Ethics

Ethics

Shared beliefs about what is good or acceptable behavior

• improves outcomes for stakeholders

Code of ethics

Written set of moral principles that can guide behavior by describing what is considered acceptable behavior

• way to communicate values, principles, and expectations of organization

Profession

• A code and standards for professional behavior.

• A regulatory body to enforce rules concerning professional behavior and monitor the ethical behavior of members.

• A focus on the needs of their clients (e.g., students, patients).

• A focus on service to society.

• A requirement to put client interests first.

• A focus on or requirement for continuing education.

Ways that professions establish trust include:

• Requiring high standards of expertise, knowledge, and skill.

• Establishing standards of ethical behavior.

• Monitoring professional conduct.

• Encouraging continuing education to maintain and increase competence.

• Being focused on clients' needs.

• Mentoring and inspiring others in the profession.

Suitability/Fiduciary Standards

• Suitability

  • Match between client return requirements and risk tolerances and the characteristics of securities recommended

• Fiduciary

  • Require professionals to use their knowledge and expertise to act in the best interest of the client

Situational influences

More important determinant of the ethical quality of behavior than internal traits that influence behavior

• Social pressure

• Loyalty

• Prospect of more money

CFA ethical decision framework

• Identify: Relevant facts, stakeholders and duties owed, ethical principles, conflicts of interest.

• Consider: Situational influences, additional guidance, alternative actions.

• Decide and act.

• Reflect: Was the outcome as anticipated? Why or why not?

CFA conduct inquiry and outcomes

Triggers for Inquiry:

• Self-disclosure of civil/criminal matters or written complaints

• Written complaints received by CFA Institute

• Publicly available evidence of misconduct (e.g., media)

• Exam proctor reports

• Monitoring of exam materials and social media

Inquiry Process:

• May involve written explanation, interviews, document collection

Possible Outcomes:

1. No sanctions

2. Cautionary letter

3. Disciplinary sanction (e.g., public condemnation, suspension from CFA Program)
   If a proposed sanction is rejected, the case goes to a disciplinary review panel.

CFA members and candidates code of ethics

CFA Institute Members and Candidates must:

1. Act with integrity, competence, diligence, respect, and in an ethical manner with all stakeholders.

2. Prioritize the integrity of the profession and clients’ interests above personal gain.

3. Use reasonable care and independent judgment in professional activities.

4. Practice and promote ethical behavior that enhances the profession.

5. Promote the integrity and viability of global capital markets for society’s benefit.

6. Maintain and improve their own and others’ professional competence.

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. Responsibilities as a CFA Institute Member or CFA Candidate

Professionalism

• Knowledge of the Law – Comply with all applicable laws and regulations; follow the stricter rule in case of conflict; do not assist in violations.

• Independence and Objectivity – Use care and judgment to maintain independence; avoid gifts or compensation that could compromise objectivity.

• Misrepresentation – Do not knowingly misrepresent facts in any professional context.

• Misconduct – Avoid dishonest, fraudulent, or deceitful behavior and anything that harms professional reputation or integrity.

• Competence – Maintain the skills and knowledge necessary to meet professional responsibilities.

Integrity of Capital Markets

• 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.

• 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.

Duties to Clients

• Loyalty, Prudence, and Care – Act in the client's best interest with loyalty, care, and prudent judgment.

• Fair Dealing – Treat all clients fairly and objectively in all professional actions.

• Suitability –

  • Understand client’s financial situation and objectives.

  • Ensure investments are suitable and aligned with client’s total portfolio.

  • Follow the mandate or strategy when managing portfolios.

• Performance Presentation – Ensure performance info is fair, accurate, and complete.

• Preservation of Confidentiality – Keep client info confidential unless:

  • It involves illegal activity,

  • Disclosure is required by law, or

  • The client permits disclosure.

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. Responsibilities 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.

Investment Analysis, recommendations and actions

• Diligence and Reasonable Basis –

  • Conduct thorough, independent, and diligent analysis.

  • Ensure recommendations and actions are based on adequate research and a sound basis.

• Communication with Clients and Prospective Clients –

  • Disclose services, costs, and the investment process (including changes).

  • Communicate significant risks and limitations.

  • Use judgment to identify key factors and include them in communications.

  • Clearly distinguish between facts and opinions.

• Record Retention –

  • Maintain appropriate records to support analysis, recommendations, and communications.

Conflicts of interest

• Avoid or Disclose Conflicts

  • Avoid conflicts that impair independence and objectivity or, if unavoidable, fully and prominently disclose them in plain language.

• Priority of Transactions

  • Ensure client and employer transactions take precedence over personal trades.

• Referral Fees

  • Disclose any compensation or benefits received or paid for recommending products or services to employers, clients, and prospective clients.

“Reasonable” “Adequate” “Token”

Do not take actions open to interpretation

What is important to understand about "reasonable care" and "token gifts" when applying the CFA Standards of Professional Conduct on the exam?

The CFA exam tests your understanding of what clearly does or does not constitute a violation—not your subjective judgment of what's "reasonable." Questions will usually make it clear if care was unreasonable or if a gift was excessive.

• Reasonable care: The analyst’s actions will clearly fall short or meet the standard.

• Token gifts: No set monetary value is given; firms may define it. A business dinner is likely token, but lavish gifts like Super Bowl tickets or luxury vacations are not. Look for clues like "lavish" or "luxury" in the question.

Standard I: Professionalism

• Knowledge of Law

  • Don’t intentionally break law

• Independence and Objectivity

  • Not offer any gift, benefit, compensation to compromise

• Misrepresentation

  • Must not knowingly make misrepresentations relating to analysis, recommendations, actions

• Misconduct

  • Not engage in dishonesty, fraud, or deceit

  • Reflects adversely on their professional reputation

• Competence

  • Act and maintain competence to fulfill responsibilities

Standard II: Integrity of Capital Markets

• Material Nonpublic Information

  • Those who possess nonpublic information must not act or cause others to act on it

• Market Manipulation

  • No collusion

Mosaic Theory

Reaching an investment conclusion through perceptive analysis of public information combined with non-material nonpublic information is not a violation

Standard III: Duties to Clients

• Loyalty, Prudence, and Care

  • Act for the benefit of their clients first

• Fair Dealing

  • Treat all clients fairly

• Suitability

  • Best fit for clients’ objective and constraints

• Performance Presentation

  • Must make reasonable efforts to ensure that it is fair, accurate and complete

• Preservation of Confidentiality

  • Confidentially

Unsolicited Trade Request

• Always discuss with the client why the trade is unsuitable based on the IPS (Investment Policy Statement).

• If the trade has minimal impact on portfolio risk/return:
  → The manager may proceed only after explaining the issue and obtaining client acknowledgment, per firm policy.

• If the trade has a material impact:
  → The manager can update the IPS if the client accepts the new risk profile.
  → If not, the trade may only be executed in a separate client-directed account, if firm policy allows.
  → If no resolution is possible, the manager should consider ending the relationship.

Standard IV: Duties to Employers

• Loyalty

  • Act in benefit for their employer and not deprive

• Additional Compensation Arrangements

  • No bribes

• Responsibilities of Supervisors

  • Supervisors must comply with applicable laws and regulations

Standard V: Investment Analysis, Recommendations, and Actions

• Diligence and Reasonable Basis

  • Independent, thorough, and reasonable

• Communication with Clients and Prospective Clients

  • Communicative and clear with clients

• Record Retention

Standard VI: Conflicts of Interest

• Avoid or Disclose Conflicts

  • Avoid or make full and fair disclosure of all matters that could be expected to impair their independence and objectivity

• Priority of Transactions

  • clients and employer priority over personal

• Referral Fees

  • Disclose compensation for recommendations

Standard VII: Responsibilities as a CFAI Member

• Conducts as Participants in CFAI Programs

  • Do not compromise reputation or integrity of CFAI

• Reference to CFAI, Designation and program

  • Do not misrepresent or exaggerate implications of CFAI membership

Why GIPS was created

Firms choose their own methodologies to make themselves look good

• top-performing portfolios

• excluding terminated accounts

• good time periods

GIPS 8 sections

• Fundamentals of Compliance – Define the firm, provide GIPS-compliant reports, comply with laws, avoid false/misleading info.

• Input Data and Calculation Methodology – Ensure consistent, comparable data and standardized calculation methods.

• Composite and Pooled Fund Maintenance – Maintain meaningful, asset-weighted composites; include pooled funds if applicable.

• Composite Time-Weighted Return Report – Procedures for time-weighted composite reporting.

• Composite Money-Weighted Return Report – Procedures for money-weighted composite reporting.

• Pooled Fund Time-Weighted Return Report – Procedures for time-weighted pooled fund reporting.

• Pooled Fund Money-Weighted Return Report – Procedures for money-weighted pooled fund reporting.

• GIPS Advertising Guidelines – Rules for advertisements that claim GIPS compliance; do not apply if GIPS is not mentioned.

Composite

Grouping individual discretionary portfolios representing a similar investment strategy or mandate

• All fee-paying discretionary portfolios managed by the firm must be included in at least one composite

Discretion

How a firm determines which portfolios should be included in a composite

GIPS verification

• GIPS verification is a third-party review of a firm's firmwide compliance with GIPS—not individual composites.

• Verifier must confirm:

  1. Firm has complied with all composite construction requirements.

  2. Firm's policies and procedures are designed to comply with GIPS calculation, data, and presentation standards.

• Required disclosure for verified firms:

  "[Firm name] has been verified for the periods [dates] by [verifier]. A copy of the verification report is available upon request."

Board Member or Director Conflicts

1. Duties owed to clients vs owed to shareholders

2. Compensation from board

3. Martial non public info