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 Code of Ethics

The CFA members and candidates are expected to know and adhere by the following standards of professional conduct:

I. Professionalism
<ol style="list-style-type: upper-alpha;">
	<li>Knowledge of the law</li>
	<li>Independence &amp; objectivity</li>
	<li>Misrepresentation</li>
	<li>Misconduct</li>
</ol>
II. Integrity of capital market
<ol style="list-style-type: upper-alpha;">
	<li>Material nonpublic information</li>
	<li>Market manipulation</li>
</ol>
III. Duties to clients
<ol style="list-style-type: upper-alpha;">
	<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 style="list-style-type: upper-alpha;">
	<li>Loyality</li>
	<li>Additional compensation arrangement</li>
	<li>Responsibilities of supervisors</li>
</ol>
V. Investment analysis, recommendations &amp; actions
<ol style="list-style-type: upper-alpha;">
	<li>Diligence &amp; reasonable basis</li>
	<li>Communication with clients &amp; prospective clients</li>
	<li>Record retention</li>
</ol>
VI. Conflicts of interest
<ol style="list-style-type: upper-alpha;">
	<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 style="list-style-type: upper-alpha;">
	<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>

CFA 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.

The questions related to standard I-A will generally revolve around whether there has been any violation of law, and how the CFA® member/candidate proceeded in the situation.

One rule of thumb is the “stricter law”. This rule says that the CFA candidate/member must always follow the stricter law. For example, if the person lives in a country where the security laws are weak compared to CFA code and standards, then he must adhere to the Code and Standards. Otherwise, if the applicable law is stricter, then the law applies. The CFA Level I exam, does not expect you to have thorough knowledge of the laws. So, in a given situation, which law is applicable will be indicated.

The question relate to how the CFA member or candidate proceeded in case of a violation. The general cue to look for is whether the candidate/member did the right thing. For example, did he consulted a counsel and followed his advice.  Alternatively, if someone else was involved in violation, did the candidate/member report to his supervisor or compliance officer, which is the right thing to do.

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.

This standard tries to maintain the integrity of the investment business.  The investment analysts and portfolio managers are making recommendations about stocks, and buying stocks of companies in the larger interest of their clients. In such a situation, if an analyst is given hefty gifts (implicit or explicit), it may force him to recommend in the company’s favor, even though he may not have recommended their stock if he had acted objectively.

As long as the gift or the benefit doesn’t interfere with the analyst’s independence and objectivity, the gift/benefit is not in violation of the standards. Let’s analyze a few situations.

Suppose a financial analyst covers the research of a company’s stock in return of a future business relationship. As long as the analyst’s firm is not expected to recommend the stock and is just providing research coverage, it’s not a violation of the standard.

In another situation, an analyst in an investment firm receives free vacation passes from a company in return of recommending their stock. This will be a violation of the standard.

C. Misrepresentation

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

Within the investment industry, there is a tendency to over promise, and provide false guarantees about how an investment product will perform. This standard is aimed at toning down and avoiding any misleading information about an investment product or a company.  The standard covers written material, advertisements, as well as electronic communication, such as email.

The standard also covers the issue of plagiarism. It states that a CFA member/candidate should not copy the works of others and presents it as their own. For example, taking some other analyst’s report and presenting it as his own, or even taking a part of someone else’s report and including it in their report.

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.

For example, being drunk at work is in violation of the standard.

Standard I - Professionalism (Standards of Professional Conduct)

The second standard, integrity, has two sub-parts:

I-A. Material Nonpublic Information

As per this standard, 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.

The main purpose of this standard to restrict members from indulging in insider trading. People with inside information can take advantage of the information and make gains, which would not be possible otherwise, and getting involved in any such activity is against the CFA Code.

There are two things that need clarity here. One is what constitutes “material” information, and the other is what is Nonpublic information.

A piece of information can be classified as material if the knowledge of it would impact the price of the security, or if it is something that investors would want to know before investing in a particular security. For example, information about earnings, merger, acquisition, change in assets, acquiring new patents, new customers, change in management, or any legal disputes, are all material information.

A piece of information is considered nonpublic until the time it is available to public in general. For example, the information about earnings, which has bee officially released by the company is considered public information. On the other hand, there is certain information that is selectively released to a small group on analysts, or is not disclosed to anyone outside the company.  An example could be a possible loss of a large customer, or talks about acquiring another firm. Till such time this kind of information is not made available to everyone, it is considered nonpublic and the CFA members and candidates should not make use of such information for their benefit or for the benefit of their clients.

Rules of thumb:

You must not act on the material nonpublic information

You must take reasonable care to protect the nonpublic information that you have access to.

Before acting on any information, you must make sure whether the information has been made selectively available to you or is it available to the public. 

I-B. Market Manipulation

As per this standard, the Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.

The market manipulation could be information-based or transaction-based.

Information-based manipulation refers to the situation where an analyst may spread false/misleading information that could propel trading. For example, an analyst may provide an exaggerated positive recommendation for a stock, which may lead to a hike in its price. The intention behind this could be to sell the stocks when the prices have jumped high.

Transaction-based manipulation could occur when a CFA member/candidate’s activities could artificially impact the price/volume of an asset to draw public’s attention. For example, an institutional investor with multiple accounts could trade in a stock to increase the trading volume significantly. Another transaction-based manipulation could be where the manipulator takes a dominant, controlling position in an asset so that he could exploit a derivative product.

Both information-based and transaction-based manipulation are a violation of Standard II-B.

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.

Examples of Violation:
<ul>
	<li>Example 1: A money manager indulges in excessive trading using his client's money because he gets commission on the trading volume. Even if all the trades are suitable for the client, it's a violation of the law.</li>
</ul>
<ul>
	<li>Example 2: An investment advisor, in order to get more clients/business from a broker, starts directly more and more of his client's trades through this broker, without clients’ knowledge and/or considering best execution practices.</li>
</ul>
<ul>
	<li>Example 3: An investment manager, who workers for an investment trust, conducts all the transactions through a particular broker, because that broker provides him personal benefits, such as lower transaction costs on his personal trades.</li>
</ul>
<ul>
	<li>Example 4: The investment manager directs all trades to a broker in return for certain products and services (pay soft dollars).</li>
</ul>
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.

Examples of Violation:
<ul>
	<li>Example 1: An analyst selectively shares the purchase recommendation of a new company with a few clients before the recommendation is sent to all clients.</li>
</ul>
<ul>
	<li>Example 2: A company's pension fund is managed by a bank. The company finds out that the company's fund managed by the bank has underperformed compared to the bank's own similar fund. On investigation it is found out that the banks pension fund manager, gives priority to the bank's own funds over the client's funds. For example, when there is a new purchase recommendation for a security, the securities are first purchased for the bank's own fund and then for the client's funds.</li>
</ul>
<ul>
	<li>Example 3: The investment manager at a money management firm is on the verge of losing a client because of poor performance. In order to retain the client, the investment manager buys certain securities and holds them for a few days without allocating them. After that it allocates the profitable ones to the losing client, and the loss making securities to other clients. This way it is able to improve the performance for this client and manages to retain it.</li>
</ul>
<ul>
	<li>Example 4: An investment manager sends new recommendations to all clients by email, but to a selected few he calls and informs personally.</li>
</ul>
C. Suitability

a. 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.

b. 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.

c. The member must also ascertain whether the investment being recommended is suitable in context of the client's overall portfolio.

Examples of Violation:
<ul>
	<li>Example 1: An investment manager recommends two different clients with different risk profiles the same portfolio allocation.</li>
</ul>
<ul>
	<li>Example 2: An investment manager learns that one of his client's financial situation has changed as he lost lots of money in his business. This affects the client's investment objectives but the investment manager does not update his investment policy statement to reflect the change objectives.</li>
</ul>
<ul>
	<li>Example 32: For a particular high-income mutual fund, an investment manager decides to purchase a growth sock. This is against the fund's investment mandate.</li>
</ul>
4. Performance Presentation

The members must ensure that the investment performance being communicated to the clients is fair, accurate, and complete.

Examples of Violation: 
<ul>
	<li>Example 1: An investment manager reports to his client that they can expect a 20% growth in the next year. This calculation is based only on the past two years' performance of the fund. In their disclosure they should have mentioned that this forecast is based on only past two years' performance.</li>
</ul>
<ul>
	<li>Example 2: An investment firm claims compliance with the GIPS standards, but the return calculations are actually not as per the requirements of GIPS standards.</li>
</ul>
<ul>
	<li>Example 3: While promoting an investment product, the manager promotes to clients by showing the performance results for a certain period. The performance results are actually simulated, but this information is not disclosed to the clients.</li>
</ul>
5. Preservation of Confidentiality 

The members must maintain the confidentiality of all their client's information (pas, current, or prospective), unless there is some illegal activity, a requirement from the law, or the client itself permits disclosure.

Example of Violation:
<ul>
	<li>An investment manager knows that his client is planning to donate a large sum of money. She passes this information to the head of her favorite donation group asking them to follow up on this with her client.</li>
</ul>

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.

There may be situations where the employee has to act against his employer in order to protect the larger interests of the capital markets. In such cases, any activity that would otherwise violate this standard will be justified.

Examples of Violation
<ul>
	<li>Example 1: An employee after leaving employment from a firm, uses private information that he had obtained from his previous employer, to contact and solicit clients from the previous firm. This is a violation of the standard. However, if the information used by the employee was publicly available, then it will not be considered violation of law.</li>
	<li>Example 2: An investment analyst prepares an industry research report for his employer, which is not yet published. The analyst then gets another job with another investment firm, and allows the new investment firm to publish the report as theirs. This is a violation as the research was conducted as a part of his previous employment.</li>
	<li>Example 3: An investment manager who has just joined a new firm contacts his clients from the previous firm requesting them to shift their account to his new firm.</li>
</ul>
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.

Examples of Violation
<ul>
	<li>Example 1: An investment manager working for a firm manages several clients. The manager is compensated for hi job by his employer. One of the clients offers the manager a fancy gift if his portfolio does very well. The manager accepts the offer but does not inform his employer about it. This is a violation of the standard.</li>
	<li>Example 2 (Non-violation): An analyst working with an investment firm recently published a buy recommendation for an airlines company. The CEO of the airlines company, after seeing the report, asks the analyst to meet him for dinner, for further discussion. The analyst gains appropriate approvals, and then meets the CEO. After the meeting the analyst provides full details of the meeting and the dinner to his employer. This is not a violation of the standards.</li>
</ul>
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.

This also means that if the member detects that the firm does not have adequate internal compliance systems in place, they should decline to supervise in writing, until the firm adopts reasonable procedures and systems.

Examples of Violation
<ul>
	<li>Example 1: An investment manager changes her recommendation for stock from Buy to Sell. Before the recommendation is formally published, she orally discusses her new recommendation with one of the executives accountable to her. The executive immediately acts on the information and sells the stock from his client’s portfolio. This is a violation of law as the investment manager was unable to prevent the actions of her subordinate, who acted on the information even before it was formally released.</li>
	<li>Example 2: An investment manager receives information about a possible stock buy from one of her analysts and without crosschecking the credibility of the information passes the recommendation to her portfolio managers. The investment manager later found out the news underlying the recommendation was not credible and the recommendation wasn’t appropriate.</li>
	<li>Example 3: A trader at a firm indulges in highly risky trading activity for a long time. Even though the risk managers reported the activity, the trader’s supervisor does not take any action to halt the activity.</li>
</ul>

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.

Example of Violation
<ul>
	<li>Example 1: An investment advisor comes across a stock that is expected to substantially rise in value because of a change in government regulations. However, the investment advisor does not have sufficient resources to conduct research on this matter. Instead he goes by his gut feeling and recommends the stock to his clients. This is a violation of law as the investment advisor has not conducted sufficient due diligence before making a recommendation to his client.</li>
	<li>Example 2: A student of finance, while pursuing his education becomes a part-time analyst at an investment firm. He is expected to provide one research report with his recommendation every month. Because of the time pressure due to studies and work, he prepares the next month's report based on the news reports and general discussions about a stock in the discussion forums. This is a violation of law because his research and recommendation does not have a reasonable basis.</li>
	<li>Example 3: An investment analyst has just completed his research report, after one month of researching. The report is due to be published in the next two days. Just then he finds out that one of the sources of information has updated their data correcting a major reporting error concerning the stock. The investment analyst gets to know about this update but does not update his research report with the updated information. Two days later, the report is published as it is. This is a violation of the law.</li>
	<li>Example 4: A small investment firm makes recommendations to their clients based on third-party research. The members can rely on third-party research but if they don't make reasonable effort and diligence to validate the report's recommendations, then it will be considered a violation of law.</li>
</ul>
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.

Examples of Violation
<ul>
	<li>Example 1: An investment firm sends out a paid investment newsletter to high net worth individuals. In the newsletter it only includes information about the top buy and sell recommendations. But does not specify the process of investment valuation and basis of the recommendations. This is a violation of law, as the newsletter should at the minimum provide the basic process and logic behind the recommendations.</li>
	<li>Example 2: An energy analyst provides a buy recommendation for an energy company. Based on indirect information, he made his own estimate of the energy generation capacity of the firm but in his report he stated it as a fact. This is a violation of the standard as he has stated his opinions as facts.</li>
	<li>Example 3: An investment fund has been consistently doing well and invests only in dividend stocks. The investment manager decided to change its policy and starts including growth stocks in the fund. If the investment manager does not communicate this change in investment philosophy to his clients, he will be violating the standard. Another example of a similar violation would be if a fund whose processes are inclined towards active fund management decides to change the processes to focus on passive management strategies.</li>
</ul>

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.

Examples of Violation
<ul>
	<li>Example 1: An analyst has to write a research report about a company. The analyst's firm actually has a special interest in the company being researched as the firm has business relationship with the company. This is a conflict of business interest; therefore, the analyst must disclose in his research report their special relationship with the company.</li>
	<li>Example 2: An analyst inherits a huge amout of stocks in a company from his relatives. At the same time, he has published a report with a buy recommendation for the same stock. Even if the analyst's recommendation is fair, it's a conflict of interest, and he must disclose his ownership of the stock.</li>
	<li>Example 3: An investment firm has recently linked the performance of its portfolio managers with peer performance and benchmark indices. Given this change, a portfolio manager in an attempt to improve his portfolio performance deviates from his fund's objectives and starts investing in high-risk stocks. He does not disclose this to his clients the new compensation structure, which has created a conflict of interest. This is a violation of the standard.</li>
	<li>Example 4: An investment analyst has recently invested in a few foreign notes. Later he recommends his firm to invest in the same bond without disclosing his personal ownership of the notes. This is a violation of the standard.</li>
</ul>
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.

Examples of Violation
<ul>
	<li>Example 1: An analyst has come across a shining stock. Before making a purchase recommendation for the stock to his clients, he purchases the stock in his personal account. This is a violation of the standard.</li>
	<li>Example 2: A portfolio manager, who manages funds for several of his clients and also his own parents, first allocates any new IPOs to other clients, and any remaining shares to his parents account. He actually does so to avoid any blame for favoring his parents. However, he is violating the standard because his parents are also paying clients like others to his firm.</li>
</ul>
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.

Examples of Violation
<ul>
	<li>Example 1: A manager working for a bank has an arrangement with a brokerage firm, where the brokerage firm gives him a referral fee for every person to open an account with the brokerage firm. The manager refers several of his bank clients to the brokerage firm, however he does not disclose this arrangement to his bank. This is a violation of the standard.</li>
	<li>Example 2: An investment firm's trading desk conducts its business with a variety of brokers. The portfolio manager in that firm tells the trading desk to direct a large portion of its trades to one of his friend's brokerage firm. The brokerage firm in return of this favor, recommends the investment firm's advisory services to its own clients. This arrangement is not disclosed to the portfolio manager's firm or to the clients of the brokerage house. This is a violation of the law.</li>
</ul>

Standard VI – Conflicts of Interest

Note: For the purpose of this article, a member refers to both members and candidates.

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 of the CFA institute, designation, or exam.

The activities include but are not limited to:
<ul>
	<li>Cheating or helping others in the exam. An example is when a student writes difficult formulas on his palm before coming for the exam.</li>
</ul>
<ul>
	<li>Disregarding the rules and policies of the CFA program. An example is when a student continues to write his answers even when the exam timing is over and the exam administrator has announced that all candidates must stop writing.</li>
</ul>
<ul>
	<li>Providing confidential information about the exam or CFA program to other candidates or public. This includes information such as specific details of questions that appeared in the exam, or details of topics that weren't tested.</li>
</ul>
<ul>
	<li>Disregarding or not circumventing security measures in the CFA exam</li>
</ul>
<ul>
	<li>Using the CFA designation inappropriately</li>
</ul>
<ul>
	<li>Using the association with CFA institute inappropriately for personal for professional gains.</li>
</ul>
<ul>
	<li>Misrepresenting information to CFA Institute. This includes information in Professional Conduct Statement, Continuing Education Program, etc.</li>
</ul>
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.

A few examples:
<ol>
	<li>David Jones, CFA is the correct representation, while David Jones, C.F.A. is incorrect. Even the use in small letters such as cfa is incorrect.  A person may use the expanded form such as Chartered Financial Analyst. The designation should not be given more prominence, for example, it cannot be bolder or larger in size than the name.</li>
	<li>The CFA candidates should clearly mention what stage they are in without any exaggeration or guesses. For example, if a candidate has passed Level I exam, he can mention in his resume "Passed Level I of the CFA examination in 2011". He can't just say "CFA Level I", or he can't say that he's expecting a degree soon.</li>
	<li>You can't say in any way that because you're a CFA charter holder, you will perform better than others.</li>
</ol>

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

Code of Ethics and Standards of Professional Conduct

This frontmatter description will appear below the title

COURSE

Code of Ethics and Standards of Professional Conduct

Lessons

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