Ethics

Code of Ethics definition

Written set of moral principles that can guide behavior (framework)

Framework for Ethical Decision Making

1. Identify: relevant facts, stakeholders, and duties owed, ethical principles, and conflicts of interest

2. Consider: situational influences, additional guidance, and alternative actions

3. Decide and act

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

Conduct inquiries from the Professional Conduct Program (PCP) may originate from:

1. M/C self disclosure on the annual Professional Conduct Statement

2. Written complaints received

3. CFA staff through media or regulatory notices

4. Exam proctors

5. Post-exam behavior (online disclosure of confidential exam material)

Once an inquiry has begun, PCP can:

Request for a written explanation from the M/C

Interviews with M/C, complaining parties, or other third parties

Collect documents and records relevant to the investigation

The PCP staff after investigation may:

Result in no action

Issue a letter

Continue to disciplinary action

If the M/C rejects the result:

It goes to the disciplinary review committee made up by CFA charter holders volunteers

Code of Ethics

1. 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

2. Place the integrity of the investment profession and the interests of clients above their own person interests

3. Use reasonable care and exercise judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities

4. Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession

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

6. Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals

Professionalism: Knowledge of the law

• Comply with all laws: You must understand and comply with all applicable laws, rules, and regulations (including the CFA Code and Standards).

• The "Stricter Law" Rule: In the event of a conflict between local law and the CFA Standards, you must always comply with the stricter rule.

• Do not assist: You must not knowingly participate or assist in any violation.

• Dissociate: If you discover illegal or unethical activity by clients or colleagues, you must actively dissociate yourself from it (e.g., bring it to your supervisor/compliance, remove your name from reports, ask for a new assignment, or even resign in extreme cases).

Recommended Procedures (Compliance Practices):

• Stay Informed: Establish practices to regularly stay updated on changes in applicable laws and regulations.

• Maintain Resources: Keep readily accessible reference copies of current regulations and statutes at your firm.

• Seek Advice: When in doubt about a potential violation, always consult your firm's compliance department or legal counsel before taking action.

• Document & Report: If dissociating from a violation, document the issue and bring it to your employer.

• Crucial exam tip: Whistleblowing to external regulators is not required by the Standards unless explicitly mandated by local law.

Professionalism: Independence and Objectivity

• The Core Rule: You must use reasonable care and judgment to achieve and maintain independence and objectivity in all professional activities.

• No Compromising Gifts: Do not offer, solicit, or accept any gift, benefit, compensation, or consideration that could reasonably be expected to compromise your (or another's) independence.

• Client vs. Third-Party Gifts: * Third Parties: Limit gifts to token items or customary business entertainment.

  • Clients: Gifts/bonuses from clients are less likely to compromise objectivity, but you must disclose them to your employer (preferably before acceptance, or immediately after) so your supervisor can monitor for favoritism.

• Issuer-Paid Research: This is acceptable, but you must negotiate a flat fee (never linked to your conclusions or recommendations) and fully disclose the compensation arrangement.

• Travel Expenses: Always pay for your own commercial transportation and hotel. You may accept modestly arranged travel only if commercial transport is completely unavailable.

Recommended Procedures (Compliance Practices):

• Create Restricted Lists: If a firm's investment banking relationship prevents analysts from issuing objective, adverse opinions about a company, that company should be placed on a restricted list.

• Restrict Travel Costs: Strictly prohibit employees from letting corporate issuers reimburse them for air transportation or hotel charges.

• Limit Gifts: Establish firm-wide policies that limit the acceptance of gratuities to token items and require clear documentation of any accepted gifts.

Professionalism: Misrepresentation

The Core Rule: You must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities.

• What Counts as Misrepresentation: Any untrue statement, omission of a material fact, or giving a false/misleading impression. Information must be accurate, timely, complete, and in plain language.

• The "Guarantee" Trap: You cannot guarantee a specific rate of return or preservation of capital on investments.

  • Exam Tip: The only exception is if the financial product actually has a built-in guarantee backed by an institution (and even then, you must explain the limits of that guarantee).

• Plagiarism is Misrepresentation: You must not copy or use someone else's original ideas, models, or text without citing the source.

  • Third-Party Research: You can use and distribute third-party research, but you must disclose the source and never pass it off as your own work.

  • The Safe Harbor: You do not need to cite recognized factual and statistical reporting services (e.g., Standard & Poor's, Bloomberg data).

• Omissions: Intentionally leaving out negative outcomes in a model, or "cherry-picking" only your best-performing accounts to show a track record, is a direct violation.

Recommended Procedures (Compliance Practices):

• Document Capabilities: Prepare a written summary of your own qualifications and your firm's actual services so you don't accidentally overpromise or oversell to clients.

• Attribute Everything: Maintain copies of all research sources. Explicitly attribute any direct quotes, paraphrases, or summaries to their original authors.

• Monitor Digital Footprints: Regularly review online content, websites, and social media posts to ensure the information is accurate, up-to-date, and not misleading.

• Have one person talk on behalf of the firm

Professionalism: Misconduct

The Core Rule: You must not engage in any professional conduct involving dishonesty, fraud, or deceit, or commit any act that reflects adversely on your professional reputation, integrity, or competence.

• The "Trust" Test: The standard focuses on conduct that damages your trustworthiness or competence as an investment professional.

• Exam Trap 1 (Personal vs. Professional): Not all illegal acts are violations of this standard. For example, getting arrested for an act of civil disobedience (like a peaceful environmental protest) is not a violation because it doesn't reflect poorly on your professional integrity or competence.

• Exam Trap 2 (Substance Abuse): Abusing alcohol or drugs during business hours is a clear violation because it directly impairs your ability to perform your professional responsibilities competently.

• Exam Trap 3 (Bankruptcy): Declaring personal bankruptcy is not an automatic violation. However, if the bankruptcy was a result of fraudulent or deceitful business conduct, it is a violation.

Recommended Procedures (Compliance Practices):

• Adopt a Code of Ethics: Encourage your firm to adopt a code of ethics that every employee must subscribe to, making it clear that behavior reflecting poorly on the individual, the institution, or the industry will not be tolerated.

• Check References: Firms should conduct background checks on potential employees to ensure they are of good character.

Integrity of Capital Markets: Material Nonpublic Information

If you possess material nonpublic information (MNPI) that could affect the value of an investment, you must not act or cause others to act on it.

• What is "Material"? Information that would significantly alter the total mix of available information and likely impact the stock's price.

  • Exam Tip: The reliability of the source matters. Hard data from a CFO is material; a speculative guess from a competitor is usually not. Ambiguous information is less likely to be material.

• What is "Nonpublic"? Information that has not been broadly disseminated to the general marketplace.

  • Exam Trap: Selective disclosure (e.g., a CEO telling a room full of 50 analysts about an earnings drop) does not make the information public. It is still nonpublic until a press release or public filing occurs.

• The "Mosaic Theory" (MUST-KNOW): You are completely free to trade if you reach a material conclusion based on a combination of Public Information + Nonmaterial, Nonpublic Information. Piecing together tiny, seemingly insignificant clues to find a big answer is just good financial analysis, not insider trading.

Recommended Procedures (Compliance Practices):

• Achieve Public Dissemination: If you receive MNPI, encourage the issuing company to make it public immediately. If they refuse, you must not trade and must only communicate it to your designated compliance personnel.

• Build Information Barriers (Firewalls): Firms must restrict the flow of confidential information between departments (e.g., between Investment Banking and Equity Research).

• Maintain Restricted/Watch Lists: Review employee and proprietary trading through the use of restricted lists (prohibiting trades) or watch lists (monitoring trades closely) when the firm possesses MNPI.

• Control Interdepartmental Communications: Route sensitive communications through a clearance area, usually the compliance or legal department.

Integrity of Capital Markets – Market Manipulation

You must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.

• Two Main Types of Manipulation:

  1. Information-Based: Spreading false rumors or misleading information to induce trading by others. Exam Example: The classic "pump and dump" scheme—hyping up a micro-cap stock online to sell your own shares at an inflated price.

  2. Transaction-Based: Executing trades that artificially distort prices or create a false impression of liquidity/activity. Exam Example: "Wash trading" (buying and selling the same security back and forth between your own accounts to make it look like there is heavy market demand).

• The "Intent" Trap (MUST-KNOW): The entire standard hinges on intent. Legitimate trading strategies that exploit market inefficiencies, or large trades that naturally move the market because of their size, are not violations. If your goal is to execute a legitimate strategy, you are fine; if your goal is to trick other investors, it is a violation.

Recommended Procedures (Compliance Practices):

• Implement Pre-Trade Controls: Use automated order management systems to identify and prevent potentially manipulative orders before they hit the market.

• Monitor Trading Activity: Firms should establish real-time monitoring and systematic surveillance across multiple platforms to catch suspicious activities (e.g., placing and immediately canceling large orders).

• Trade Exception Reporting: Actively review and investigate any trades that flag outside of normal parameters.

Duties to Clients: Loyalty, Prudence, Care

• You must act with reasonable care and prudent judgment. Most importantly: Client interests always come first, before your employer's and before your own.

• Identifying the Client (Exam Trap!): You must know exactly who your client is. If you manage a corporate pension plan or trust, your duty of loyalty is owed to the ultimate beneficiaries (the employees/retirees), not the CEO or the company management that hired you.

• Prudence & The Portfolio View: Prudence requires the care, skill, and diligence of a reasonable person. You must judge the suitability and risk of an investment in the context of the total portfolio, not just in isolation.

• Soft Dollars (Client Commission Practices): Brokerage commissions are the property of the client, not the manager. If you pay higher commissions to receive "soft dollar" benefits (like research services), those benefits must directly aid the client. You cannot use client commissions to pay for your firm's rent, your personal travel, or subpar research.

• Directed Brokerage: If a client specifically directs you to use a certain broker, you can comply, but you must warn the client if it means they will not receive "best price" and "best execution."

• Proxy Voting: Proxies have economic value. You must vote them in an informed, responsible manner in the best interest of the client. (Note: You do not have to vote absolutely every proxy if a cost-benefit analysis shows voting is too expensive or immaterial).

Recommended Procedures (Compliance Practices):

• Draft an IPS: Establish the client's investment objectives and constraints in a written Investment Policy Statement (IPS) before taking any investment action.

• Send Regular Statements: Submit itemized statements of all funds, securities, and transactions to clients at least quarterly.

• Seek Best Execution: Always seek the most favorable terms for client trades, unless the client explicitly directs otherwise.

• Diversify: Diversify investments to reduce the risk of loss, unless the specific plan guidelines dictate a concentrated strategy.

• Vote Proxies: Establish firm-wide policies for how proxies will be voted to safeguard client value.

Duties of Clients: Fair Dealing

• The Core Rule: You must deal fairly and objectively with all clients when providing investment analysis, making recommendations, or taking investment action.

• "Fair" Does Not Mean "Equal" (MUST-KNOW): The exam will try to trick you into saying all clients must be treated equally. Because clients have different objectives and it is impossible to reach everyone at the exact same millisecond, you cannot treat everyone equally. You must treat them fairly by giving everyone an equal opportunity to act on recommendations.

• Premium Services: You can offer different, higher levels of service (e.g., a VIP tier that gets personal phone calls). However, these premium services must be disclosed, available to everyone willing to pay for them, and must not disadvantage other clients.

• Trade Allocation & IPOs: Block trades and oversubscribed "hot issues" (IPOs) must be allocated on a pro-rata (proportional) basis according to order size. You cannot favor your largest clients just to keep them happy.

• Family Accounts (Exam Trap): If a family member is a fee-paying client whose account is managed identically to other clients, their account must be treated exactly like any other client account. You cannot favor them, but you also cannot penalize them (e.g., leaving your brother out of an oversubscribed IPO just to avoid the "appearance" of a conflict is a violation).

Recommended Procedures (Compliance Practices):

• Simultaneous Dissemination: Establish procedures to broadcast new investment recommendations or changes in ratings to all clients at the exact same time. Do not tip off your biggest clients first.

• Limit Pre-Dissemination Knowledge: Restrict the number of people inside the firm who know about an upcoming change in a recommendation before it goes public.

• Maintain Client Lists: Keep up-to-date records of client holdings so you can quickly notify anyone who holds a security if your recommendation on it changes.

• Standardize Trade Allocation: Process and execute orders on a first-in, first-out basis. If bundling trades into a block, ensure all participating accounts receive the same execution price.

• Disclosure about allocation. Disclosure about unfair allocation still puts you in violation of 3B.

Duties to Clients: Suitability

• You must make a reasonable inquiry into a client's investment experience, risk/return objectives, and financial constraints before making any recommendation.

• The Total Portfolio View (MUST-KNOW): You must always judge the suitability of an investment in the context of the client's total portfolio, not in isolation. (An inherently risky derivative might actually reduce overall portfolio risk if used as a hedge).

• The IPS Requirement: You must document the client's needs, circumstances, and objectives in a written Investment Policy Statement (IPS) and update it regularly (at least annually, or whenever the client experiences a major life event).

• Exam Trap 1 (Unsolicited Trade Requests): If a client demands you execute a trade that you know is completely unsuitable for them:

  • Step 1: Do not execute it immediately. Discuss it with the client and educate them on why it deviates from their IPS.

  • Step 2: If they still insist, and the trade has a material impact on their portfolio risk, you must update the IPS. If they refuse to update the IPS, you may need to reconsider the advisory relationship.

• Exam Trap 2 (Fund Mandates): If you manage a pooled fund or an index (e.g., a Small-Cap Growth Fund), your duty of suitability is to the fund's stated mandate, not to the individual retail investors who buy the fund. You just need to make sure you are buying small-cap growth stocks.

Recommended Procedures (Compliance Practices):

• Draft a Comprehensive IPS: The IPS should clearly outline return expectations, risk tolerance, and all constraints (Time horizon, Taxes, Liquidity, Legal, and Unique circumstances like ESG preferences).

• Conduct Suitability Tests: Before making a recommendation, analyze the impact on portfolio diversification, compare the risk with the client's assessed risk tolerance, and verify it fits the required strategy.

• Annual Reviews: Institute firm-wide policies to systematically review every client's IPS at least once a year.

Duties to Clients – Performance Presentation

When communicating investment performance, you must make reasonable efforts to ensure it is fair, accurate, and complete.

• No Cherry-Picking: You must not misrepresent past performance by only showing your best-performing accounts, your best time periods, or by excluding accounts that underperformed.

• Simulated & Past Performance: You can show simulated/backtested models, or performance you achieved at a prior firm, but you must clearly disclose it. You cannot pass off simulated results as live money, and you cannot claim a prior firm's track record as your new firm's record.

• The GIPS Trick (MUST-KNOW): Compliance with the Global Investment Performance Standards (GIPS) is highly recommended, but it is not required to comply with Standard III(D). However, if a firm claims GIPS compliance, it must adhere strictly to all GIPS rules.

Recommended Procedures (Compliance Practices):

• Use Composites: Present the performance of a composite (a grouping of similar portfolios) rather than relying on a single "representative" standout account.

• Include Terminated Accounts: Always include terminated accounts in your historical performance up to their termination date. Excluding them creates survivorship bias and inflates returns.

• Disclose Fee Structures: Clearly state whether the performance being presented is gross of fees, net of fees, or after taxes.

• Maintain Data: Keep all the underlying data and records used to calculate the performance you are presenting.

Duties to Clients – Preservation of Confidentiality

• The Core Rule: You must keep information about current, former, and prospective clients confidential.

  • Exam Trap 1: Yes, even if a client fires you, or if a prospect decides not to hire you after a pitch, their information remains strictly confidential forever.

• The Three Exceptions (MUST-KNOW): You must maintain confidentiality UNLESS:

  1. The information concerns illegal activities on the part of the client.

  2. Disclosure is required by law.

  3. The client or prospect permits disclosure.

• The "Knowledge of the Law" Trap: If a client is doing something illegal, but applicable local law requires you to maintain confidentiality, you must follow the law. (When in doubt, consult legal/compliance).

• CFA Institute Investigations: Cooperating with an investigation by the CFA Institute Professional Conduct Program (PCP) does not violate this standard. You are expected to cooperate with them, and they will keep the information confidential.

Recommended Procedures (Compliance Practices):

• Limit Internal Sharing: Avoid disclosing client information even to fellow employees unless they are directly working on the client's account and need the information to perform their duties.

• Establish a Secondary Contact (Vulnerable Investors): Best practice is to ask for a trusted secondary contact (like a family member) at the beginning of the relationship. This gives you a legal avenue to intervene if you suspect the client is experiencing a decline in mental capacity or financial exploitation.

• Secure Electronic Data: Follow firm procedures for safely storing, communicating, and disposing of sensitive electronic client data to prevent accidental leaks.

*You are allowed to give already public information about a client

Duties to Employers: Loyalty

In matters related to employment, you must act for the benefit of your employer. You must not deprive them of your skills and abilities, divulge confidential information, or cause them harm.

• Independent Practice (The "Side Hustle" Rule): You can start an independent business while employed, but before you begin, you must notify your employer (providing details on the types of services, duration, and compensation) AND obtain written consent.

• Leaving an Employer (MUST-KNOW): * Before you leave: You must continue to act in your employer's best interest until your resignation is officially effective. You cannot solicit clients or take proprietary property (client lists, models, spreadsheets) before leaving.

  • After you leave: Once you have left, simple knowledge of the names of former clients is not confidential. You can contact former clients using public information (unless you signed a specific non-compete agreement stating otherwise).

• The Whistleblowing Exception: You are permitted to violate your duty of loyalty to your employer (e.g., contradicting instructions or sharing employer records) ONLY IF your intent is to protect clients or the integrity of the capital markets. Whistleblowing for personal gain is a violation.

Recommended Procedures (Compliance Practices):

• Clarify Policies: Understand your firm's specific policies regarding outside employment, independent practice, and resignation procedures.

• Leave Firm Property: When resigning, leave all firm property behind. Work performed on behalf of the employer (even if you built the model yourself) is the property of the firm, not you.

• Establish Whistleblowing Procedures: Encourage firms to adopt confidential and anonymous reporting procedures that allow employees to report potentially unethical or illegal activities.

Duties to Employers: Additional Compensation Arrangements

• You must not accept any gifts, benefits, compensation, or consideration that competes with or might create a conflict of interest with your employer's interest unless you obtain written consent from all parties involved.

• The "Written Consent" Requirement: The consent must be in writing (email usually counts) and must be obtained before you accept the offer.

• The Client Bonus Trap (MUST-KNOW): The exam loves to test the difference between a spontaneous gift and a pre-arranged bonus.

  • Spontaneous Gift: A client unexpectedly sends you a set of golf clubs to say "thank you" for a great year. This falls under Standard I(B) Independence and Objectivity. You can accept it, but you must disclose it to your employer.

  • Pre-Arranged Bonus: A client tells you at the start of the year, "If you beat the benchmark by 2%, I will give you a free week at my ski chalet." This is an Additional Compensation Arrangement. Because it creates an incentive for you to favor this client over others, you must obtain written consent from your employer before agreeing to it.

• Part-Time Work: If you take a second job (even outside of finance, like bartending on weekends) that does not compete with your employer, you generally do not need written consent under this standard, though you should still check your firm's specific HR policies.

Recommended Procedures (Compliance Practices):

• Provide Full Details: When requesting permission from your employer, you must provide a written report specifying the exact terms of the agreement, including the nature of the compensation, the approximate amount, and the duration of the agreement.

• Establish Clear Firm Policies: Employers should have strict, written guidelines detailing exactly what types of outside compensation or client bonuses are permitted and the exact process for getting them approved.

Duties of Employers: Responsibilities of Supervisors

• You must make reasonable efforts to ensure that anyone subject to your supervision or authority complies with applicable laws, regulations, and the CFA Code and Standards.

• Delegation is NOT Absolution: You can delegate supervisory duties to a subordinate, but you cannot delegate your ultimate responsibility. If your subordinate messes up the supervision, you are still on the hook.

• The "Broken System" Trap (MUST-KNOW): If your firm's compliance system is completely inadequate or non-existent, you must strongly advise management to fix it. If they refuse, you must decline supervisory responsibility in writing until adequate procedures are adopted. You cannot supervise under a broken system.

• The "Suspected Violation" Trap (MUST-KNOW): The exam loves to test how a supervisor reacts to a rumor or suspicion of a violation.

  • What NOT to do: You cannot just ask the employee if they did it, take their word for it, and move on.

  • What you MUST do: You must promptly launch a thorough investigation. Most importantly, you must place limits on the suspected employee's activities (or heavily increase monitoring) while the investigation is ongoing to prevent further potential harm to clients.

Recommended Procedures (Compliance Practices):

• Stand-Alone Compliance: A firm’s compliance program should be separate from its investment operations (so compliance officers aren't reporting to the portfolio managers they are supposed to be policing).

• Clear Hierarchy: Establish a clear chain of command so every employee knows exactly who they report to and who is responsible for their supervision.

• Regular Training: Conduct periodic, mandatory training for all employees on the firm's compliance policies and the CFA Standards.

• Incentive Structure: Ensure that the firm's compensation structure does not inadvertently incentivize unethical behavior (e.g., tying a supervisor's bonus entirely to the trading volume of their subordinates).

Investment Analysis, Recommendations, and Actions: Diligence and Reasonable Basis

You must exercise diligence, independence, and thoroughness. You must have a reasonable and adequate basis, supported by appropriate research, before making any investment recommendation or taking action.

• Third-Party Research: You can rely on research provided by others (like a brokerage firm or external research provider), but you cannot do so blindly. You must make a reasonable effort to verify that their research is sound (evaluate their assumptions, rigor, timeliness, and objectivity).

• Quantitative Models: You do not have to be the programmer who built the "black box" model, but you must understand its parameters, assumptions, and limitations. You must also ensure the model has been stress-tested across various scenarios, including extreme downside/negative market events.

• External Managers: Hiring an external sub-adviser requires the exact same level of strict due diligence as buying an individual stock. You must review their code of ethics, compliance procedures, and performance history. (You cannot just pick the manager with the lowest fees).

• Group Research (MUST-KNOW TRAP): If you are on a research committee and the final group report differs from your personal opinion, you do not have to remove your name from the report as long as you believe the group's consensus has a reasonable and adequate basis. (You only dissociate if you think the group's basis is completely unjustified or unethical).

Recommended Procedures (Compliance Practices):

• Establish Review Committees: Require all research reports and recommendations to be reviewed and approved by a supervisory analyst or a committee before being circulated to clients.

• Set Measurable Criteria: Develop standardized, measurable criteria for evaluating the quality of internal research, third-party research providers, and external advisers. Review these providers regularly.

• Mandate Scenario Testing: Create detailed, written guidance that establishes minimum levels of scenario testing for all computer-based models to ensure they capture a broad range of potential outcomes.

Investment Analysis, Recommendations, and Actions: Communication with Clients and Prospective Clients

• Disclose the Process: You must describe the basic format and general principles of your investment process. Most importantly, you must promptly disclose any material changes to this process (e.g., switching from a quantitative model to fundamental analysis, or shifting to use external sub-advisers).

• Disclose Costs and Services (NEW UPDATE): You must disclose the exact nature of the services provided, along with all associated costs to the client.

• Disclose Risks & Limitations: You must outline significant risks (like the use of leverage, counterparty risk, or country risk) and limitations (like liquidity issues or capacity constraints of a specific strategy).

• Fact vs. Opinion (MUST-KNOW TRAP): You must strictly distinguish between what is a proven fact and what is an opinion.

  • Exam Trap: Stating "The company will earn $4.00 per share next quarter" or "This target price is $50" as absolute truths is a violation. Earnings estimates, price targets, and future dividend outlooks are opinions subject to future circumstances and must be presented as such.

Recommended Procedures (Compliance Practices):

• Rigorous Review: Firms should establish a rigorous methodology for reviewing research that is created for publication and dissemination to ensure facts and opinions are clearly separated.

• Be Ready to Elaborate: Because you cannot include every single variable in a concise research report, you must maintain records and be prepared to supply additional supporting information to any client who asks for it.

Investment Analysis, Recommendations, and Actions: Record Keeping

• You must develop and maintain appropriate records to support your investment analyses, recommendations, actions, and communications with clients.

• Property of the Firm (MUST-KNOW TRAP): All records (including models, spreadsheets, and personal notes that you built or wrote) are the property of your employer. When you leave a firm, you cannot take them with you without explicit written permission.

• The "Re-Creation" Rule: If you change firms and want to use your old research or models, you must completely re-create the supporting records at your new firm using publicly available information. You cannot rely on your memory or files taken from your old job.

• Action vs. Inaction: You must retain records that support your decisions to buy or sell, as well as your decisions to hold or do nothing.

• New Media: The standard applies to all formats. Emails, text messages, blog posts, and social media posts must be archived just like formal written reports.

Recommended Procedures (Compliance Practices):

• The 7-Year Rule (Highly Testable): You must fulfill local regulatory or firm requirements for record retention. However, if there is no local regulation or firm policy, the CFA Institute recommends retaining records for at least 7 years.

• Archive the Evidence: Maintain archives (electronic or hard copy) of personal notes from company visits, computer model inputs/outputs, risk analyses, and any third-party research reports you relied upon to form your recommendation.

Conflicts of Interest – Avoid or Disclose Conflicts

• You must avoid or make full and fair disclosure of all matters that could reasonably be expected to impair your independence and objectivity, or interfere with your duties to clients, prospects, and employers.

• The Disclosure Standard (NEW UPDATE): Disclosures must be prominent, delivered in plain language, and communicate the relevant information effectively.

  • Exam Trap: Burying a conflict of interest in the fine print, using overly dense legal jargon, or putting it in a footnote is a direct violation.

• Avoidance First: Best practice is to avoid actual conflicts (or the appearance of conflicts) entirely. If it is not reasonable to avoid the conflict, you must mitigate it and fully disclose it.

• Beneficial Ownership (Must-Know): You must disclose if you have a direct or indirect pecuniary interest (e.g., you or your spouse own the stock) in a security you are analyzing or recommending.

• Board of Directors Trap: Serving on a company's board creates three massive conflicts you must manage: (1) duties to clients vs. duties to company shareholders, (2) receiving stock options as compensation, and (3) the likelihood of receiving Material Nonpublic Information (MNPI).

Recommended Procedures (Compliance Practices):

• Update Disclosures: You must update disclosures immediately if the nature of a conflict changes materially (e.g., your bonus structure changes from annual to quarterly, increasing short-term pressure).

• Disclose to Employers: Promptly report any ownership of recommended stocks, participation on outside boards, or financial pressures to your employer so they can assess the impact.

• Disclose to Clients: Disclose your firm's broker/dealer market-making activities, any sub-advisory agreements, and any non-standard fee structures (like 12b-1 mutual fund fees) so clients can accurately evaluate your objectivity.

Conflicts of Interest – Priority of Transactions

• Investment transactions for clients and employers must have priority over investment transactions in which you are the beneficial owner. (The golden order: Clients first, Employer second, You third).

• Beneficial Ownership: The rules for your personal trades apply to any account where you have a direct or indirect financial interest, or the power to control/direct the investments (e.g., your account, your spouse's account, or dependent children's accounts).

• The Family Account Trap (MUST-KNOW): If a family member is a fee-paying client of your firm, their account must be treated exactly like any other client account. You cannot favor them, but you also cannot disadvantage them (e.g., skipping your fee-paying sister on a hot IPO allocation just to avoid the "appearance" of a conflict is a violation).

• Wait Your Turn: You can trade for your personal account only after your clients and employer have had an adequate opportunity to act on a new recommendation.

• Front-Running: Trading for your personal account before trading for client accounts (to take advantage of the price movement your clients' massive trades will cause) is strictly prohibited.

Recommended Procedures (Compliance Practices):

• Establish Blackout/Restricted Periods: Institute blackout periods for investment personnel involved in the decision-making process to prevent front-running.

• Preclearance and Duplicate Confirmations: Require employees to preclear all personal trades before execution and direct their brokers to send duplicate trade confirmations directly to the employer.

• Limit IPOs and Private Placements: Strictly limit or prohibit investment personnel from participating in equity IPOs and private placements to avoid the appearance of taking lucrative opportunities away from clients or receiving favors from underwriters.

• Disclose Personal Holdings: Require employees to disclose all personal holdings upon commencement of employment and at least annually thereafter.

Conflicts of Interest – Referral Fees

• You must disclose to your employer, clients, and prospective clients any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services.

• The "Why": Disclosure allows clients to evaluate any partiality or bias in your recommendation and understand the full cost of the services they are receiving.

• The Timing Trap (MUST-KNOW): Appropriate disclosure means you must inform the client before entering into any formal agreement for services. If you disclose the fee after they have already signed the contract, you have violated the standard.

• Internal vs. External Trap (MUST-KNOW): The standard does not distinguish between internal and external referrals. Getting a cash bonus for referring your wealth management client to your own bank's trust department requires the exact same disclosure as getting a kickback from an external, third-party broker.

• What to Disclose: You must disclose the nature of the benefit (e.g., flat fee, percentage, soft dollars, or non-cash in-kind gifts) and the estimated dollar value.

Recommended Procedures (Compliance Practices):

• Establish Clear Rules: Encourage your firm to adopt strict procedures regarding referral fees—either completely restricting them or clearly outlining the steps for requesting approval.

• Update the Boss: If your firm allows you to participate in approved referral fee programs, you should provide your employer with regular updates (at least quarterly) on the amount and nature of the compensation you are receiving.

Responsibilities as a CFA Institute Member or CFA Candidate: Conduct as Participants in CFA Institute Programs

• You must not engage in any conduct that compromises the reputation or integrity of CFA Institute or the CFA designation, or the integrity, validity, or security of CFA Institute programs.

• The "Exam Content" Trap (MUST-KNOW): You cannot reveal any confidential information about the exam. This includes:

  • Specific details of questions.

  • Broad topical areas and formulas that were tested.

  • What was NOT tested (e.g., tweeting, "I studied Ethics for 50 hours and there were barely any questions on it!" is a direct violation).

• The "Opinion" Exception (MUST-KNOW): The CFA Institute is not a dictatorship. You are completely free to express your personal opinions about the CFA program, even if they are highly critical or negative (e.g., "The Level 1 exam is absurdly difficult and the grading process is unfair"). Expressing disagreement is allowed; revealing confidential exam details is not.

• Testing Center Rules: This standard covers all forms of cheating or rule-breaking at the exam center (e.g., bringing in "cheat sheets," looking at another candidate's screen, or refusing to stop writing/typing the exact second time is called).

• Misusing Volunteer Positions: If you volunteer for a local CFA society, you cannot use that position to unfairly benefit your own clients or firm.

Recommended Procedures (Compliance Practices):

• Stay Silent on Specifics: When talking to friends or posting on platforms like Reddit, LinkedIn, or AnalystForum after the exam, limit your comments to how difficult you felt the exam was or your general study experience.

• Report Cheaters: You are strongly encouraged to report any suspected violations or cheating by other candidates to the CFA Institute Professional Conduct Program.

• Know the Rules: Be completely familiar with the Candidate Rules Agreement before you sit for the exam.

Responsibilities as a CFA Institute Member or CFA Candidate: Reference to CFA Institute, the CFA Designation, and the CFA Program

• You must not misrepresent or exaggerate the meaning or implications of membership, holding the designation, or being a candidate. (You cannot promise superior investment performance just because you have the charter).

• The "Lapsed Membership" Trap (MUST-KNOW): To actively use the CFA designation, you must pay your dues and sign the Professional Conduct Statement (PCS) annually. If you forget to pay or sign, your membership lapses, and you must immediately stop using the letters on your business cards, LinkedIn, and resume until you reinstate it.

• The Candidacy Trap (MUST-KNOW): There is no such thing as a "partial designation."

  • What is a violation: Writing "CFA, Level II," "CFA (Expected 2026)," or "CFA Charter Pending."

  • What is allowed: "I am a candidate for the Level II CFA examination" or "I passed all three levels of the CFA exam" (if you are just waiting on your work experience requirement).

• The "First Try" Exception: You can state that you passed all three exams on your first attempt in consecutive years (because that is a verifiable fact). However, you cannot claim that doing so makes you a superior analyst or guarantees better returns.

• Proper Usage (Adjective vs. Noun): The letters "CFA" must always be used as an adjective, never as a noun.

  • Violation: "I am a CFA."

  • Allowed: "I am a CFA charterholder."

• No Pseudonyms: You cannot use the designation with a fake or anonymous online profile (e.g., posting in a chat room under the username "MarketGuru, CFA" is a violation).

Recommended Procedures (Compliance Practices):

• Standardize Bios: Firms should create standardized templates for business cards, resumes, and employee biographies to ensure all references to the CFA designation comply with the rules.

• Distribute the Rules: Distribute written guidance on the proper usage of the designation to the firm's legal, compliance, public relations, and marketing departments so they don't accidentally print non-compliant advertisements.

Professionalism: Competence

• The Core Rule: Members and Candidates must act with and maintain the competence necessary to fulfill their professional responsibilities.

• The Three Pillars of Competence: You must maintain the appropriate:

  1. Knowledge: The body of information applied to your function.

  2. Skills: The capabilities to perform role-specific acts.

  3. Abilities: The attitudes and capabilities that support behaviors resulting in observable outcomes.

• Continuous Maintenance: Your role will evolve, and markets will change. You have a duty not just to achieve competence, but to continuously maintain and improve it. (However, the CFA Institute does not mandate a specific, rigid continuing education program—you can maintain competence in a variety of ways).

Exam Traps (MUST-KNOW):

• The "Bad Outcome" Trap: A lack of competence cannot be determined strictly by a negative outcome. If you do thorough, diligent research and the stock still tanks, you are not suddenly "incompetent." Competence is about your process, knowledge, and skills, not possessing a crystal ball.

• The "New Role" Trap: If you are a brilliant equity analyst and get promoted to "Director of Research," you now have supervisory responsibilities. You cannot just rely on your stock-picking skills; you must proactively gain the management and compliance skills necessary for that new role. Failing to do so is a violation.

• The "Hot Trend" Trap: If clients ask you to invest in a brand-new asset class (like a complex cryptocurrency product) and you buy it without fully understanding how it works just to keep them happy or chase a trend, you have violated Standard I(E).

• The "Education" Trap: Having a high level of education (e.g., a PhD in Economics) does not automatically make you competent in a specific, unrelated practice area (like auditing GIPS compliance).

Recommended Procedures (Compliance Practices):

• Regular Professional Development: Engage in continuing education, self-study, or earn professional certifications.

• Stay Updated: Diligently read subject matter articles, attend industry webinars/conferences, and participate in training offered by your employer.

• Acknowledge Limitations: If you do not have the competence to analyze a specific asset class, either acquire the necessary skills before taking action, or refer the client to someone who is competent in that area.

Common Misconceptions

The Trap: Confusing Independence and Objectivity with Additional Compensation Arrangements.

How to spot it: Look at the timing and the source.

Past/Spontaneous + From Client = Independence and Objectivity. You just need to disclose it to your employer.

Future/Pre-Arranged + From Client = Additional Compensation Arrangements. You need prior written consent from your employer.

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The Trap: Confusing your duties under Knowledge of the Law with your Loyalty to Employers.

How to spot it: The exam will try to trick you into whistleblowing to the police or SEC immediately. You must report internally first. If they don't fix it, you must dissociate (step away or resign). Whistleblowing externally is permitted to protect capital markets, but rarely explicitly required unless local law demands it.

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The Trap: Failing to apply Diligence and Reasonable Basis when using third-party research or quant models.

• How to spot it: You can absolutely use third-party research, but you cannot do it blindly. You must independently verify that the research is sound. If a third-party model blows up and you didn't check their assumptions, you are in violation.

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The "Who is My Client?" Puzzle: Standard III(A) Loyalty, Prudence, and Care

When managing institutional money, candidates often show loyalty to the wrong person.

• The Misconception: Thinking the person who hired you is your client.

• The Trap: You manage the corporate pension fund for XYZ Corp. The CEO of XYZ Corp asks you to buy some XYZ company stock to help fend off a hostile takeover. You do it to keep the CEO happy.

• How to Avoid It (The Fix): Your duty of loyalty is to the ultimate beneficiaries—the employees and retirees of XYZ Corp. If buying that stock hurts the pension fund's diversification or is too risky, you must say no to the CEO.

Who Can Claim Compliance?

• Only investment management firms can claim compliance.

• Exam Trap: Individuals cannot claim GIPS compliance (e.g., "I am GIPS compliant" is a violation). Software, data vendors, and performance measurement systems cannot be "GIPS compliant."

• Firm-Wide Only: A firm cannot comply with GIPS on a single product or specific fund. Compliance must be firm-wide. (There is no such thing as "partial compliance").

Composites

Composite is an aggregation of one or more portfolios managed according to a similar investment mandate, objective, or strategy.

• The Golden Rule of Composites: A composite must include all actual, fee-paying, discretionary portfolios managed in accordance with the same strategy.

Non-Discretionary Accounts: If a client strictly dictates every trade and you have no actual control (non-discretionary), they cannot be included in the composite because their performance does not reflect your firm's skill.

Simulated/Model Portfolios: Never include simulated or backtested "paper" money in a composite with actual live money.

Verification

• Voluntary, not mandatory: Firms are encouraged to hire an independent third party to verify their GIPS compliance, but it is not required.

• What Verification Does: It assesses whether the firm has complied with all the composite construction requirements on a firm-wide basis, and whether their policies and procedures are designed to calculate and present performance in compliance with GIPS.

• The Trap: Verification does not ensure the accuracy of any specific, individual composite presentation. It tests the firm's process, not the specific math of a single fund's marketing sheet.

GIPS Historical Performance Presentation Requirement

A mandate within the Global Investment Performance Standards (GIPS) that dictates the minimum length of compliant investment performance a firm must show prospective clients. It is structured in two sequential phases:

1. Initial Requirement (The 5-Year Rule): To make an initial claim of compliance, a firm must present a minimum of five years of GIPS-compliant annual performance. (Note: If the firm or composite has existed for less than five years, performance must be presented since inception).

2. Ongoing Requirement (The 10-Year Rule): Following the initial claim, the firm must add one additional year of compliant performance annually until it achieves and maintains a continuous ten-year rolling track record.

Conflict with Local Law

• The Hierarchy: If local laws or regulations conflict with GIPS, you must follow local law.

• The Disclosure: You can still claim GIPS compliance, but you must disclose the conflict in the GIPS Report.