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CFA LVL 1 IRC
ETHICS
READING 56 – ETHICS AND TRUST IN THE INVESTMENT PROFESSION
Ethics encompasses a set of moral principles and rules of conduct that provide guidance for our behavior.
➔ Code of ethics – beliefs about obligatory and forbidden conduct in a written set of principles.
➔ A profession’s code of ethics – the shared principles and expected behaviors of a profession’s members.
➔ Standards of conduct – benchmarks for the minimally acceptable behavior of community members and
can help clarify the code of ethics.
Challenges to ethical behavior:
➔ Being overconfident in one’s own morality.
➔ Underestimating the effect of situational influences (environmental issue & cultural elements), which
will make one focusing on the immediate rather than long-term outcomes or consequences of a
decision.
➔ Compliance approach may oversimplify decision making -> ignoring situational considerations.
The importance of ethical conduct in the investment industry:
➔ Some little unimportant unethical behaviour, in aggregate can precipitate a market crisis.
➔ Ethical behaviour builds & fosters trust, which improve the efficiency in capital flows.
➔ Unethical behavior erodes and can even destroy trust, which lead to increasing borrowing costs,
reducing jobs, slowing growth and innovation.
Ethical vs. Legal Standards:
➔ Laws and regulations often codify ethical actions, but they are not always the same.
➔ Some legal behaviors or activities may be unethical (e.g. drink alcohol in work office).
➔ Some behaviors or activities considered ethical may be deemed illegal in certain jurisdictions (e.g.
whistle blowing)
READING 57 – CODE OF ETHICS AND STANDARDS OF PROFESSIONAL CONDUCT
READING 58 – GUIDANCE FOR STANDARDS I–VII
READING 60 – ETHICS APPLICATION
The Code of Ethics:
➔ Act with integrity, competence, diligence, and respect and in an ethical manner with the public, clients,
prospective clients, employers, employees, colleagues in the investment profession, and other
participants in the global capital markets.
➔ Place the integrity of the investment profession and the interests of clients above their own personal
interests.
➔ Use reasonable care and exercise independent professional judgment when conducting investment
analysis, making investment recommendations, taking investment actions, and engaging in other
professional activities.
, ➔ Practice and encourage others to practice in a professional and ethical manner that will reflect credit on
themselves and the profession.
➔ Promote the integrity and viability of the global capital markets for the ultimate benefit of society.
➔ Maintain and improve their professional competence and strive to maintain and improve the
competence of other investment professionals.
STANDARDS OF PROFESSIONAL CONDUCT
PROFESSIONALISM
I(A) Knowledge of the Law
➔ Must comply with all applicable law & codes and standards; follow the stricter one.
➔ Must dissociate from illegal activities (must approach supervisor / compliance department)
I(B) Independence and Objectivity
➔ Buy-Side Clients (avoid pressure sell-side analyst to issue buy call to their stocks holdings)
➔ Fund Manager and Custodial Relationships (can accept gifts from clients for good fund’s performance,
disclosure to firm is required)
➔ Investment Banking Relationships (cannot accept substantial gifts for recommending investments; do
not be pressured by sell-side; firewall between research & investment team)
➔ Performance Measurement and Attribution (independent in measuring performance)
➔ Public Companies (do not be pressured by companies to issue good report)
➔ Credit Rating Agency Opinions (prevent undue influence by issuer firm)
➔ Influence during the Procurement Process (do not accept gifts during hiring process)
➔ Issuer-Paid Research (apply flat fee without regard to report recommendation)
➔ Travel Funding (analysts to pay their own commercial travel; can take client’s arranged transport but
must inform supervisor)
I(C) Misrepresentation
➔ Do not make false statements / impressions.
➔ Do not guarantee investment performance.
➔ Do not perform plagiarism (must cite the source).
I(D) Misconduct
➔ Must not engage conduct involving dishonesty, fraud, or any behaviour that reflects adversely on own
professional reputation, integrity, & competence.
INTEGRITY OF CAPITAL MARKETS
II(A) Material Nonpublic Information
➔ Do not act or cause others to act on material non-public information.
➔ Mossaic Theory – analyst has no violation when he reaches investment conclusion through analysis of
public information & non-material non-public information.
,II(B) Market Manipulation
➔ Do not distort the price / volume. Market making is allowed with disclosure to investors.
➔ Do not spread false rumours.
DUTIES TO CLIENTS
III(A) Loyalty, Prudence, and Care
➔ Act with care & have prudent judgement.
➔ Client’s interest before employer’s or own interest.
➔ Soft commission (benefit-in-kind) must be used to benefit the client.
III(B) Fair Dealing
➔ Be fair when disseminating recommendations or take investment actions.
➔ Disclose different service levels to all clients.
➔ Pro-rate basis for oversubscription.
III(C) Suitability
➔ Follow IPS, ensure suitability of investments.
➔ IPS should be updated at least annually or prior to material change to any specific investment
recommendations or decisions.
III(D) Performance Presentation
➔ Do not misstate performance or mislead clients/prospects about performance.
➔ Make available detailed information on request.
III(E) Preservation of Confidentiality
➔ Keep clients / prospects confidentiality unless the information contains illegal activities, disclosure
required by law, obtain permission for disclosure, or for supporting CFA Professional Conduct Program
investigation.
DUTIES TO EMPLOYERS
IV(A) Loyalty
➔ After effective resignation, simple knowledge (former clients’ name) is not confidential.
➔ Can use knowledge / experience gained from previous job.
IV(B) Additional Compensation Arrangements
➔ Obtain written consent for receiving any gifts or benefits that is expected to create conflict of interest
with employer.
IV(C) Responsibilities of Supervisors
➔ Must take steps to prevent employees from violating laws & standards.
➔ Must decline supervisory role if one feels there is inadequate compliance procedures.
, INVESTMENT ANALYSIS, RECOMMENDATIONS, AND ACTIONS
V(A) Diligence and Reasonable Basis
➔ Must exercise diligence & independence in analysing investment, making recommendation, selecting
external advisor, and using third party research.
V(B) Communication with Clients and Prospective Clients
➔ Disclose to clients the investment process.
➔ Distinguishes between fact and opinion.
V(C) Record Retention
➔ CFA Institute recommends at least 7 years holding period for appropriate record.
CONFLICTS OF INTEREST
VI(A) Disclosure of Conflicts
➔ Must disclose any actual and potential conflicts of interest to clients, prospects, employers.
➔ Must disclose material beneficial ownership interest in the stocks the analyst is recommending.
VI(B) Priority of Transactions
➔ Investment transactions for clients & employers must have priority than oneself.
VI(C) Referral Fees
➔ Must disclose referral fees to clients.
RESPONSIBILITIES AS A CFA INSTITUTE MEMBER OR C FA CANDIDATE
VII(A) Conduct as Participants in CFA Institute Programs
➔ Must not engage in any activities that compromise the integrity of CFA Institute (e.g. do not reveal exam
questions, improper use of designation)
VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program
➔ Must not misrepresent the meaning and implication of membership in CFA Institute.
➔ He is a CFA charterholder (correct); He is a CFA (wrong).
➔ Name, CFA (correct); Name, C.F.A. (wrong); Name, cfa (wrong); Name, CFA (wrong).
➔ Passed Level I of the CFA examination (correct); CFA Level I (wrong); CFA Charter Pending (wrong).
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