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24th Nov 2022

READING 2 - Code of Ethics and Standards of Professional Conduct

EXAM FOCUS

In addition to reading this review of the ethics material, we strongly recommend that all candidates for the CFA examination read the Standards of Pratice Handbook 11th Edition(2014) multiple times. As a Level I CFA candidate, it is your responsibility to comply with the Code and Standards. The complete Code an Standards are reprinted in Volume 1 of the CFA Program Curriculum.

MODULE 2.1: CODE AND STANDARDS

LOS 2.a: Describe the structure of the CFA Institute Professional Conduct Program and the process for the enforcement of the Code and Standards.

CFA Program Curriculum, Volume 1, page 39

The CFA Institute Professional Conduct Program is covered by the CFA Institute By laws and the Rules of Procedure for Proceedings Related to Professional Conduct. The Program is based on the principles of fairness of the process to members and candidates and maintaining the confidentiality of the proceedings. The CFA Institute Board of Governors has overall responsibility for the Professional Conduct Program and its Disciplinary Review Committee is responsible for enforcing of the Code and Standards.

The CFA Institute Professional Conduct staff conducts inquiries related to professional conduct. Several circumstances can prompt such an inquiry:

  1. Self-disclosure by members or candidates on their annual Professional Conduct Statements of involvement in civil litigation or a criminal investigation, or that the member or candidate is the subject of a written complaint.
  2. Written complaints about a member or candidate's professional conduct that are received by the Professional Conduct staff.
  3. Evidence of misconduct by a member or candidate that the Professional Conduct staff received through public sources, such as a media article or broadcast.
  4. A report by a CFA exam proctor of a possible violation during the examination.
  5. Analysis of exam materials and monitoring of social media by CFA Institute.

Once an inquiry has begun, the Professional Conduct staff may request(in writing) an explanation from the subject member or candidate and may: (1) interview the subject member or candidate, (2) interview the complainant or other third parties, and/or (3) collect documents and records relevant to the investigation.

The Professional Conduct staff may decide: (1) that no disciplinary sanctions are appropriate, (2) to issue a cautionary letter, or (3) to discipline the member or candidate. In a case where the Professional Conduct staff finds a violation has occurred and proposes a disciplinary sanction, the member or candidate may accept or reject the sanction. If the member or candidate choose to reject the sanction, the matter will be referred to a disciplinary review panel of CFA Institue members for a hearing. Sanctions imposed may include condemnation by the member's peers or suspension of candidate's continued participation in the CFA Program.

LOS 2.b: State the six components of the Code of Ethics and the seven Standards of Professional Conduct.

CFA Program Curriculum, Volume 1, page 46

Code of Ethics

Members of CFA Institute [including Chartered Financial Analyst (CFA) charterholders] and candidates for the CFA designation ("Members and Candidates") must:

  • Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleague in the investment profession, and other participants in the global capital markets.
  • Place the integrity of the investment profession and the interests of client above their own personal interests.
  • Use reasonable care and exercise independent professional judgement 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.

The Standards of Professional Conduct

  1. Professionalism
  2. Integrity of Capital Markets
  3. Duties to Clients
  4. Duties to Employers
  5. Investment Analysis, Recommendations, and Actions
  6. Conflicts of Interest
  7. Responsibility as a CFA Institute Member or CFA candidate

LOS 2.c: Explain the ethical responsibilities required by the Code and Standards, including the subsections of each Standards.

CFA Program Curriculum, Volume 1, page 46

Standards of Professional Conduct

  1. PROFESSIONALISM

    1. Knowledge of the Law. Members and Candidates must understand and comply with all applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and Standards of professional Conduct) of any government, regulatory organization, licensing agency, or professional association governing their professional activities. In the event of conflict, Members and Candidates must comply with the more strict law, rule, or regulation. Members and Candidates must not knowingly participate or assist in any violation of laws, rules, or regulations and must dissociate themselves from any such violation.
    2. Independence and Objectivity. Members and Candidates must use reasonable care and judgement to achieve and maintain independence and objectivity in their professional activities. Members and Candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another's independence and objectivity.
    3. Misrepresentation. Members and Candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities.
    4. Misconduct. Members and Candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence.

  2. INTEGRITY OF CAPITAL MARKETS

    1. Material Nonpublic Information. 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.
    2. Market Manipulation. Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.

  3. DUTIES TO CLIENTS

    1. Loyalty, Prudence, and Care. Members and Candidates have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgement. Members and Candidates must act for the benefit of their clients and place their clients' interests before their employer's or their own interests.
    2. 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.
    3. Suitability.
      1. When Members and Candidates are in an advisory relationship with a client, they must:
        1. Make a reasonable inquiry into a client's or prospective clients' investment experience, risk and return objectives, and financial constraints prior to making any investment recommendation or taking investment action and must reassess and update this information regularly.
        2. Determine that an investment is suitable to the client's financial situation and consistent with the client's written objectives mandates, and constraints before making an investment recommendation or taking investment action.
        3. Judge the suitability of investments in the context of the client's total portfolio.
      2. When Members and Candidates are responsible for managing a portfolio to a specific mandate, strategy, or style, they must make only investment recommendations or take only investment actions that are consistent with the stated objectives and constraints of the portfolio.
    4. Performance Presentation. When communicating investment performance information, Members or Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete.
    5. Preservation of Confidentiality. Members and Candidates must keep information about current, former, and prospective clients confidential unless:
      1. The information concerns illegal activities on the part of the client or prospective client,
      2. Disclosure is required by law, or
      3. The client or prospective client permits disclosure of the information.

  4. DUTIES TO EMPLOYERS

    1. Loyalty. In matters related to their employment, Members and Candidates must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer.
    2. Additional Compensation Arrangements. Members and Candidates must not accept gifts, benefits, compensation, or consideration that competes with or might reasonably be expected to create a conflict of interest with their employer's interest unless they obtain written consent from all parties involved.
    3. Responsibility of Supervisors. Members and Candidates must make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and the Code and Standards.

  5. INVESTMENT ANALYSIS, RECOMMENDATIONS, AND ACTIONS

    1. Diligence and Reasonable Basis. Members and Candidates must:
      1. Exercise diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions.
      2. Have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action.
    2. Communication with Clients and Prospective Clients. Members and Candidates must:
      1. Disclose to clients and prospective clients the basic format and general principles of the investment process they use to analyze investments, select securities, and construct portfolios and must promptly disclose any changes that might materially affect those processes.
      2. Disclose to clients and prospective clients significant limitations and risks associated with investment process.
      3. Use reasonable judgement in identify which factors are important to their investment analyses, recommendations, or actions and include those factors in communications with clients and prospective clients.
      4. Distinguish between fact and opinion in the presentation of investment analysis and recommendations.
    3. Record Retention. Members and Candidates must develop and maintain appropriate records to support their investment analysis, recommendations, actions, and other investment-related communications with clients and prospective clients.

  6. CONFLICTS OF INTEREST

    1. Disclosure of Conflicts. Members and Candidates must make full and fair disclosure of all matters that could reasonably by expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and employer. Members and Candidates must ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively.
    2. Priority of Transactions. Investment transactions for clients and employers must have priority over investment transactions in which a Member or Candidate is the beneficial owner.
    3. Referral Fees. Members and Candidates must disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received by, or paid to, others for the recommendation of products or services.

  7. RESPONSIBILITIES AS A CFA INSTITUTE MEMBER OF CFA CANDIDATE

    1. Conduct as Participants in CFA Institute Programs. Members and Candidates must not engage in any conduct that compromised the reputation or integrity of CFA Institute or the CFA designation or the integrity, validity, or security of CFA Institute programs.
    2. Reference to CFA Institute, the CFA Designation, and the CFA Program. When referring to CFA Institute, CFA Institute membership, the CFA designation, or candidacy in the CFA Program, Members and Candidates must not misrepresent or exaggerate the meaning or implications of membership in CFA Institute, holding the CFA designation, or candidacy in the CFA Program.