by anyone under their supervision.

Standard IV – Duties to Employers

This standard has two parts:



A. Diligence and Reasonable Basis



This standard states that the member must exercise diligence, independence, and thoroughness while analyzing investments, making recommendations, and taking investment actions.



The member must also have a reasonable basis supported by research and investigation for investment analysis, recommendations, and actions.



B. Communication with Clients and Prospective Clients



This standard states that the members disclose their investment processes to clients and prospective clients. This includes information such as formats, investment principles, and changes in the processes, etc.



The members should reasonably identify the important factors affecting their investment processes and communicate them to their clients.



The members while presenting investment analysis to clients should distinguish between facts and opinions.

Standard V – Investment Analysis, Recommendations, and Actions

This standard has three parts:



A. Disclosure of Conflicts



This standard states that the members must make full and fair disclosures of all matter that could give rise to a conflicting situation with clients or employers, for example, any act that could interfere with the member’s duties towards its employer. The member should also ensure that the disclosure information is communicated effectively.



B. Priority of Transactions



This standard states that for a member the investment transactions for his clients and employers should take priority over his personal investment transactions.



C. Referral Fees



This standard states that if a member receives any referral fees (compensation or benefit) for recommending a product or service, he must disclose it to the concerned people such as employer and clients.

Standard VI – Conflicts of Interest

This standard has two parts:



A. Conduct as Members and Candidates in the CFA Program



This standard states that the members must not engage in activity that affects the reputation or the integrity of the CFA Institute, designation, or exam.



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



This standard states that while referring to CFA Institute, membership, designation, or candidacy, the members and candidates should not exaggerate or misrepresent the meaning or implication of the membership, designation, or candidacy in the CFA program.



The next reading Guidance for Standards I – VII addresses the practical application of the Code of Ethics and Standards of Professional Conduct. We will provide various examples demonstrating the application of these standards and situations that demonstrate the violation of Code and Standards.

Standard VII – Responsibilities of a CFA Institute Member or CFA Candidate

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