Ethics / standards and GIPS

I(A) Knowledge of the Law: rule, violation, overboard?

RULE: Understand and comply with all applicable laws and the Code and Standards; if they conflict, follow the STRICTER; don't knowingly assist in a violation, and dissociate from it. ❌ VIOLATION: following weaker local law; staying involved after a violation isn't fixed. ⚠️ OVERBOARD (not required): expert knowledge of ALL laws (only those where you trade or do business; you can rely on compliance); reporting to regulators; required CE hours.

I(B) Independence and Objectivity: rule, violation, overboard?

RULE: Use reasonable care to stay independent and objective; don't offer, solicit, or accept any gift or benefit that could reasonably compromise your (or another's) objectivity. ❌ VIOLATION: issuer-paid flights; lavish non-client gifts; bowing to pressure to recommend (just ignore the request). ⚠️ OVERBOARD: refusing disclosed client gifts. Firm tips: put a company on a restricted list if the firm blocks negative opinions.

I(C) Misrepresentation: rule, violation, overboard?

RULE: Don't KNOWINGLY misrepresent anything about analysis, recommendations, actions, or professional activities. ❌ VIOLATION: plagiarism (compiling others' research without citing it); guaranteeing returns; exaggerating your client base ('thousands of clients' when you have a few institutions). ⚠️ OVERBOARD: citing recognized statistical sources; an honest typo is not 'knowing' (but correct it).

I(D) Misconduct: rule, violation, overboard?

RULE: No PROFESSIONAL conduct involving dishonesty, fraud, or deceit, or any act that reflects poorly on your professional reputation, integrity, or competence. ❌ VIOLATION: submitting a false expense receipt; working intoxicated; shoving another trader on the floor. ⚠️ OVERBOARD: policing your private life; personal bankruptcy from medical bills isn't a violation (unless it involves fraud).

I(E) Competence: rule, violation, overboard?

RULE: Act with and maintain the competence necessary for your professional responsibilities. ❌ VIOLATION: taking a role or recommending products you don't understand. ⚠️ OVERBOARD: requiring a specific CE program (not required); treating a bad outcome as proof of incompetence.

II(A) Material Nonpublic Information: rule, violation, overboard?

RULE: If you have material nonpublic information that could affect value, don't act on it or cause others to act on it. ❌ VIOLATION: trading after a friend mentions due diligence for an upcoming acquisition; acting on select-meeting information. ⚠️ OVERBOARD: treating ALL nonpublic information as off-limits. If it wouldn't move the price (not material), you may use it; the mosaic theory is allowed.

II(B) Market Manipulation: rule, violation, overboard?

RULE: Don't distort prices or artificially inflate volume WITH INTENT to mislead. ❌ VIOLATION: false information to fake liquidity; a dominant futures position meant to push the underlying's price. ⚠️ OVERBOARD: banning big trades that happen to move a price, or arbitrage and legitimate strategies that exploit inefficiencies (intent is the test).

III(A) Loyalty, Prudence, and Care: rule, violation, overboard?

RULE: Duty of loyalty to clients; act with reasonable care and prudence; put clients BEFORE your employer and yourself. For a trust or pension, the client is the BENEFICIARIES, not the trustee or the person who hired you. ❌ VIOLATION: churning; using soft dollars for things that don't benefit clients; serving the sponsor or trustee over the beneficiaries. ⚠️ OVERBOARD: requiring monthly statements (QUARTERLY is the minimum); an 'equal balance' between clients and employer (clients come first).

III(B) Fair Dealing: rule, violation, overboard?

RULE: Deal FAIRLY and objectively with all clients in analysis, recommendations, actions, and other activities. ❌ VIOLATION: excluding a fee-paying family account from an IPO; tipping favored clients first; prioritizing trades by fee level. ⚠️ OVERBOARD: identical treatment for everyone (premium services are fine if offered to all); a tech glitch isn't a violation. Firms should do systematic account reviews.

III(C) Suitability: rule, violation, overboard?

RULE: Advisory: make a reasonable inquiry (experience, objectives, constraints, personal data such as age and occupation), write an IPS, check suitability in the TOTAL portfolio context, and update regularly. Mandate: stay within the stated objectives. YOU decide suitability, not the client. ❌ VIOLATION: putting a thinly traded, leveraged product into conservative accounts; an across-the-board sale with no regard to each client. ⚠️ OVERBOARD: a complete analysis when the client WITHHOLDS information (use what's provided).

III(D) Performance Presentation: rule, violation, overboard?

RULE: Make reasonable efforts so performance is fair, accurate, and complete. ❌ VIOLATION: a single representative account; excluding terminated accounts; a prior firm's record shown as your firm's. ⚠️ OVERBOARD: saying GIPS is MANDATORY (it isn't). Recommended: weighted composites, include terminated accounts, and consider the audience's knowledge and sophistication.

III(E) Preservation of Confidentiality: rule, violation, overboard?

RULE: Keep current, former, and PROSPECTIVE client information confidential unless (1) it concerns illegal activity, (2) the law requires disclosure, or (3) the client permits it. ❌ VIOLATION: telling a friend about a prospect; sending holdings because a requester claims the law requires it (check with compliance first). ⚠️ OVERBOARD: treating employer information as covered (that's IV(A)); refusing to cooperate with the CFA Institute PCP (sharing with it is allowed).

IV(A) Loyalty to Employer: rule, violation, overboard?

RULE: In employment matters, act for your employer's benefit: don't deprive it of your skills, divulge its confidential information, or otherwise harm it. ❌ VIOLATION: bad-mouthing the employer to clients; soliciting before leaving; issuing your own contradictory report to clients. ⚠️ OVERBOARD: banning all preparation to leave (OK on your own time without soliciting); telling clients you're leaving is fine; protective whistleblowing is OK.

IV(B) Additional Compensation: rule, violation, overboard?

RULE: Don't accept gifts, benefits, or compensation that COMPETE or CONFLICT with your employer's interest without WRITTEN consent from ALL parties involved. ❌ VIOLATION: a secret client bonus; a charity donation for advice with only an email NOTICE (notice is not consent); secretly selling your report. ⚠️ OVERBOARD: requiring consent for non-conflicting work (teaching kids on weekends for a nominal fee needs no consent or disclosure).

IV(C) Responsibilities of Supervisors: rule, violation, overboard?

RULE: Make reasonable efforts to ensure anyone you supervise complies with laws and the Code and Standards. ❌ VIOLATION: no safeguards to check a junior trader's best execution; relying on an employee's written promise instead of investigating. ⚠️ OVERBOARD: supervising everything yourself (you can delegate, but you keep responsibility); if compliance is inadequate, DECLINE supervision in writing. Recommended: a plain-language code kept separate from procedures, and professional conduct in performance reviews.

V(A) Diligence and Reasonable Basis: rule, violation, overboard?

RULE: Exercise diligence, independence, and thoroughness, and have a reasonable and adequate basis supported by research. ❌ VIOLATION: relying on a source you doubt; no research behind a decision (e.g., selling to get back to golf). ⚠️ OVERBOARD: removing your name when you disagree with a team report that has a sound process (OK to leave it; you may ask to remove it); doing all research yourself (third-party research is fine after review).

V(B) Communication with Clients: rule, violation, overboard?

RULE: Disclose the nature of services and their costs, the investment process and any MATERIAL changes (promptly), significant risks and limitations, and the important factors; distinguish FACT from OPINION. ❌ VIOLATION: presenting an earnings forecast as fact; not mentioning a new options strategy. ⚠️ OVERBOARD: disclosing how many staff handle communications; requiring pro forma earnings estimates.

V(C) Record Retention: rule, violation, overboard?

RULE: Develop and maintain appropriate records supporting your analysis, recommendations, actions, and client communications (keep at least 7 years if no rule applies). Records are FIRM property. ❌ VIOLATION: not updating client records; re-creating support from memory or old-firm sources. ⚠️ OVERBOARD: thinking you can never use an old report (you can, with the former employer's EXPRESS CONSENT, but re-create support from public or company sources).

VI(A) Avoid or Disclose Conflicts: rule, violation, overboard?

RULE: AVOID, or make full and fair disclosure of, anything that could impair your independence or interfere with your duties; disclosures must be prominent, in plain language, and effective. ❌ VIOLATION: secretly building a competing hedge fund (disclose it to your employer); undisclosed board conflicts. ⚠️ OVERBOARD: requiring WRITTEN permission (disclosure is enough); thinking confidentiality agreements count as disclosure.

VI(B) Priority of Transactions: rule, violation, overboard?

RULE: Client and employer transactions have priority over transactions where you're the beneficial owner. ❌ VIOLATION: front-running; trading your own account first. ⚠️ OVERBOARD: banning personal trading; applying VI(B) to non-trading acts (selling a report is IV(B)). Selling clients first, then yourself, is COMPLIANT.

VI(C) Referral Fees: rule, violation, overboard?

RULE: Disclose to your employer, clients, and prospects any compensation or benefit received or paid for referrals: its NATURE and ESTIMATED VALUE, BEFORE any formal agreement. This includes cash, soft dollars, and in-kind benefits. ❌ VIOLATION: disclosing only after signing; hiding internal referral pay. ⚠️ OVERBOARD: requiring the client's approval (disclosure is the requirement).

VII(A) Conduct in CFA Programs: rule, violation, overboard?

RULE: Don't compromise the reputation or integrity of CFA Institute or the designation, or the integrity, validity, or security of its programs. ❌ VIOLATION: posting broad topics tested or NOT tested; sharing questions; cheating. ⚠️ OVERBOARD: banning criticism. You MAY disagree with CFA Institute or question the program publicly.

VII(B) Reference to CFA Institute and the Designation: rule, violation, overboard?

RULE: Don't misrepresent or exaggerate the meaning of membership, the designation, or candidacy. ❌ VIOLATION: crediting the charter for superior returns; using 'CFA' in a firm name; saying you can use the designation right after the program (work experience is also needed); using 'CFA' while dues are lapsed. ⚠️ OVERBOARD: treating unpaid dues alone as a violation (fine if you don't claim membership); 'the program enhanced my skills' is OK.

Code of Ethics vs. Standards: what's the difference, and name the six Code components?

Code = broad principles; Standards = specific minimum required conduct. Code: (1) Act with integrity, competence, diligence, respect, ethically; (2) put the profession's integrity and clients' interests above your own; (3) use reasonable care and independent judgment; (4) practice and encourage professional, ethical conduct; (5) promote the integrity and viability of global capital markets for the ultimate benefit of society; (6) maintain and improve competence. 'Punish abuses' is NOT a component.

PCP: who oversees, who enforces, and what are the outcomes and sanctions?

The Board of Governors OVERSEES; the Disciplinary Review Committee ENFORCES (a DRC panel hears the case only if the member rejects the sanction). Principles: fairness and confidentiality. Outcomes: no action, cautionary letter, or discipline. Sanctions: public censure, suspension, revocation (NO monetary fines).

GIPS: who can claim compliance, and is it required?

Firms AND asset owners that manage actual assets can claim it. Consultants (who don't manage the assets) and software vendors CANNOT; they can only endorse. It's VOLUNTARY and all-or-nothing firm-wide; no claiming it for a single composite or for 'domestic portfolios only'.

GIPS composites: what must or may go in?

MUST: every actual fee-paying, DISCRETIONARY portfolio, in at least one composite of similar strategy, assigned ex ante. MAY: non-fee-paying discretionary portfolios. MUST NOT: non-discretionary portfolios; mixing value and growth strategies; excluding portfolios just because of legal structure.

GIPS verification and local law: key rules?

Verification is OPTIONAL (recommended); done by an independent third party, firm-wide; it increases confidence but doesn't shift responsibility or guarantee a report. Firms self-regulate their claim. Local law conflict: follow the law, KEEP claiming, DISCLOSE the conflict. Initially present 5 years of history, then build to 10.