- Six Components of Code of Ethics
- CFA Seven Standards of Professional Conduct
- Standard I - Professionalism (Standards of Professional Conduct)
- Standard II – Integrity of Capital Markets
- Standard III – Duties of Clients
- Standard IV – Duties to Employers
- Standard V – Investment Analysis, Recommendations, and Actions
- Standard VI – Conflicts of Interest
- Standard VII - Responsibilities of a CFA Institute Member or CFA Candidate
Standard I - Professionalism (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.
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.
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.